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Recent changes that impact payroll for small businesses

As the COVID-19 pandemic continues to unfold, so too do regulations on payroll for businesses

Illustration courtesy of iStock

COVID-19 has changed how small businesses operate, from applying for relief such as the Paycheck Protection Program (PPP) to updating payroll processes. Payroll—comprised of complex processes including garnishments and unemployment claims, payroll taxes, and classifying workers—doesn’t have to be confusing. By understanding payroll changes, payroll technology, and the ebb and flow of time and attendance, you can improve and simplify your payroll processes. WeWork Business Solutions, powered by VensureHR makes professional services simple, so you can revitalize your small business during this time.

Many small business owners have been able to modify their business models in response to the COVID-19 pandemic. Restaurant owners are offering delivery and takeout-only options, movie theaters are offering drive-up concessions, and physicians are moving non-urgent doctor appointments online through telehealth options. 

And yet, despite some small business owners finding ways to keep their businesses afloat, 32 percent have laid off employees or cut wages, 36 percent are likely to follow without additional government relief, and 30 percent of small business owners anticipate spending their reserved funds by the end of 2020. 

Amid these challenges, business owners are also expected to keep an eye on general operating tasks including payroll issues. Here are some recent payroll changes to keep track of as the COVID-19 pandemic continues to unfold, along with an explanation of the benefits of implementing or upgrading your payroll software and technology.

Changes to healthcare and insurance

Healthcare laws, rules, regulations, and coverage options change frequently. With the continuing pandemic disruption, employers across the country must take necessary steps to review and compare healthcare and insurance options to help keep their employees safe. Small businesses, however, may find these tasks to be challenging, as premium costs can be staggering. 

Social Security, Medicare, and Supplemental Security Income

Starting January 2021, Social Security and Supplemental Security Income (SSI) benefits will increase by 1.3 percent, thanks to COLAs (cost-of-living adjustments). Additionally, Medicare changes for 2021 will be announced on the Medicare website. Social Security beneficiaries receiving Medicare will not receive their new benefit amount until 2021 Medicare premiums have been finalized. Final 2021 benefits will be distributed to beneficiaries through a COLA notice and My Social Security’s Message Center, rather than by the employer.

This forthcoming annual adjustment can have an impact on the Social Security and Supplemental Security Income payments that small business owners pay to the government via payroll or employment tax. 

It is up to you as the employer to decide whether or not you want to add a policy to your handbook about adjusting the base salary and compensation structures based on any COLA updates. If you do, the policy should outline how often employees should expect a raise and detail the parameters for how this increase percentage is determined. 

General health insurance

Uncertainty around the pandemic has led to health insurance providers slowing conversations around rate increases, as it would be difficult to justify significant rate surge. In the same vein, life insurance premiums are also projected to only increase 3 percent in 2021, recovering only about 5 percent in the U.S. market from the 2020 drop.  

While you may be waiting for final 2021 rates, it is up to you to determine which policy may be best for your employees and to communicate to them any potential changes to health insurance costs. You should also provide proper training on payroll deductions and compliance for employees, to ensure that no additional penalties or fees occur due to gaps in coverage or other insurance-related issues.

Qualified Small Employer Health Reimbursement Arrangements (QSEHRA)

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), also known as a small business health reimbursement arrangement (HRA), is not a new option but a good alternative to group health insurance. Small businesses may use it to provide tax-free contributions to employee qualified medical expenses. QSEHRAs do not require minimum contributions or participation.

This option may be especially appealing to small business owners. The good news: Setting up a QSEHRA is a straightforward process:

  1. Verify if you’re an eligible employer.
  2. Confirm which employees are eligible for a QSEHRA.
  3. Determine the amount each employee may be reimbursed.
  4. Define the “qualified expenses” you want to reimburse.
  5. Set a date for the QSEHRA to begin.
  6. Ensure proper record-keeping and maintain legal documents.
  7. Create a process to run your QSEHRA.
  8. Notify your employees of the QSEHRA.
  9. Address any questions or concerns your employees may have on this new benefit.

