Finances and Taxes

Here’s the Latest Guidance on How to Spend Your PPP Loan for Full Forgiveness

Andi Smiles Small business financial consultant 
male Baker working in the kitchen

The deadline for PPP applications has been extended through May 31, 2021, but some experts say funding may run out mid-April.

Learn everything you need to know about the latest PPP legislation here.

Update as of June 26, 5:00 PT: This article has been updated to reflect the latest official guidance on PPP loan forgiveness.

You just got the email that your Paycheck Protection Program (PPP) loan was approved—congrats! Getting this far is a major accomplishment and warrants some serious celebration (homemade frosé anyone?). 

But being approved for a loan is just the start of your PPP journey. Now, it’s time to strategize how you’ll use the funds to keep your business going while ensuring that you qualify for loan forgiveness. Below, we’ve put together a step-by-step guide for how to budget your loan funds and keep your expenses organized so your loan forgiveness application is a breeze.

We’ve even created a calculator that will help you track how much of your loan can be forgiven based on your expenses and team changes:

PPP Forgiveness Allocation Calculator

Now, let’s get started.

Immediately after your loan is approved

Before you do anything with your PPP money, make sure you understand your specific requirements for loan forgiveness.

To qualify for total PPP loan forgiveness, you must use the funds within 24 weeks after your initial loan disbursement or by December 31, 2020—whichever one occurs first—and only for approved costs. At least 60% of the money needs to go towards payroll expenses. If you don’t spend at least 60% of your PPP loan on payroll costs then your loan forgiveness will be reduced.

Note: If you got your PPP loan disbursed before June 5, you can elect to use the original eight-week forgiveness window. This article assumes the full 24-week covered period.

These payroll costs can either be:

  • Real, which means money actually went out to pay these expenses during the forgiveness window; or
  • Incurred, which means the payroll costs were incurred during the forgiveness window but the pay date fell after the end of the forgiveness window.

For incurred payroll costs, only the amount incurred during the forgiveness window is eligible. For example, if your loan forgiveness window ends on June 15, but your current pay period was from June 13 to June 19, only the payroll costs incurred on June 13, 14, and 15 are eligible for forgiveness.

If you want the full loan forgiven, the other 40% of the loan can only be spent on:

  • Business rent
  • Business utility payments (including electricity, gas, water, transportation, telephone, or internet access)
  • Interest on existing debt, including mortgage interest

You must also maintain an average number of full-time equivalent employees (FTEs) and their wages. If you reduce your employees’ wages more than 25% or reduce the amount of FTEs, then you may not qualify for total loan forgiveness. The Paycheck Protection Program Flexibility Act (PPPFA) has added several new exceptions to the requirement to rehire all employees. We talk more about that in Step 2.

So, to qualify for total loan forgiveness, you need to know three numbers:

  • 60% of your total loan amount (this is the portion that you’ll need to spend on payroll costs)
  • Your average full-time equivalent employees (FTEs) 
  • Each employee’s average salary or wage

In addition, under the PPPFA, if your business isn’t able to return to the same level of business activity as on or before February 15, 2020, you will still be eligible for full loan forgiveness if you fulfill the other requirements.

If you manage your payroll with Gusto, we have a report that will do the calculations below for you, help keep you on track for full forgiveness, and help you fill out your loan forgiveness application.

Step 1: Calculate how much of your loan you must spend on payroll costs.

The easiest math of all! Simply multiply your total loan amount by 60%, or 0.6. 

For example, if you received a loan for $45,000, then $27,000 must be spent on payroll costs. 

$45,000 x 0.6 = $27,000

Keep in mind that payroll costs don’t just include employee wages, commissions, and tips. They also include:

  • Employee benefits like health care expenses and retirement contributions 
  • Employee vacation, sick, medical, or parental leave
  • State and local taxes on employee wages
  • Self-employed income (capped at $100,000 annualized)

Also good to know: Spending more than 60% of the loan on payroll costs is a-okay. You can even spend the entire loan on payroll costs; 60% is just the minimum. 

