A Small Business Owner’s Guide to the Paycheck Protection Program
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?
Everything Small Businesses Need to Know About the Families First Coronavirus Response Act
Team ManagementBear 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.
Get the support you need. Apply now for a PPP loan.
[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.
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Hi,
I’m trying to understand how to treat recent hires who make above $100k.
Example
– Report dates- Jan 1 – Dec 31 2019
– We hired an employee who makes $125k on Nov 1 2019
For the report period, the employee only made $20.8k (2 months of pay). Do we get to include the entire amount since they weren’t paid above $100k or do I have to treat the employee as if they only made $100k and therefore only use $16.6k (100k/12*2).
Thanks for your help.
Hi John, when you apply the $100k salary cap for highly compensated employees, you can’t include any annualized, employee compensation that is in excess of $100k (for purposes of this calculation, we’ll refer to this rule as the “salary cap” and to those who hit it as “highly compensated employees”).
Gusto has implemented the salary cap by counting all Earnings of highly compensated employees each month until each highly compensated employee has received $100k in annualized pay. Once they’ve received $100k in Earnings, we won’t include any Earnings for that employee for the remainder of the year.
Ex: If a highly compensated employee receives $100k by April of each year, you’ll see a drop in Earnings in the PPP Report starting in April or May and for the remainder of the lookback period. You can learn more about our methodology here: https://support.gusto.com/1840352911/Paycheck-Protection-Program-Report.htm
Why is the federal tax paid by employees subtracted from your payroll calculation (leading to a “monthly average” calculation that is well less than our actual monthly payroll draft)? The federal guidance that I’ve seen is it is wages/compensation + some state/local taxes + benefits.
Hi Scott,
Gusto removes the amounts in calculating it for loan max. They are also removed for calculating forgiveness during the forgiveness period as far as we can tell. For reference, you can look at page 12 of the CARES Act legislation where it’s made clear that chapter 21,22,24 taxes are not included in the max loan calculation while page 11 makes it clear that state taxes are included.
In addition, the guidance in the regulations is defining this for forgiveness amounts otherwise it’d be in direct contradiction of the legislation. Any time that the SBA deviated from the strict language of the legislation or acted within its authority to select from a range, it describes why that decision was made. No such explanation is made here in the regulations so this is supposed to just be calling out for the ER that any of the same taxes are still excluded during the covered period for the calculation of loan forgiveness (which would be in-line with the legislation).
We understand you’re a trusted advisor to your clients. If you want to add them back for your clients and attempt to get a higher amount, you’re welcome to but it’s not in our Gusto report because we have given it much consideration and feel confident in our calculation (going with a higher potentially non-allowed number could also put the client in danger for not spending the forgivable amount and being left with a loan after the 8 weeks).
Does this mean that if you haven’t been paying your employees through payroll then you are excluded? Our company was paying employees through draws on the business account.
Hi Steve,
Payroll includes “compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation” as well as other expenses. If you have paid your employees from other accounts, we recommend you gather documentation of those expenses as verification.
We recommend you continue to review the SBA site for the most up to date information, and consult with legal or tax advisors for specific advice.
Are churches and religious groups eligible for the PPP if they fulfill all other requirements?
Hi Nora, religious business are ineligible for the payroll protection program loans, according to new treasury requirements.
If your religious group is registered as a tax-exempt nonprofit organization described in section
501(c)(3) of the Internal Revenue Code than it is eligible.
What if I employee all contact employees that are 1099’d. I used gusto to do this last year, but the amounts are not shown in my eligibility
Hello Suzanne, employers can not include independent or business contractors in their calculations for a PPP loan.
Contractors may apply for their own loan on April 10th.
I am looking at the report and don’t understand why you take out the EE federal taxes. If I pay an employee $5k per month compensation, that’s the cost, regardless of how much they pay in taxes. The treasury instructions don’t say to deduct EE taxes. Can you provide a link to the instruction you followed?
