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Paycheck Protection Program – A Primer on Payroll

What are gross wages and why don’t they match the tax forms?

The Paycheck Protection Program (PPP) requires applicants and lenders to use gross wages in calculating the loan amount. Gross wages is defined as the total amount paid by an employer to an employee. Gross wages is the amount before any deductions and is based on a rate for each employee, typically per hour or an annual salary.

Gross wages for an hourly employee: 40 hours x $25 = $1,000
Gross wages for a salaried employee: $52,000 a year / 52 weeks = $1,000 per week

In general, on a Company’s income statement, wage expense will equal gross wages. Example: If Company X has one employee earning $52,000 per year, wage expense on Company X’s income statement will be $52,000.

This will, however, not match the payroll tax forms for Company X. There are a variety of deductions that are made on a pretax basis, such as “Cafeteria Plans” which allow employees to pay for certain medical expenses, like health insurance premiums. Other popular pretax deductions are Health Savings Accounts (H.S.A.), Flexible Savings Accounts (F.S.A.), and employee contributions to retirement plans.

Cafeteria plan and H.S.A. contributions are not subject to Medicare tax and are excluded from wages reported on Form W-2, Box 5 “Medicare wages and tips.” Continuing our example, let’s say our salaried employee has $2,500 deducted from their wages annually for health insurance and contributes $3,500 into a H.S.A. The math for computing Box 5 wages for W-2 and W-3 (and line 5c, column 1 of Form 941) is as follows:

Gross Wages$52,000
Less: Annual Medical Insurance(2,500)
Less: H.S.A. contribution(3,500)
W-2/W-3 Box 5 “Medicare wages and tips”$46,000

In addition, regular employee contributions into a retirement plan (not Roth) are subject to Medicare tax but are not subject to Federal or state income taxes. As such, an additional deduction would need to be made from Box 5 wages, in order to compute wages for Box 1 “Wages, tips, other compensation” on forms W-2 and W-3 (and line 2 of Form 941). Using our same example, let’s say our salaried employee elects to contribute 10% of gross wages into a 401(k) plan, the math looks like this:

W-2/W-3 Box 5 “Medicare wages and tips”$46,000
Less: Employee 401(k) contribution at 10% ($52,000 * 10%)(5,200)
W-2/W-3 Box 1 “Wages, tips, other compensation”$40,800

As you can see, gross wages from our example, $52,000, does not appear on the W-2, W-3 or Form 941. However, $52,000 is the eligible amount of wages under the PPP program. When gathering information to determine true gross wages, we recommend using the 2019 annual payroll register for the PPP Application.

Note: This is not a complete or exhaustive example. There are unique items that get added into Form W-2, Box 1 that are not considered here. Examples are life insurance, personal use of a vehicle and health insurance premiums for a 2% S Corporation principal.

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