Step 2: Calculate your average FTEs. 

The average number of full-time equivalent employees (FTEs) that you must maintain during the 24-week forgiveness window is based on your FTE count during one of these two baseline periods:

Baseline PeriodNumber of weeks in the period
February 15, 2019 to June 30, 201919 weeks
January 1, 2020 to February 29, 20208 weeks

If you’re a seasonal business, you also have the option of using any of the above periods or any 12 weeks from May 1, 2019 to September 15, 2019.

Choose the period where you had the fewest number of FTEs. Just make sure you’re using the same period consistently throughout your calculations.

If your full-time and part-time employee situation is pretty straight forward (say you had three full-time employees and two part-time employees during all of 2019 ), you can skip the complicated math. Any employee who works 40 hours per week or more is 1.0 FTE, and anyone who works less than 40 hours per week is 0.5 FTE. In our example, you would have 4 FTEs.

But if you have a mixture of full- and part-time employees, or if your employees’ hours fluctuate, you’re going to do some number crunching.

You’ll need to calculate your FTEs for the baseline period. The easiest way to figure this out is for each employee:

  1. Add up your employee’s average weekly hours. To do this add up their total hours for the baseline period and divide it by the number of weeks in the period (note: don’t include employee hours that are in excess of 40 hours per week).
  2. Divide each employee’s average weekly hours by 40.
  3. Round to the nearest tenth.
  4. Add up your employee’s FTE number.

Let’s do an example: You use the period of January 1, 2020 through February 29, 2020. Employee A worked an average of 32 hours per week, Employee B worked an average of 22 hours per week, and Employee C worked an average of 13 hours per week.

First, divide each employee’s average weekly hours by 40. 

Employee A: 32 / 40 = 0.8

Employee B: 22 / 40 = 0.55

Employee C: 13 / 40 = 0.325

Next, round to the nearest tenth.

Employee A = 0.8

Employee B = 0.55 → 0.6

Employee C = 0.325 → 0.3

Finally, add up the number of FTEs. 

0.8 + 0.6 + 0.3 = 1.7

You’ll need to maintain an average of 1.7 FTEs to be eligible for total loan forgiveness. 

A few exceptions to reducing your FTEs (including new exceptions under the PPPFA)

  1. Did you reduce your employee headcount between February 15, 2020 and April 26, 2020? If you rehire all those employees (or an equivalent number) by December 31, 2020, then any reduction that may have occurred to your forgiveness will be cancelled out. 
  2. Should you make an offer to rehire an employee for the same wages and number of hours as they previously worked and they reject it, they won’t count against your FTE average, and your forgiveness amount will not be reduced for salary or wage reductions either. More on this in Step 5.
  3. If you terminate an employee for a legal cause, like stealing from your company, then the terminated employee won’t count against your FTE average. 
  4. Did your employee voluntarily resign from their position? Or did they offer to voluntarily reduce their hours? If so, they won’t count against your average FTEs.
  5. If you can demonstrate that you’re unable to hire a similarly qualified employee before January 1, 2021 to replace an employee who was hired before February, 15, 2020, then those FTEs won’t count against your averages.

You’ll need written documentation to support that these scenarios actually occurred, and you can only count them as exceptions if you do not rehire or increase the hours of other folks to make up for their loss during the 24-week period.

Step 3: Calculate how much you must pay each employee.

To qualify for loan forgiveness, you cannot reduce the average wage of any employee by more than 25%. This is based on the total average salary or hourly wage that the employee is paid in the forgiveness period. Employees who earned an annual salary of $100,000 cash compensation or more (that breaks down to $8,333.33 per month) in 2019 are exempt from this rule.

You’ll base your employees’ average salary or hourly rate on what they were paid in the first quarter of 2020. Your payroll history will show this.