Hello Cheryl,
Gusto removed FICA taxes when calculating for the loan max. They are also removed for calculating forgiveness during the forgiveness period as far as we can tell. For reference, you can look at page 12 of the CARES Act legislation where it’s made clear that chapter 21,22,24 taxes are not included in the max loan calculation while page 11 makes it clear that state taxes are included.
In addition, the guidance in the regulations is defining this for forgiveness amounts otherwise it’d be in direct contradiction of the legislation. Any time that the SBA deviated from the strict language of the legislation or acted within its authority to select from a range, it describes why that decision was made. No such explanation is made here in the regulations so this is supposed to just be calling out for the ER that any of the same taxes are still excluded during the covered period for the calculation of loan forgiveness (which would be in-line with the legislation).
You can add them back for your repor and attempt to get a higher amount. It’s not in our Gusto report because we have given it much consideration and feel confident in our calculation (going with a higher potentially non-allowed number could also put the client in danger for not spending the forgivable amount and being left with a loan after the 8 weeks).
The bulk of our non-profit employees are part time. Does the loan only apply to wages of full time employees?
Hi Jeri, part-time Employees are eligible for a PPP loan.
I’m completely confused by what is the annual period to use for calculating the PPP and this seems to vary from institution to institution. Is there a report that allows for a customizable time period to aggregate payroll information. The best report I saw was the YTD reports, but those require considerable adjustment due to the odd periods required.
Hi Andrew! We’ve updated our PPP report to allow customers the flexibility to customize their date range. You can learn more about our changes here: https://support.gusto.com/1840352911/Paycheck-Protection-Program-Report.htm
Our company has payroll AND pays subcontractors as part of cost-of-sales. From my understanding of the PPP, subcontractor payments (capped at $100K) are also considered payroll. Is that correct?
Hi Sally, contractors should not be included as part of payroll costs under the PPP. They are eligible to apply individually starting April 10.
Does Gusto have a report I can download easily for this information? The custom timeline payroll report I downloaded does not compute this easily at all. It requires me to build new calculations in it to calculate totals and average monthly
Hi Diana, we’ve now updated our PPP report to allow customers the flexibility to customize their date range. You can learn more about our PPP reports here: https://support.gusto.com/1840352911/Paycheck-Protection-Program-Report.htm
I have just 3 time part-time employees which looks to be ok for applying for the PPP. Under the forgiveness part it states “In its application for loan forgiveness, a borrower must document: The number of full-time employees and pay rates for the lookback period including”
So why does it say full time for forgiveness. I don’t anticipate having any full time employees moving forward but I do still have my 3 part time employees. Would I ultimately have to repay this loan?
Hi Jen,
The amount of your forgiveness depends on how your payroll costs during the eight-week period following loan origination compare to your payroll costs on February 15, 2020. Part-time employees are covered.
In addition, “The actual amount of loan forgiveness will depend, in part, on the total amount of 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, over the eight-week period following the date of the loan.”
We recommend you continue to review the SBA site for the most up to date information, and consult with legal or tax advisors for specific advice.
The fixed interest rate was changed to 1% it is not 0.5% as your article currently states. Keep up the good work pushing info out so quickly!
Hi Dean,
Thanks for the feedback, we’ve updated our information to reflect this new guidance from the Treasury department.
When you apply the $100,000 salary cap by employee, should you also reduce the exclusion of Federal Withholding on a pro rata basis?
Hi David, based on the latest guidance from the AICPA, we’ve updated our PPP reports to allow customers the flexibility to customize their date range, as well as choose whether or not they want federal taxes to be included in the calculation of Payroll Costs.
The Act and the recently issued SBA Interim Final Rule are silent with respect to federal employer payroll taxes prior to 2/15/2020 being included as “payroll costs”. Any thoughts?
Hi Ron, we’ve updated our PPP report to allow customers the flexibility to choose whether or not they want federal taxes to be included in the calculation of Payroll Costs. The new report defaults to include federal taxes, which increases your Average Monthly Payroll Costs, thereby increasing the loan you could be eligible for. However, if you, your PPP lender or CPA prefer to exclude them – you may choose to do so when running your report.
