You were not the only one confused about this, and the latest revision to the PPP seems to make it clear (as mud!) that payroll taxes are indeed part of payroll costs! Here’s a link to the Kaplan answer that I am cutting and pasting below:
The SBA has now clarified that there will be no such reduction in gross payroll by taxes withheld, effectively ignoring this provision of the law that it appears Congress now believes was added in error:
Question: How should a borrower account for federal taxes when determining its payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan, and the amount of a loan that may be forgiven?
Answer: Under the Act, payroll costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.
Since federal agencies aren’t really allowed to ignore the text of the law, the SBA did come up with a formal justification for reading the law to come to this result which it put into a footnote in the FAQ. The SBA is arguing that, effectively, this was just a poorly worded way of saying you don’t reduce the gross—which would then beg the question about why that February 15, 2020 to June 30, 2020 period is in there? Well, that one they did just literally decide to ignore.
Here is the SBA’s justification for the position they took—which itself is unusual, since a detailed analysis of law provisions isn’t included for any other items. That is, the SBA seems to be tacitly admitting they know this is a bit of a strained reading:
The definition of “payroll costs” in the CARES Act, 15 U.S.C. 636(a)(36)(A)(viii), excludes “taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period,” defined as February 15, 2020, to June 30, 2020. As described above, the SBA interprets this statutory exclusion to mean that payroll costs are calculated on a gross basis, without subtracting federal taxes that are imposed on the employee or withheld from employee wages. Unlike employer-side payroll taxes, such employee-side taxes are ordinarily expressed as a reduction in employee take-home pay; their exclusion from the definition of payroll costs means payroll costs should not be reduced based on taxes imposed on the employee or withheld from employee wages. This interpretation is consistent with the text of the statute and advances the legislative purpose of ensuring workers remain paid and employed. Further, because the reference period for determining a borrower’s maximum loan amount will largely or entirely precede the period from February 15, 2020, to June 30, 2020, and the period during which borrowers will be subject to the restrictions on allowable uses of the loans may extend beyond that period, for purposes of the determination of allowable uses of loans and the amount of loan forgiveness, this statutory exclusion will apply with respect to such taxes imposed or withheld at any time, not only during such period.