What Are Payroll Costs
We got the following comment from a reader:
“On the 943, we use Line 2 for Gross Wages. This part I understand. As for Lines 3 & 5 (total social security and medicare), do we or do we not add 1/2 of these amounts (the employer portion) to Gross Wages? Additionally, do we include amounts paid as 940 tax and state unemployment?”
We continue to get some questions like this so we thought it would be a good idea to review the payroll costs that count for the Paycheck Protection Program (PPP) and those that do not count.
First, all forms of wages, salaries, commissions treated as compensation (not treated at 1099 payments), etc. count as payroll. This includes commodity wages.
Federal payroll taxes do not count. Therefore, you do not count any of the employer portion of FICA and Medicare taxes. You also do not reduce gross wages by the employee share of FICA and Medicare costs plus any federal income tax withheld. If you pay someone $1,000, you count $1,000. Nothing more, nothing less.
Now for Federal Unemployment (FUTA) taxes. This is in the gray area. FUTA taxes are covered under Chapter 23 of the Internal Revenue Code. The law specifically states you can’t include Chapter 21 (FICA), Chapter 22 (Railroad FICA) and Chapter 24 (Federal Withholding) taxes, but it does not discuss Chapter 23. However, it specifically does not list FUTA as being a tax that you can include in payroll costs, so we suggest that FUTA is not allowed as part of these costs.
Any tax imposed by a state or local tax authority on wages is allowed as part of payroll costs. This would include State Unemployment taxes, certain local taxes for cities and counties that impose a payroll tax and we also believe it includes worker’s compensation. Although in many states workers compensation is covered by private insurance companies, it is usually mandated by the state. For example, in Washington State, this tax is imposed and administered by the state.
Group health costs are also part of payroll costs. This would be group insurance for health, dental and vision. This likely also covers any other costs that the employer covers for its employees.
Retirement plan costs incurred by the employer are also allowed. These would include 401(k) match payments, defined benefit payments, etc. We are uncertain on the status of voluntary profit sharing payments. We would need clarification on these payments.
Some banks are simply taking numbers off of Form 941 or 943 to determine qualified compensation. However, this may be under-counting the loan amounts. 401(k) employee deferrals, Section 125 plan deferrals and several other items may reduce the amount of compensation reported on these forms. If this applies in your situation, it is best to reconcile total payroll costs to the amounts shown on these forms.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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