Finances and Taxes

What You Can Do to Help Avoid PPP Loan Fraud

Gusto Editors  
3 Ways to Avoid Paycheck Protection Program (PPP) Loan Fraud - Gusto

Updated as of December 29, 2020: On December 27, 2020, President Trump signed a new bill into law called the Consolidated Appropriations Act, 2021. Within this bill there is new PPP legislation. Stay up-to-date and learn everything you need to know about PPP Round 2 here.

The deadline for Paycheck Protection Program (PPP) applications lapsed in August and while the country waits on Congress to pass another stimulus package, many employers have turned their attention to applying for loan forgiveness. The requirements for forgiveness have shifted since the program started, as Congress relaxed certain rules to give small businesses more flexibility during this trying time. These changes have left many small business owners confused about how to spend the loan proceeds in order to qualify for forgiveness. Unfortunately, opportunities to commit fraud are rife, and some small business owners may not even realize their PPP fund practices are fraudulent.

Here are deliberate actions you should take to ensure you spend the PPP proceeds without putting your business at risk.

Pay your employees legally and consistently

There have been multiple reports of business owners paying employees throughout the duration of the covered period—or increasing salaries and/or work hours during the covered period—only to garnish wages later. This is illegal. 

Here are a few practices you should never implement; do not: 

  • Ask employees to pay back portions of their wages after the covered period ends.
  • Ask employees to work for free after the covered periods ends to “make up” for the wages they earned during the covered period.
  • Garnish wages after the covered period to “make up” for wages paid during the covered period

Employees who are concerned for their jobs may not be empowered to speak out and may feel pressured to comply with dubious employer requests, but make no mistake: activities like this should not be part of your operation. Make sure you communicate and implement clear, consistent, and legal policies surrounding compensation; do not deviate from these in order to access PPP funds. 

Certify, in good faith, that you need your PPP loan.

On April 23, the Treasury Department issued additional guidance on who exactly qualifies for PPP loans. Responding to criticism that PPP funding was being awarded to businesses with access to capital outside of the PPP, like Shake Shack and the Los Angeles Lakers, the new rule discourages larger companies with access to other sources of liquidity from monopolizing the limited pool of funding.

The Treasury emphasized the requirement that PPP borrowers certify in good faith that the loan is “necessary to support the ongoing operations of the applicant.” The guidance particularly calls out that “companies with large valuations and access to capital markets” are “unlikely” to meet that requirement.

Additionally, the Justice Department has begun investigating companies to ensure they did not apply to the program with misleading information, and Treasury Secretary Steven Mnuchin has stated the Small Business Administration (SBA) will audit all PPP loans of more than $2 million for any criminal liability—keep in mind that all loans are subject to review, but the mandatory audit only applies to larger loans.

What you can do:

  • Carefully review the Treasury’s guidance and program eligibility rules. Double-check affiliation rules and qualifications based on your size, industry, and entity type.
  • Take a look at your current business activity and other sources of liquidity, and ask yourself if they are sufficient to keep your business going without a PPP loan.
  • While the CARES Act waives the requirement that applicants are unable to get credit elsewhere, if you do apply for other loans, have documentation handy to show you considered other sources.

Our COVID-19 Small Business Resource Hub has legislation updates, advice, and support.

Make sure every business only receives one loan.

Many businesses have applied for a PPP loan with multiple lenders to increase chances of receiving funding. However, you are required to certify in your application that you have not and will not receive another PPP loan. Thus, you must be careful to only accept ONE loan corresponding to the tax information you submitted (either your employer identification number, Social Security number, or your tax ID). While this may seem like a no-brainer, audits have revealed that over a billion dollars of PPP funds have gone to companies that have received multiple loans. 

Applying for PPP loans for multiple affiliated businesses can also be complicated. The rules vary based on total number of employees, industry, and other factors.

What you can do:

  • If you have already submitted more than one PPP loan application, make sure you only sign loan documentation for one of those loans. 
  • If you somehow ended up with two PPP loans for your single business with the same tax ID number, notify your lender and repaying any additional PPP loans.
  • For those with multiple affiliated businesses, it’s unclear whether getting multiple loans for multiple businesses is acceptable under the PPP. So if you have already received a PPP loan for one of your businesses, try looking for other sources of relief for additional business needs. Our Small Business Relief Finder can help.