Here’s how to figure out how much you must pay each employee.

For salaried employees:

1. Determine your employee’s average salary for the first quarter (for example, $50,000 per year). Again, you can find this information in your payroll history.

2. Calculate 75% of their average first quarter salary. Simply multiply their average salary by 75%. This is the minimum average salary you must pay your employee during the forgiveness window. 

$50,000 x 0.75 = $37,500

3. If you plan to adjust your employee’s pay week to week, then calculating the employee’s minimum forgivable weekly salary will also be helpful. To do this, first divide their average first quarter salary by 52 (the number of weeks in the year). 

$50,000 / 52 = $961.54

4. Now multiply their average weekly salary by 75%. This is an easy baseline to follow if you plan to reduce your employee’s salary. 

$961.54 x 0.75 = $721.15

Note that Step 4 is meant to give you a simple guideline to follow. But, keep in mind that the salary reduction is based on the average salary paid during the forgiveness window. This means that you could reduce your employee’s salary below the baseline in Step 4 for one week and then restore it to the first quarter average for the remaining seven weeks and still meet the 75% threshold. This is where you may need to finesse the numbers, especially if your employees’ salaries will change week to week.

For hourly employees:

1. Determine your employee’s hourly rate during the first quarter of 2020, for example $15 an hour.

2. Calculate 75% of their average hourly rate. Simply multiply their hourly rate by 75%. This is the minimum average hourly rate you must pay your employee during the forgiveness window. 

$15 x 0.75 = $11.25

3. If you plan to pay your employee multiple rates during the forgiveness period, you’ll need to make sure the average of these rates is above the amount you calculated in Step 2. For example, if you plan to pay your employee $10 an hour and $15 an hour during the forgiveness period, you’ll need to calculate the average of the two rates and ensure that it’s above what you calculated in Step 2. 

$15 + $10 = $25

$25 / 2 = $12.50

Also important to know: Individual employees are not allowed to earn more than $15,385 in gross wages during the 24-week forgiveness period. If you pay a single employee more than $15,385 then the excess cannot be included in the forgivable payroll costs.

More happy news: If by December 31, 2020, you restore an employee’s pay to the same wage that they earned as of February 15, 2020, then wage reductions made during the 24-week forgiveness period will not impact your loan forgiveness.

Step 4: Determine how you’ll allocate the funds.

All right, we just did a lot of math. But these numbers are crucial to planning how you’ll allocate your PPP funds for maximum loan forgiveness. 

Now it’s time to make a plan. Don’t skip this step or decide to “just wing it.” You’ll be using this plan throughout the forgiveness window to make sure you’re on track. 

In Step 1, you calculated the minimum amount you must spend on payroll costs, so you know how much you have to allocate towards payroll. Now it’s time to make all the numbers work together. 

1. Project your 24-week FTEs. Make a list of all your employees and the number of hours a week they currently work or will work after you rehire them in the 24-week forgiveness window. You can either use the simplified method to calculate your 24-week FTE count or the more complicated method in Step 2. In either case, be sure to add up your total FTEs. Is the number the same or higher than the number you calculated in Step 2? If it’s lower than your average FTEs in Step 2, increase your employee hours. 

2. Project how much you’ll pay each employee during the forgiveness period. This will either be their regular salary or hourly rate or the minimum weekly salary or hourly rate you calculated in Step 3. Remember, if your employees’ rate or salary will fluctuate, you’ll need to ensure that their average pay during the forgiveness period is more than the minimum pay from Step 3. Then, add it all up to calculate your total employee wages for the forgiveness period.

3. Add your additional payroll costs. This includes things like your employees’ health insurance premiums, state and local taxes, etc. See our full list of forgivable payroll costs in our PPP forgiveness overview.

