PPP Loans – Stay Alert!
In response to the COVID-19 global pandemic the US federal government began providing PPP (Paycheck Protection Program) loans as an economic relief for US small businesses. One of the main objectives of the PPP loan is for it to cover payroll wages and self-employment income.
Let’s talk about the PPP loan as it relates to payroll wages specifically. To begin with, the loan amount is calculated at 2.5 multiplied by average monthly wages. So for instance, let’s say a business owner claims that their payroll wages run about $120,000 per year; that averages out to be $10,000 per month or $30,000 per quarter. In this scenario, the business owner qualifies for a $25,000 loan (2.5 x $10,000). Now, as we look at this scenario closer it gets more and more interesting.
To begin with, I understand that if you are using your payroll wages info from this year 2020, the loan providers are doing some due diligence and requesting a copy of the 941 tax return filed for the most recent quarter to show your wages reported over that 3 month period. That should pretty much corroborate with your average monthly payroll wages reported on your financial statements and loan application. Based on the scenario presented above, the 941 should show $30,000 in reported wages.
I can hear someone in the back: “What if my bank did not request my 941 and only used my quarterly financial statements?” Well, if you are using the cash-basis accounting method for your books, as most small business owners do, then you are saying you actually paid those wages already (that is why the wages amount is on the books).
“What if I had to amend my 941 because I reported the incorrect wages amount? Well, it happens and there are a few ways of dealing with such an instance. If your wages were actually more than previously reported, then you can see about receiving an additional loan amount (or revised loan). If your wages were actually less than reported on your 941, then maybe you should see about returning the excess amount of the loan resulting from the overstated wages.
But, here is the deal; without amending the 941 tax return, come 2021 the IRS will likely be looking for a minimum of a $30,000 W3 from the SSA (Social Security Administration); if you used the $25,000 loan to cover future payroll, then make that a minimum of a $55,000 W3. Those wages will be required to be reported on a personal tax return come 2021; and will be subject to personal income taxes accordingly.
If our current economic conditions turn around and everything turns out peachy, then the best case scenario would be a $120,000 W3 and personal income tax reporting requirements of $120,000 when 2021 rolls around.
I have heard quite a few small businesses snapping up PPP loans for $80K, $125K, and more. Do the math on the 941 and W3 reporting requirements; the payroll taxes due; and the income taxes due.
“What if I didn’t file any 941s and will not file a W2/W3 but received a PPP loan based on my financial statements?” Don’t walk; RUN come by and let us help you get everything rectified to avoid any adverse consequences.
Until next time, check in with us from time to time for more helpful tips to know as a small business owner.
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