Last updated: May 5, 2020
Disclaimer: The information contained in this article only applies to certain small businesses and other eligible organizations. For example, effective April 20, 2020, if you filed or will file a 2019 IRS Form 1040 Schedule C, other rules apply.
- Included and excluded costs
- Calculate average monthly payroll costs
- Forgiveness requirements
- Organize payroll for loan forgiveness
The Paycheck Protection Program (PPP) is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, for which the government recently authorized an additional $310 billion in government-backed loans (bringing the total to $659 billion) to help small businesses continue paying payroll costs and certain operating expenses.
Business owners can apply for a loan of 2.5 times their average qualified monthly payroll expenses, up to $10 million, to be used for eligible payroll costs, rent, mortgage interest, utilities, interest, or certain other debt obligations and refinancing an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 (though at least 75% of the loan proceeds ust be used for eligible payroll costs). PPP loans may be forgivable, in whole or in part, if certain requirements are met.
Business owners using PPP relief to maintain payroll and pay certain operating expenses may not be required to repay all or part of their loans if certain requirements are met. The actual amount of loan forgiveness will depend, in part, on how much you spend during the 8-week period following loan origination on eligible payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020.
Keep your payroll costs organized, otherwise you may find it harder to prove how you spent your loan proceeds.
Here are a few things to account for as you organize payroll for the 8-week period after the lender sent your PPP loan funds to you to help meet requirements for the Paycheck Protection Program loan forgiveness.
PPP loan amounts are calculated using your average qualified monthly payroll costs. However, certain payroll costs are excluded from this calculation and similarly will not be considered for loan forgiveness. So it’s important to know the difference between included and excluded payroll costs.
Included payroll costs (incurred over the 8-week period)
Cash compensation capped at $15,385 for each employee making more than $100,000 annually, including:
- Salary, wages, commissions, or similar compensation, as well as cash tips or equivalent. Payroll expenses are calculated on a gross basis, without subtracting federal taxes that are imposed on the employee or withheld from employee wages.
- Employee benefits including payment for vacation, medical, family, parental and sick leave
- Allowance for separation or dismissal
- Payment for group health care benefits, including insurance premiums
- Retirement contributions
- Payment of state and local taxes assessed on compensation of employees
Excluded payroll costs
- Individual employee compensation in excess of annual compensation of $100,000 per year
- Compensation for employees who live outside the U.S.
- The employer’s share of certain payroll taxes
- Qualified sick and family leave wages under the Families First Coronavirus Response Act
The PPP loan may be forgiven, in whole or in part, if you use the funds as directed by the SBA and meet certain criteria.
For example, at least 75% of your loan forgiveness amount must be attributable to payroll costs. In addition, your forgiveness amount may be reduced if you do not maintain the same number of employees on the payroll or maintain employee salary levels.
Rehire and restore wages to employees who were laid off between February 15 and April 26, 2020, as a result of the coronavirus by June 30, 2020 to avoid any reductions.
1. Gather the payroll documents you’ll need
Borrowers can apply for loan forgiveness through their lender. You’ll need to verify the number of employees on the payroll and their pay rates for the 8-week period after the lender sent your PPP loan funds to you.
Documents needed for loan forgiveness include, but may not be limited to:
- Employee pay rates
- Payroll tax filings
- State income, payroll, and unemployment insurance filings
- Canceled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments
- Documentation of any advance received under the CARES Act EIDL Emergency Grant program
2. Record employee wages and time worked accurately
Recording employee wages accurately can help you reduce the risk of errors that could compromise your eligibility for loan forgiveness. As you spend your PPP loan, track and organize payroll costs daily. And keeping employee timesheets of hours worked can help you verify that you’ve paid each employee accurately and haven’t reduced pay or hours.
3. Track all paid time off
Employee paid time off (including vacation pay, sick leave, paternal leave, and family leave) is included in your PPP payroll costs. So, it may be eligible for loan forgiveness. You need to know exactly how much you’re spending in these categories.
Record employee paid time off by employee and PTO type. Remember, qualified sick and family leave covered by the Families First Coronavirus Response Act is excluded from loan forgiveness. Record this type of leave separately.
4. Manage a separate payroll bank account
Managing a separate bank account for payroll purposes can help you keep track of payroll-related transactions. You’ll always know how much you’re spending on payroll costs and can verify those figures later.
The resources described above are made available to businesses within the United States of America.
Regulations and guidance from the SBA and the U.S. Department of Treasury on the PPP are evolving rapidly, and the information contained herein may be outdated. Please refer to the latest guidance from SBA and Treasury to confirm current program rules.
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