Use your loan for working capital.

Many PPP applicants have questions on how flexibly they can use PPP funds outside of payroll costs and other eligible costs specified in the CARES Act. While the CARES Act stated which expenses are eligible for forgiveness, it was less clear about what expenses could be covered if a small business is not seeking forgiveness.

John Asbury, the chief executive of Atlantic Union Bankshares in Virginia, told the New York Times, “As long as they’re using the funding for the operating expenses of the business, our interpretation—and we think it’s clear—is yes, you can use it as effectively a working capital loan.”

Note that lenders may differ in their approach to permissible use, and you should check with your individual lender to understand what you may use your PPP funds for outside of payroll and other eligible costs. 

What you can do: 

  • Check with your lender on any other permissible uses for your PPP funds. For example, some lenders may determine that a use is not eligible for forgiveness but is still eligible for use under the PPP.
  • If you need the PPP money for business costs outside of payroll and other approved expenses, make sure you are using the funds as working capital, or in other words, to support the day-to-day operations of your business.
  • Still keep track of everything you spend it on, even if you may not be eligible for loan forgiveness.
  • Spend what you can, and either return what you don’t spend (there’s no prepayment penalty) or make a plan to pay back the low-interest loan within two years. Keep in mind that the 1% interest accrues on a daily basis, even while payments are deferred the first six months of the loan.

To make sure you’re spending PPP proceeds responsibly, visit our PPP spending guide; if you still have questions, visit these PPP FAQs

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Updated: January 6, 2021

Gusto Editors
Gusto Editors


  • Rick Childs

    Gusto in the beginning they said we could pay our independent contractors with it. The loan was approved and we made our disbursements. Now we are told we could not pay them and it’s to late the money is gone. If we only have the 25% of operations expenses do we get a reduced amount forgiven?

    • Gusto Editors

      Hi Rick — as of April 6, we provided updated guidance from the SBA that made it clear independent contractors should not be treated as employees for the purposes of calculating a business loan amount. Independent contractors, however, could apply for PPP loans for themselves starting April 10. We recommend you discuss your individual situation with a lawyer for next steps.

  • K. H.

    First, Thank you for doing this. Your insights help a lot!

    Second, I ran the Gusto PPP forgiveness report and i’m at 64% for Payroll use. Can I provide an early Off Cycle Payroll to get the value over 75% or do I need to hire a new employee?

    • Gusto Editors

      Hi K.H. — we recommend you touch base with your CPA for more specific guidance on your situation!

  • Joe Cooper

    Is loan forgiveness based on spending 75% of the total loan amount on payroll costs or 75% of the loan amount spent in the 8 week period? (With the balance of the loan paid back or rolled into a loan with the 1% interest).

    • Gusto Editors

      Hi Joe — at least 75% of the total loan amount should be spent on payroll costs over the 8-week period.

  • Steven Johnson

    I was approved for a PPP loan through Cross River Bank and signed closing docs on April 21st. I still have not received the funds and Cross River Bank will not return my calls or email. Any suggestions? Can I apply with another bank even though I’ve signed closing docs?

    • Gusto Editors

      Hi Steven — if you provide us your company name and the email tied to your Gusto account, our team can assist!

    • Charlie Branson

      If you bring back an employee who made more than $135K but offer only 67K, a 50% reduction, will it be forgiven?

      • Gusto Editors

        Hi Charlie — to qualify for loan forgiveness, you cannot reduce the average wage of any employee by more than 25%. However, 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.

  • Carolyn Case

    If an owner loaned us money to pay our employees while we were waiting for our PPP to be approved, we have now received the PPP money, can I repay the owner back with the PPP funds an it be considered forgiven?

    • Gusto Editors

      Hi Carolyn — the PPP funds must be used for expenses incurred during the 8-week period after you receive the funds, and at least 75% must be used on payroll for your employees. You can learn more here:

    • Margie

      What happens if you get the ppp loan and use all the money and still your business doesn’t have any income, can you close your business for good? Or would that be considered fraud?

      • Gusto Editors

        Hi Margie — since tax rules change over time and can vary by location and industry, we recommend consulting a CPA or tax advisor for specific guidance.


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