4. Check and adjust your numbers. If your projected costs are less than your minimum payroll allocation (aka your calculation from Step 1), you’ll need to increase your employees’ pay or hours (if they work hourly). If it’s more, you can reduce your employees’ pay (but not below their minimum pay!) or leave it and allocate more than 60% of the loan to payroll. 

5. Allocate the remaining loan. List all of your other approved expenses and project their cost during the forgiveness window. Since you’re only allowed to use 40% of the loan for these costs, you may need to use other sources of capital to cover the difference. 

If you’re confident in a plan to restore your employee headcount or wages by December 31, 2020, or if you know you won’t be able to restore your business to pre-February 15, 2020 operational levels, you can take more liberties with your FTE number and employee pay. But you still need to spend 60% of the loan on payroll costs in order to have the whole thing forgiven. 

Step 5: Notify your employees and rehire them.

Now it’s time to let your employees know what’s happening. Start by telling them that you were approved for a PPP loan (yay!) and then explain any changes that affect them. 

Besides changes to hours and pay, let them know if there are changes to their work duties. For example, if your employees can’t physically go to work due to government restrictions, will you ask them to perform tasks remotely? Will they be working on a special project instead of their regular duties? Be clear with them about your expectations. 

Here’s what to include when you notify your employees:

  • Changes to the number of hours they work
  • Increases or decreases to their wages
  • Changes to the work they perform
  • The date these changes will take effect
  • How long you anticipate these changes to last. It’s okay if you’re not 100% sure yourself, but do try to be honest with your employees about what you’re anticipating so they can also make plans. 

For employees who have been laid off, you’ll also need to let them know:

  • That you’re rehiring them and the date of their rehire
  • That they’ll need to stop collecting unemployment insurance benefits

So what happens if an employee refuses to be rehired? 

First, keep records of communication with the employee and their refusal. You’ll submit these later with your loan forgiveness application. You must offer to rehire the employee at the same hours and wages they originally had before being laid off. 

If the SBA finds that you acted in good faith to rehire the employee and they refused, their hours won’t reduce your FTE averages, and you may still qualify for full loan forgiveness. The employee should note, though, that they will likely forfeit their right to unemployment benefits should they refuse the offer.

Immediately after your loan is disbursed

Step 6: Deposit or transfer funds to a separate bank account (optional but recommended).

While the SBA doesn’t require that you use a separate bank account to hold PPP loan funds, it’ll make tracking the use of the funds more manageable. It’ll also reduce the temptation to use PPP funds for other, non-approved expenses. There’s also the possibility that your lender may require this. Be sure to check in with them in order to understand any requirements like this.

If you plan to keep detailed and meticulous records of how you use your PPP funds, you can skip this step. But if you know that your business finances tend to be a little… er… chaotic, then keeping the funds separate will make your loan forgiveness application less of a headache. 

Step 7: Switch your payroll withdrawal account to the PPP bank account.

If you do decide to keep your PPP funds in a separate bank account, then you’ll also need to switch your payroll withdrawal account to your dedicated PPP account. 

Step 8: Mark on your calendar when the covered period for loan forgiveness ends. 

Thanks to the PPPFA, the covered period was extended from eight weeks to 24 weeks for most borrowers.

You have two choices when it comes to the start and end date of the 24-week covered period for loan forgiveness. The first is to have your start date be the same date as your first loan disbursement. Typically, your first loan disbursement will happen no more than 10 days after your loan is approved. 

If you choose this option then you’ll count out 24 weeks from the disbursement date and mark that on your calendar as the forgiveness period end date. 

The second option is to use the Alternative Payroll Covered Period, which is the first day of your first payroll period after your first loan disbursement. If you choose this option then you’ll count 24 weeks out from the first day of that payroll period. You can only use the Alternative Payroll Covered Period if you have a bi-weekly (or more frequent) payroll schedule.

12 weeks after you receive your first loan disbursement

Step 9: Review your PPP-related expenses.

You’re halfway through your forgiveness window and it’s time to review your PPP expenses to make sure that you’re using the money appropriately. 

