What Payroll Taxes Are Included in PPP Loan Forgiveness?
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If you’re thinking about applying for PPP loan forgiveness, you might be wondering what payroll taxes are included. Here’s what you need to know.
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Payroll Taxes
Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the employee’s salary. Common payroll taxes include Social Security and Medicare taxes.
The employer’s share of Social Security and Medicare taxes are payroll taxes that are included in the PPP loan forgiveness. The Social Security tax is 6.2% of an employee’s wages, and the Medicare tax is 1.45%. The employer pays these taxes on behalf of the employee.
Federal unemployment tax
The Federal Unemployment Tax Act (FUTA) is a payroll tax that all employers must pay. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee in a calendar year. However, most employers are eligible for a credit against the FUTA tax, which reduces the effective rate to 0.6%.
Withholding Taxes
The Payroll Protection Program (PPP) loan forgiveness rules include payroll taxes as an eligible expense. This means that you can use your PPP loan money to pay your withholding taxes and they will be forgiven. However, there are some restrictions on how much you can use for payroll taxes.
Federal income tax
The federal income tax is a tax imposed by the Internal Revenue Service (IRS) on the income of individuals, corporations, partnerships, and other legal entities. The tax is calculated based on the taxable income of the entity and is typically withheld from employees’ wages by their employer.
State and local income tax
According to the SBA, “state and local income taxes are eligible for forgiveness if paid by the borrower during the covered period.” So if your business pays state and local income taxes on behalf of its employees, those taxes are included in PPP loan forgiveness.
Self-Employment Taxes
If you’re self-employed, you’re required to pay both the employer and employee share of Social Security and Medicare taxes. The employer share is 7.65% and the employee share is 7.65%. The PPP loan forgiveness application includes a Worksheet for payroll tax calculation which allows for the deduction of payroll taxes paid.
Social Security and Medicare taxes
As a self-employed individual, you are responsible for paying both the employee and employer portions of Social Security and Medicare taxes. These taxes are commonly referred to as FICA taxes.
For 2020, the employee portion of Social Security tax is 6.2% of your earned income up to the Social Security wage base limit of $137,700. The employer portion of Social Security tax is also 6.2%.
The Medicare tax rate is 1.45% of all of your earned income with no wage base limit. As a self-employed individual, you are responsible for paying the entire Medicare tax rate.
Federal unemployment tax
This is a tax imposed by the federal government on employers to fund unemployment compensation benefits. Employers are required to pay this tax on the first $7,000 of wages paid to each employee in a year. The tax rate for 2020 is 6%, but employers are allowed to take a credit of up to 5.4% against the tax, resulting in an effective rate of 0.6%. This means that the maximum amount of federal unemployment tax that an employer would have to pay on any one employee is $42 ($7,000 x 0.6%).
