Finances and Taxes

A Small Business Owner’s Guide to the Paycheck Protection Program

Caleb Newquist Editor-at-Large, Gusto 
What Is the Paycheck Protection Program PPP - Gusto

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.

LIVE UPDATES

There has been a lot of guidance issued to clarify the details of the Paycheck Protection Program. We’ll be making live updates to this article based on that guidance, with the most recent appearing first, and technical corrections appearing in the body of the post. Questions? Hit us up on Twitter @GustoHQ

June 5

The president has signed the Paycheck Protection Program Flex Act (PPPFA), which makes important changes to the PPP. To understand the changes, visit this breakdown of the PPPFA.

As of today:

  • $150 billion remain in the PPP fund
  • the application deadline is June 30, 2020

May 13, 2:45pm, PT

The SBA has issued a new interim final rule that allows PPP lenders to increase existing PPP loans to partnerships or seasonal employers to include appropriate amounts to cover partner compensation. If the loan has already been issued, this new rule permits the lender to make another distribution to the borrower. 

April 24, 11:20am, PT

The Paycheck Protection Program has been replenished with $320 billion. The Small Business Administration (SBA) will resume accepting loan applications on Monday, April 27, at 10:30am ET from approved lenders.

Applications that have already been submitted will continue to be processed on a first-come, first-served basis. If you have not already done so, apply now. Check our list of banks and lenders who are accepting PPP applications.

April 16, 1:05pm PT

Existing funds for PPP loans have been exhausted, but it’s very likely that more money will be allotted to the program. We recommend that you move forward with your application process. If and when the government approves more funding, the SBA will quickly resume loan processing and you’ll be at the front of the line.

April 8, 7:30pm PT

The latest update from the Small Business Administration and the Treasury Department addressed a critical issue: timing. Specifically, the start of the eight weeks when the loan proceeds spent by a business will be eligible for loan forgiveness. The clock starts ticking on that eight weeks from the date the lender makes the first disbursement of PPP funds to the borrower. That first disbursement must occur within ten calendar days of the date of the loan approval.

April 7, 3:30pm PT

New guidance from the Small Business Administration and the Treasury Department has answered common questions from both lenders, borrowers, and their business advisors. Most notably, the FAQ clarifies issues like compensation that exceeds $100,000, and how to account for federal taxes when determining payroll costs for calculating the maximum allowable loan.

April 6, 12:15pm PT

Recent guidance from the Small Business Administration has clarified the eligibility of certain businesses for the Paycheck Protection Program. For example, faith-based organizations are eligible for both the Paycheck Protection Program and the Emergency Injury Disaster Loans program, so long as they meet other CARES Act requirements. The post is updated below with more details about the eligibility of certain types of businesses. 

April 6, 9:20am PT

Accountants, banks, tax think tanks and numerous other observers have different interpretations of how the PPP loan amounts are calculated. To allow for flexibility in preparing Gusto’s PPP reports, we’ve updated our reporting tool to give our users the option of including or excluding the federal income, FICA, and FUTA taxes when calculating the loan amount. We have also removed the illustrative example that excluded FICA tax for calculating the loan amount from this piece.

We have included a new example that illustrates the exclusion of amounts paid to independent contractors. Guidance from the Small Business Administration has made clear that independent contractors should not be treated as employees for the purposes of calculating a business’s loan amount. Independent contractors are eligible to apply for their PPP loan under the CARES Act.

April 3, 4:15pm PT

We’ve heard questions regarding our calculation methodology for PPP reports, specifically around FICA and the order of operations. We stand by our calculation and believe it aligns with the CARES legislation.

However, we are aware that it may be interpreted differently by others in the industry. We are awaiting further clarification from the SBA.

You can read more about our methodology here.

April 3, 2:20pm PT

All Gusto customers can now find a draft of Form 941 for Q1 2020 in “Documents” in their Gusto account. Note: This draft can only be used for PPP. The form will still have to be finalized for other tax purposes.

April 3, 11:10am PT

Check this live spreadsheet for a list of banks and lenders that will be accepting PPP applications.

While some banks are accepting applications from their customers and/or non-customers today, other banks may delay accepting applications until Monday, April 6, or later. Our spreadsheet will be updated in real time with the latest information we have.

April 3, 9:30am PT

If you’re a Gusto customer, you can now get payroll data reports for your Paycheck Protection Program (PPP) application through your Gusto account. Log in for more details.

Note: We’re currently updating our reports to be consistent with the US Treasury’s latest guidance. We expect to have them back up at 11:30am PT.

To understand how we’re calculating PPP reports in Gusto, read our deep dive into the methodology.


With cash flows ebbing due to the declaration of a public health emergency, many small businesses have been unable to make payroll in recent weeks.

The CARES Act attempts to address this problem with the Paycheck Protection Program, which is intended to ensure the survival of small and medium enterprises by making loans and conditional grants quickly available to them.

What is the Paycheck Protection Program?