Remember that plan you made way back when? Well, it’s time to whip that bad boy out. You’ll also need records of how you’ve spent the money so far and your payroll totals for the past month. Then, you’ll compare how you planned to spend your PPP funds to how you actually spent them. 

Here’s what you want to ask yourself as you review your PPP spending so far:

  • Have you spent at least 60% of your PPP funds on payroll costs? 
  • Have you maintained your FTE averages? If not, do you meet any of the exceptions we discussed in Step 2?
  • Have you reduced any employee’s wages by more than 25%? If so, do you plan to restore their wages by December 31, 2020?
  • How else have you spent the money? Are these PPP-approved expenses?
  • How much of the PPP funds do you have left? How will you use these funds?
  • Do you need to make adjustments in the next 12 weeks to meet the 60% threshold?

Step 10: Make adjustments to your payroll expenses.

In a perfect world, you’ll review your PPP spending and discover that you’re right on track for total loan forgiveness. But in real life, random, unexpected stuff happens and you’ll probably need to adjust. 

If you’re not on track for loan forgiveness, use your initial plan to calculate what adjustments you need to make. Remember, you only have 12 weeks left of your forgiveness window, so you’ll need to implement changes right away. 

Step 11: Organize your PPP expense records.

Wait—can’t I do this after my 24 weeks are up? You could, but getting a head start on organizing your expense records will make your loan forgiveness application a little easier. 

Here’s what records you need:

  • Payroll reports or bank account statements verifying the number of employees on payroll, their pay rates, and the total amount you paid them during the forgiveness window
  • Payroll reports or bank account statements verifying the number of employees on payroll, their pay rates, and the total amount you paid them during the baseline period 
  • Payroll tax filing for the IRS
  • State income, payroll, and unemployment insurance filing
  • Documents verifying how much you paid for employee benefits
  • For business mortgage payments, copies of the amortization schedule from your lender or copies of your lender account statements
  • For rent payments, copies of your current lease agreement
  • Records of payments for other PPP approved expenses, including receipts, invoices, and ACH drafts 
  • Statements for interest paid for debt obligations incurred before February 15, 2020
  • Copies of any employee job offers and refusals, firing for cause, voluntary resignation, or requests by employees for reduction in work hours

24 weeks after you receive your first loan disbursement (or December 31, 2020, whichever occurs first)

Step 12: See if you qualify for loan forgiveness. 

It’s the moment of truth: Will all (or some) of your PPP loan be forgiven? To find out, you’ll need to check the following:

  • Did you use at least 60% of the total loan on payroll costs? To figure this out, divide your total payroll costs during the forgiveness window by the total loan. 

If you answer no to this question then your forgiveness amount may be reduced. If you answered yes, check the following:

  • Did you maintain your monthly average FTEs? Use the calculation method from Step 2 to calculate your FTE for the forgiveness window. Then compare your average FTE to your 24-week FTE.
  • Did you pay each of your employees at least 75% of their average wage? Refer back to each employee’s minimum wage (you did this in Step 3), and then look at the total you paid them during the forgiveness window. Did you pay them more than their minimum wage? Remember, you may need to average their salary or wages during the 24-week forgiveness period. 

If you answered yes to both of these questions, then you’ll likely qualify for full loan forgiveness. If you answered no to one or more of these questions, then check to see if you meet the following exceptions:

  • Did you restore (or do you plan to restore) your employee headcount and wages back to their February 15, 2020 levels by December 31, 2020?
  • Are you unable to rehire employees who were employed on or before February 15, 2020 before January 1, 2021?
  • Are you unable to hire similarly qualified employees before January 1, 2021?
  • Were you unable to return to the same operational level as on or before February 15, 2020?

If you answered yes to any of these exception questions, you’ll likely qualify for loan forgiveness. 

