How to organize payroll for PPP loan forgiveness

Note: Regulations and guidance from the SBA and the U.S. Department of Treasury on the PPP are evolving rapidly. Please refer to the latest guidance from SBA and Treasury to confirm current program rules and how they apply to your particular situation. 

The Paycheck Protection Program (PPP) is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It’s intended to help small businesses continue paying payroll costs and certain operating expenses during the coronavirus pandemic.

Business owners can apply for a loan of 2.5 times their average monthly payroll expenses to be used for eligible payroll costs , rent, mortgage interest, utilities, operations expenditures, property damage costs, supplier costs, worker protection expenditures, interest, or certain other debt obligations, and refinancing and Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020.

PPP loans may be forgivable, in whole or in part, if certain requirements are met. Namely, at least 60% of the forgiveness amount must be attributable to eligible payroll costs and no more than 40% of the forgiveness amount may be attributable to eligible non-payroll costs.

For that reason, it’s important to keep your payroll costs organized. Otherwise, you may find it harder to prove how you spent your loan proceeds. Here are a few tips.

4 tips for organizing payroll for loan forgiveness

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 your loan forgiveness covered period after the lender sent your PPP loan funds to you.

Documents needed for loan forgiveness include, but may not be limited to:

• IRS Forms 941 or equivalent third-party payroll service provider reports
• State and local payroll tax filings or equivalent third-party payroll service provider reports
• Payment receipts, canceled checks, or account statements documenting the amount of any employer contributions to employee group health, life, disability, vision or dental insurance and retirement plans that the Borrower included in the forgiveness amount
• Canceled checks, payment receipts, transcripts of accounts, purchase orders, orders, invoices, or other documents verifying payments on rent, mortgage interest, utilities, operations expenditures, property damage costs, supplier costs, and worker protection expenditures

Depending on the type of application you submit, you may be required to include with your application documents verifying costs such as your payroll and non-payroll expenses and full-time employees. In general, the simplified application (Form 3508S) for borrowers with loans of $150,000 or less requires borrowers to submit no supporting documents or very few supporting documents, although borrowers are required to retain certain supporting documents for 3-4 years.

For more information about PPP loan forgiveness documentation, please refer to the forgiveness application and instructions applicable to you and the SBA’s website.

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 payment for vacation, parental, family, medical or sick 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 PPP payroll costs and is not eligible for 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.