The Paycheck Protection Program (PPP) is a new loan program under the Small Business Association (SBA). It will allow certain businesses such as banks and current SBA lenders, in addition to new or nontraditional lenders approved by the Treasury Department, to provide PPP loans on behalf of the SBA to small businesses affected by COVID-19. These loans can be used for:

  • Payroll costs1,2  (i.e., “gross pay” that includes, for example, employee federal income and FICA taxes, per SBA and Treasury guidance)
  • Interest on debt, mainly mortgages 
  • Rent 
  • Utilities
  • Group health insurance premiums

The loans will be available to all businesses with fewer than 500 employees (i.e., full-time, part-time, or seasonal). Sole proprietors, independent contractors, and folks who are self-employed are also eligible to apply for a PPP loan on their own. Businesses with more than 500 employees are eligible in certain industries. 

So while many small businesses will be eligible for PPP, including faith-based organizations, guidance from the SBA has clarified that certain businesses may be ineligible. Those include:

  • Financial services businesses and lenders
  • Businesses that have defaulted on SBA or other federal loans in the past
  • Businesses whose owners (including partial owners) are currently indicted or arraigned, are on parole for a criminal charge, or were convicted of a felony within the last five years 
  • Businesses dealing in cannabis or are otherwise illegal at the federal level
  • Businesses that engage in a pyramid scheme
  • Household employers (e.g., nannies or housekeepers)
  • Venture-backed companies that are deemed to have more than 500 affiliated employees (refer to the SBA guidance for details on affiliations)

Timing

These loans can be made from February 15, 2020 through June 30, 2020, which is known as the “covered period.” 

What are the terms of the loans?

Bear with us, there’s a lot to cover here.

Loan maximums

For starters, there will be limits to what a business can borrow.

For the Paycheck Protection Program, the maximum amount that can be borrowed is the lesser of:

  • 2.5 times the average monthly payroll costs3; or
  • $10 million

Example: If Widgets, Inc. has an average monthly payroll cost of $1 million, the most they could borrow would be the lesser of: $2.5 million ($1,000,000 x 2.5) or $10 million. Ergo, Widgets, Inc. could borrow $2.5 million under the Paycheck Protection Program.

If a business has an outstanding SBA loan from January 31, 2020 through the origination of this new loan, that balance will be added to the 2.5x average monthly payroll costs, and refinanced through the new loan.

Using the same example: If Widgets, Inc. has an outstanding SBA loan of $1 million, and an average monthly payroll of $1 million, the most they could borrow would be the lesser of: $3.5 million [$1,000,000 + ($1,000,000 x 2.5)] or $10 million. Ergo, Widgets could borrow $3.5 million under the program.

It’s important to note that there are certain things that cannot be included when calculating the loan maximum. Those things include:

  • Salaries of non-residents
  • Salary amounts that exceed $100,000 (Per SBA’s guidance, this applies to cash compensation ONLY. non-cash compensation like employer-paid health insurance premiums, retirement contributions, etc. are excluded from this exception)
  • Amounts paid to independent contractors (i.e. those who receive a 1099)
  • Credits received as a result of the Families First Act for sick leave or FMLA 

Going back to our original example: Let’s say Widgets, Inc’s $1 million average monthly payroll costs consisted of two employees who earned $150,000 each. The most Widgets could borrow would be the lesser of: $2,479,167 [($1,000,000 – [$100,000/12]) x 2.5] or $10 million. Ergo, Widget’s maximum loan amount would be $2,479,167.

And a slightly different scenario: Widgets, Inc. has an average monthly payroll of $1 million: $800,000 paid to full-time employees, and $200,000 to independent contractors. The maximum amount of Widgets’s loan would be $2 million ([$1,000,000–$200,000]*2.5) or $10 million. Ergo, Widgets, Inc. could borrow $2 million under the Paycheck Protection Program.

One final item about amounts: if a business wants to borrow funds under the SBA’s Express Loan terms, that maximum has been increased from $350,000 to $1 million. 

Payment terms

Payment terms for Paycheck Protection Program loans are as follows:

  • Interest rates for these loans will have a fixed rate interest of 1% 
  • The lender cannot charge a
    • guarantee fee, 
    • a yearly fee, 
    • a prepayment penalty, or 
    • request a personal guarantee or collateral for the loan. 
  • Also, the requirement that the business cannot obtain credit from another lender doesn’t apply. 

Finally, the lender has to provide payment deferment for at least six months (but not more than one year) for borrowers who were: 

  • in operation as of Feb 15, 2020, 
  • approved or pending approval for a SBA loan, and 
  • adversely affected by COVID-19 (which is presumed).