If, answering all of the questions above, you know that your loan forgiveness will be reduced, it’s now time to calculate the forgiveness reduction. The forgivable amount of the reduction is proportional to:

  • The monetary adjustment needed to ensure 60% of the forgiveness request consists of payroll costs. This is a little complex, so hang in there. Let’s say you received a $45,000 loan and used 55% ($24,750) of your loan for payroll costs and 45% ($20,250) for other approved costs. To calculate the loan reduction you would divide the amount of the loan you used for payroll costs by 0.60 ($24,750 / 0.6 = $41,250). The forgivable loan amount is $41,250, which is now adjusted to ensure payroll costs make up 60% of the forgiveness request.
  • The percentage of employees you reduced from your FTE-based averages. For example, if your baseline FTE average is 1.7 and your FTE average during the forgiveness window is 1.5, that’s a 12% reduction. Your loan forgiveness will be reduced by 12%.
  • The dollar amount that you reduced any employee’s salary. For example, if you should have paid an employee a minimum of $4,200 during the forgiveness window and you only paid them $3,500, your loan forgiveness will be reduced by $700. 

The loan forgiveness reduction is based on the smaller of the following numbers:

  • Your salary reduction plus the FTE reduction
  • The monetary adjustment needed to ensure 60% of the loan is used for payroll costs 

Here’s an example using the numbers above: You receive a $45,000 loan and only use 55% ($24,750) for payroll costs. The adjusted forgivable amount is $41,250. 

You also reduce one employee’s salary $700 below the 75% average pay threshold and reduce your FTEs by 12%. First you would subtract the salary reduction from your total loan amount spent on payroll expenses and approved expenses:

$45,000 – $700 = $44,300

Next, you would divide your forgiveness period FTEs (1.5) by your average FTEs (1.7).

1.5 / 1.7 = 0.88

Then, you’ll multiply this amount (0.88) by the loan amount that includes the salary reduction ($44,300). 

$44,300 x 0.88 = $38,984

Finally, you compare the adjustment to meet the 60% payroll expense requirement ($41,250) to the amount based on a reduction to salary and FTEs ($38,984) and choose the smaller of the two. This is the amount that is forgivable. 

In the above example, the forgivable amount is $38,984, and you would need to pay back $6,016.

Step 13: Organize your remaining PPP expense records.

It’s time to compile the rest of your PPP documents (see Step 11 for what you need). Aren’t you glad that you already got a head start?

Step 14: Complete your application for loan forgiveness.

After your 24-week forgiveness window is up, it’s time to submit your forgiveness application to your lender.  

If you plan to restore your employee headcount or wages by December 31, 2020, wait until after you do this restoration to apply for loan forgiveness. Then include documentation, like your payroll report, that verifies you’ve completed this restoration. 

Under the PPPFA you now have 10 months from the end of your covered period or December 31, 2020, whichever occurs first, to submit your application for loan forgiveness. Your loan payments will begin after your loan forgiveness is determined.

After you submit your loan forgiveness application

Step 15: If you haven’t received a determination, check with your lender.

Your lender is required to give you a forgiveness determination within 60 days of receiving your loan forgiveness application. If you don’t hear from them after 60 days, reach out and request a determination.

Real talk time: This is a lot, we know. Unlike a traditional business loan, a PPP loan requires an extra level of planning, tracking, and organization. The payoff? If done right, a PPP loan can amount to “free” government money to keep your business afloat and your employees paid. But a bigger payoff means a longer to-do list.

Ultimately, we still think the extra work is worth it to give your business a few extra months of relief while keeping your awesome team paid.

If you’re worried about accidentally committing bank fraud with your PPP loan, we have a few suggestions for that, too. Need help with your loan forgiveness application? Here’s a step-by-step guide.

Andi Smiles
Andi Smiles Andi is a small business financial consultant and coach who teaches business owners to take control of their finances. She’s helped hundreds of self-employed folx organize and understand their business finances, while also uncovering their emotional relationship with money.
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