Employers and employees throughout the United States have been affected by the COVID-19 pandemic. Many businesses have been forced to close, reduce hours in operation, or lay off employees. While some programs have been implemented to provide relief to both businesses and individual taxpayers, many people and businesses continue to struggle financially. In response to these concerns, a recent presidential order has been issued that will allow employers to defer certain payroll taxes.

Payroll Tax Deferral Available from September through December of 2020

On August 8, 2020, President Trump issued a Presidential Memorandum, “Relief with Respect to Employment Tax Deadlines Applicable to Employers Affected by the Ongoing Coronavirus (COVID-19) Disease 2019 Pandemic.” This order allows employers to defer the withholding of employees’ share of Social Security (FICA) taxes on wages paid between September 1, 2020, and December 31, 2020. Deferrals are available for any employee who earns less than $4,000 on a biweekly basis before taxes are withheld.

Over the past few years, California’s employment laws have been in flux due to court decisions and legislation that have affected how workers are classified. Specifically, Assembly Bill 5 (AB5) has required some companies to classify their workers as employees rather than independent contractors, which will allow workers to receive a minimum wage and benefits. However, companies such as Uber and Lyft have fought against these requirements, and voters will be able to decide whether to implement a measure in the upcoming election to determine whether certain types of workers will receive an exemption from the requirements put in place by AB5.

NOTE: AB5 has very recently been renumbered as AB2257 and clarifies current definitions of employee versus independent contractor and enumerates a number of exemptions for certain industries. Prop 22 was placed on the ballot prior to this change in numbering and therefore refers to the old AB5. 

The COVID-19 virus has impacted every facet of our lives. Schools across the country have been canceled and replaced by online classes, employees have been laid off from their jobs, and business owners have lost valuable income. From restaurants to doctor’s offices, business owners are suffering. If you are a small business owner, you may be extremely concerned about the effect “shelter-in-place” directives are having on your business. You may even wonder whether or not your business will survive. One option that may be beneficial is business interruption insurance.

What Is Business Interruption Insurance?

Business interruption insurance covers business losses caused by a disaster. It is an optional form of coverage that may be included in a business owners’ policy or a comprehensive multi-peril commercial policy, or it can be issued on a standalone basis. This insurance is intended to protect against losses resulting from disruptions to normal business operations. In addition to replacing lost income, business interruption insurance may also cover:

• Estimated profits based on previous months’ profits
• Fixed costs such as operating expenses
• Employee wages and worker training costs  
• Civil authority ingress/egress
• Taxes
• Loan payments
• Other reasonable expenses

Will Business Interruption Coverage Cover Losses Due to COVID-19?

There has been a great deal of uncertainty and confusion regarding business insurance coverage and shutdowns caused by COVID-19. Recently, the Pennsylvania Supreme Court made a ruling in the case of Friends of Danny DeVito v. Wolf that may influence business interruption insurance claims. The plaintiff in this case was asking for the shutdown order to be set aside on the grounds that the mandated shutdown was an overreach. In the end, the Pennsylvania Supreme Court ruled that the order should not be canceled, because the coronavirus is “a natural disaster and a catastrophe of massive proportion.” If other states, including California, agree with the Pennsylvania Court’s classification of the coronavirus pandemic as a natural disaster, insurers would likely be required to pay business interruption claims based on COVID-19.

California Assembly Bill 5, also called AB 5, has many business owners wondering how compliance with the new law will affect their business. The bill will significantly limit employers’ ability to classify workers as independent contractors. Many workers will now need to be classified as employees of the company, and they will be entitled to the associated benefits, such as workers’ compensation, minimum wage, overtime, rest breaks and meal periods, protection from anti-discrimination and retaliation laws, and reimbursement for business expenses incurred during the course of their job. Employers will also be required to pay payroll taxes on the workers classified as employees. AB 5 takes effect on January 1, 2020, so employers only have a short period of time to make any changes necessary to stay compliant with the new law.

AB 5 Makes the California Supreme Court Decision Regarding Worker Classification State Law

In 2018, the California Supreme Court announced its decision regarding Dynamex Operations West, Inc. v. Superior Court of Los Angeles. The landmark decision established a test called the “ABC test” for determining whether a worker is an independent contractor or an employee. Under the new rule, a worker can only be classified as an independent contractor if the hiring agency can establish each of the following criteria:

• The worker is not under the direction and control of the hiring agency with regard to the performance of the work.
• The worker performs duties that are outside the hiring agency’s typical course of business.
• The worker is engaged in an independently established occupation, trade, or business of the same nature as the work he or she does for the hiring agency.

California employers are already subject to the rules established by the Supreme Court Decision. The purpose of AB 5 is to clarify exactly how the ruling should be implemented in practice and identify industries that are exempt from the new rules. Doctors, psychologists, dentists, veterinarians, insurance agents, lawyers, accountants, architects, stockbrokers, real estate agents, state-licensed engineers, and private investigators will not be forced to comply with the new worker classification law. Newspaper delivery companies must comply, but they will be given an extra year before being required to classify their paper carriers as employees.

Making the decision to purchase an existing business can be an exciting and lucrative endeavor. Owning your own business allows you to have a great deal of independence and direction over how the business is run. Being your own boss and watching a business grow and develop can be especially rewarding. Of course, buying a business is not without risk. One of these risks is successor liability for any debts owed by the business, including tax debts.

Stock Purchase Versus Asset Purchase

When you buy an existing business, you have two options: an asset purchase or a stock purchase agreement. A stock purchase allows you to buy most of the seller’s shares, or in the case of an LLC purchase, the membership units. However, assets such as equipment and inventory are still owned by the entity. If you acquire a business through a stock purchase, you will most likely assume all of that company’s liabilities.

In an asset purchase agreement, you purchase the business’s assets, and the seller retains ownership of the actual business. In most asset purchases, the assets are transferred to the new owner without liabilities, but there can be exceptions. Most people buying an existing business choose to undergo an asset purchase transaction to avoid assuming debts accumulated by the previous owner. A qualified attorney can help you decide what type of business purchase agreement is right for you.