Loan forgiveness for Paycheck Protection Program

Under the CARES Act, Paycheck Protection loans are eligible for “forgiveness”—which means that the lender can release the borrower from the obligation of repaying the balance. The amount that can be forgiven is limited to the amount the lender reasonably expects the borrower to spend during the eight-week covered period4 on:

  • Payroll costs (capped at $100,000 on an annualized basis per employee)
  • Interest for mortgages signed prior to February 15, 2020
  • Interest payments on debt incurred prior to February 15, 2020
  • Rent obligations from a lease agreement signed prior to February 15, 2020
  • Utility payments 
  • Health care benefits
  • Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020
  • Additional wages to account for the reduction in tips for tipped employees

A couple other things: 

  • The amount forgiven cannot be greater than the loan principal;
  • It will be proportionately reduced by a decrease in headcount or wages compared to an earlier lookback period5, unless the employer reverses that reduction of headcount or wages by June 30, 2020.
  • Payroll costs must make up 75% of the forgiven amount.

Applying for loan forgiveness

In its application for loan forgiveness, a borrower must document: 

  • The number of full-time employees and pay rates for the lookback period including
    • Payroll tax filings with the IRS, 
    • State income, payroll, and unemployment insurance filings, 
  • Proof of payment, including cancelled checks, receipts, and other documentation that verifies payments for mortgage and lease obligations, as well as utility payments.
  • A certification by the borrower that all the above information is accurate and that the amounts were used to retain employees, make rent, mortgage, or utility payments. 

All lenders have 60 days to decide on the loan forgiveness, and any portion that is not forgiven must be repaid within two years. Any forgiven loans will be excluded from gross income for tax purposes.

Adjustments to the amount of loan forgiveness

If a borrower lays people off between February 15, 2020, and April 26, 2020, the amount of the loan forgiveness will be reduced by:

(Avg. monthly FTE during covered period / Avg. monthly FTE during the lookback period) x Total amount of loan forgiveness = New loan forgiveness

Using the same example: Widgets, Inc. wants $1 million in loan forgiveness under the Paycheck Protection Program. During the covered period, Widgets has 25 average monthly full-time employees. During the lookback period, Widgets had 50 average monthly full-time employees. Widgets is eligible for $500,000 in loan forgiveness [(25 / 50) x $1,000,000].

If a borrower cuts its employees’ wages between February 15, 2020, and April 26, 2020, the amount of loan forgiveness will be reduced by:

  • The amount of any salary or wage reduction of employees whose annualized rate of pay during any pay period in 2019 was less than $100,000; and 
  • whose salary or wage reduction was in excess of 25% of the total salary or wages they received during the most recent full quarter before the covered period.

Example: Widgets, Inc. wants $2.5 million in loan forgiveness under the Paycheck Protection Program. During the covered period, Widgets cut its employees wages from $2 million in the previous quarter to $1 million. None of their employees earned more than $100,000. Widgets would be eligible for $1.5 million in loan forgiveness ($2,500,000 – $1,000,000).

How to apply for the Paycheck Protection Program

The SBA allows lenders to start accepting applications from most entities on April 3, and has made an application form available. Contractors and self-employed individuals can apply starting April 10.

A prospective borrower can apply directly with any current SBA lender, federally insured depository institution, federally insured credit union, Farm Credit System institution, or any other non-traditional lender that is participating in the program. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program.

For quick reference, you can refer to the Treasury Department’s overview and information sheet on the program.


[1] Under the CARES Act, and confirmed by guidance from the SBA and US Treasury, “payroll costs” are: salary, wages, cash tips or equivalents, payment for regular leaves of absence, dismissal or separation compensation, group health insurance payments, retirement benefits payments, and some state/local payroll taxes. Whew.

[2] For a sole proprietor or independent contractor, “payroll costs” are: wages, commissions, or similar compensation that is less than $100,000 in 1 year, as prorated for the “covered period,” which is Feb. 15, 2020 through June 30, 2020. Double whew.

[3] “Average monthly payroll” means the average monthly payroll in the 12 months prior to the loan, excluding seasonal employers. Seasonal employers use the 12 weeks prior to the covered period, or the amount between March 1, 2019 and June 30, 2019, or, if they were not in business from Feb 15, 2019 through June 30, 2019, the average monthly payments from Jan 1, 2020 to Feb 29, 2020.

[4] Eight weeks from the origination of the loan. Per guidance from the SBA and Treasury, the eight weeks starts the date the lender makes the first disbursement of PPP funds to the borrower. The first disbursement must be made within ten days of loan approval.

[5] A lookback period, in this context, is used to compare the expenses in the covered period to what is normal for a typical business, and determine if it is a reasonable amount. Under the CARES Act, employers can choose between two lookback periods: either February 15, 2019 to June 30, 2019; or January 1, 2020 to February 29, 2020. For seasonal employers, the lookback period is February 15, 2019 to June 30, 2019.

Caleb Newquist
Caleb Newquist Caleb is Editor-at-Large at Gusto. In 2009, he became the founding editor of Going Concern, the one-of-a-kind voice on the accounting profession, serving in the role for 9 years. Prior to Going Concern, Caleb worked as a CPA for nearly 6 years in New York and Denver. He lives in Denver with his wife, two daughters, and two cats.
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