QSEHRAs may be set up through your payroll provider to process and distribute reimbursements—it’s important to note that some QSEHRA benefits are taxable and you will need to withhold payroll taxes from reimbursements. If you do not have a payroll processor and are attempting to navigate this alone, you may consider reaching out to a payroll professional like WeWork Business Solutions, powered by VensureHR, which can provide industry insight into best practices, competitive rates, and simplified implementation.

Changes to taxes and reporting

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed, which created the Paycheck Protection Program (PPP), a loan to provide small businesses financial and economic relief. On June 5, 2020, the PPP Flexibility Act was passed as a modification to the original guidelines by providing employers payroll tax relief options. 

These are the highlights and key takeaways for small business owners. 

Payroll tax deferrals

The CARES Act grants small businesses an extension to payroll tax payments for 2020. This includes a deferment of the Social Security payroll tax (6.2 percent) over a two-year period—businesses have to pay 50 percent by December 31, 2021, and the remaining 50 percent by December 31, 2022.

While this deferment doesn’t necessarily save businesses money, it allows them to preserve short-term capital to stay afloat as the COVID-19 situation continues to evolve.

Employee retention credit

The CARES Act created an Employee Retention Credit, allowing up to a $5,000 refundable credit for each employee retained between March 13 and December 31, 2020. The employee retention credit may not be used simultaneously with the PPP.

Employee retention credit qualifications require that businesses either:

  1. Fully or partially stop operation during any 2020 calendar quarter due to government orders restricting business (i.e., trade, travel, or meetings) due to COVID-19; or
  2. Experience a significant decline in gross revenues during a calendar quarter (e.g., the first quarter a business’s gross revenue in 2020 is less than 50 percent of its gross revenue from 2019).

To claim the employee retention credit, employers may:

  1. Deposit required funds on a semi-weekly or monthly basis and claim the tax credit on their IRS Form 941 quarterly; or
  2. Preserve the taxes to maintain payroll and then report tax credit utilization on Form 941.

Paid sick leave tax credits

In addition to the CARES Act, the Families First Coronavirus Response Act (FFCRA) provides supplementary payroll tax changes, such as mandatory rules on paid sick leave. The FFCRA requires emergency paid sick leave for eligible employees who are required to quarantine, diagnosed with, or potentially have COVID-19. Emergency paid sick leave offers a maximum of $511 per day for up to 10 days. Eligibility criteria includes seeking a medical diagnosis for COVID-19 symptoms, advised by a healthcare provider to self-quarantine for COVID-19, or caring for a child/individual whose normal place of care is closed for COVID-19-related reasons, etc. 

Emergency paid sick leave also provides small business employees up to 12 weeks of paid family leave if the employee or the employee’s family member is in quarantine, or if the employee’s child’s school or childcare facility is closed due to COVID-19. Employers are required to pay at least two-thirds of the employee’s wages (up to $200 per day) up to $10,000 per employee.

Small businesses are provided a tax credit up to 100 percent of qualified emergency sick leave and family leave payments until the end of 2020. Additionally, employers who are mandated to provide sick leave and family leave payments are exempt from the Social Security tax responsibility on federal payroll taxes. The paid sick leave tax credits do not impact eligibility for PPP or other tax relief.

However, many small businesses are opting not to utilize such payroll tax relief because:

  1. Businesses are on the hook to pay the full amount later.
  2. There is lack of guidance from governing agencies (e.g., IRS) on how the money will be collected in 2021. For example, will the money need to be deducted from paychecks or will employees be responsible for the lump sum?
  3. Collecting the funds is complex.

Payroll requires more than just timely and precise employee paycheck distributions. Businesses must adapt to legislative changes, new payroll technology and upgrades, and industry trends. To simplify these processes, learn more about the WeWork Business Solutions, powered by VensureHR.

Lizz Morse is a marketing and communications supervisor at Vensure Employer Services. She holds a master of psychology from Grand Canyon University and has been published in Attorney at Law Magazine, Real Estate Agent Magazine, and The Good Men Project, among others. Morse has also ghostwritten a number of articles focused on small business administration and operations, appearing in publications such as Thrive Global and Small Biz Daily. 

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