Payroll Tax Credits and PPP Interplay: Enter the IRS Employment Tax and SBA PPP Loan Audit.

• Author: Christensen, Shannon
• Position: Payroll protection program, Small Business Administration

It's time to have a conversation about audits, specifically the Internal Revenue Service employment tax audit and the Small Business Administration PPP loan forgiveness audit. Regardless of what industry or sector includes your organization, the COVID-19 pandemic forced all employers, big and small, to deal with new employment issues. Fortunately, government-backed relief quickly became available, and many employers took advantage of one or even all of the following: the SBA's Paycheck Protection Program (PPP),1 the Employee Retention Tax Credit (ERTC),2 the employee/employer Social Security tax deferral,3 and the paid sick and family leave credits under the Families First Coronavirus Response Act (FFCRA), the Coronavirus Aid, Relief, and Economic Security Act (CARES), and the Consolidated Appropriations Act (CAA), including extensions under the American Rescue Plan Act of 2021 (ARPA).4

These payroll tax benefits, which hinge on qualified wages and health plan expenses, presented much-needed injections of cash to keep employers operating and employees earning wages. How will the government perform its due diligence to ensure that those payroll funds and credits are doled out properly? How will penalties and tax be assessed on bad actors?

Enter the employment tax audit.

Without going too deeply into the multiple types of relief, this article aims to inform employers about the interplay of these benefits, the required documentation each employer should maintain, and the likelihood of an IRS or SBA audit.

The IRS provides guidance, in Notice 2021-20, on eligibility for the ERTC, including the interplay among FFCRA credits, the ERTC, and the PPP loan forgiveness program.5 One commonality among these payroll tax benefits is that no double-dipping can occur on the same wages. That is, an employer cannot claim PPP loan forgiveness on the same funds used to pay qualifying wages when the employer also received the FFCRA or ERTC credit.

That said, if an employer reports wage expenses on the forgiveness application for a PPP loan and that loan is not forgiven, the employer can then use those wages for the ERTC. Employers must track wages for each employee and the benefit or credits being applied to those wages. Employers need to track information such as:

1. orders issued by a government authority, and the period covered, to suspend operations, commerce, travel, or group meetings due fully or partially to COVID-19;

2. any records (such as quarterly financial statements) the employer used to determine that it had experienced a significant decline in gross receipts for 2019-2021;

3. the number of full-time employees working and not working, for large employers with over 500 (formerly 100) full-time employees;

4. documentation that a government shutdown had more than a...