Can part time employees wages be covered?
Hi, Mitchell, yes, part-time employees are covered.
Will Gusto release a built-in calculator to determine all these values for loan amounts based on the actual data you already have for your customers? This would be an IMMENSE help to make sure we get all the rules right, including calculating for employees paid more than $100K.
Hi Matt — we’ve released a PPP reporting tool, which should help companies with employees making over $100K. You can learn more about our methodology here: https://support.gusto.com/1840352911/Paycheck-Protection-Program-Report.htm
For the average payroll calculation. Are you using 2019 payroll or the last 12 months?
Hi Sigrid, thanks for your question. Per the SBA guidance released late on April 2, 2020, we are calculating using the previous 12 months of payroll expenses.
When calculating payroll cost – the amounts include just wages paid to employees only or subcontractors also?
Hi Angela, contractors are not eligible for the program, as they can separately apply for funding under the program.
So employers who have only part-time staff are not eligible for loan forgiveness at all? That eliminates a lot of the smallest businesses in the country.
Hi Jennifer, part-time staff are eligible for the program.
Can you guys confirm this has been corrected in your payroll calculator you all have on the site now? We have two employees over 100K and I want to make sure that the pro rated amount is still included in the calculator. Thanks!
Hi there — we’ve recently updated our PPP report and you can learn more about the updates here: https://support.gusto.com/1840352911/Paycheck-Protection-Program-Report.htm Please let us know if you have any further feedback!
I am disappointed with the red tape that comes with helping small businesses.
My business banks with a major bank who was first to start this program today however in order to apply we must have not just a business bank account with them but also a business line of credit with them. So for small businesses who have no need for credit or who are building and can’t afford another bill we are still left in the cold.
Hi Gerald, we hear you and share your concern. Gusto is working to put in place options for small businesses to apply for and receive funding as soon as possible.
If we have seasonal South African workers that are in the US for 10 months does there pay qualify? They got here in January & they will leave in November?
Hello Sarah, fulltime, part-time and seasonal employees are eligible to be included in the PPP loan.
In the “Applying for loan forgiveness” section, it states that “the borrower must document: the number of full time employees and pay rates…” My question is: I have mostly part-time employees, how does that affect my loan forgiveness eligibility?
Hi Jeff,
The amount of your forgiveness depends on how your payroll costs during the eight-week period following loan origination compare to your payroll costs on February 15, 2020. Part-time employees are covered.
In addition, “The actual amount of loan forgiveness will depend, in part, on the total amount of 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, over the eight-week period following the date of the loan.”
We recommend you continue to review the SBA site for the most up to date information, and consult with legal or tax advisors for specific advice.
What’s considered a “New Buisness”? We’re a growing firm that’s only 2 years old and our last two months payroll average is way higher than the previous 1 year average.
We recommend you continue to review the SBA site for the most up to date information, and consult with legal or tax advisors for specific advice.
Thank you for this article! The only question I have (and can’t seem to find an answer to anywhere) is should we be using gross or net pay when calculating average salary?
Hello Mark,
Gusto’s calculation uses gross wage. Gross wages are the total amount of gross pay (salary, wages, commissions, tips, and bonuses) you paid to full-time and part-time employees during a given month. It includes employee-paid State and Federal Taxes and employee-paid Benefits Contributions. It does not include employer-paid Federal Taxes or State Taxes.
For more information on Gusto’s methodology please see this help center article, https://support.gusto.com/1840352911/Paycheck-Protection-Program-Report.htm
Any thoughts on small businesses who have grown over the past 12 months? In March 2019, I had 3 employees. Now I have 8. The ‘average’ payroll won’t allow me to keep them all employed at my current payroll rates. How do I calculate my monthly rate in this scenario?
Hi Michael, you are required to use the calculation specified in the SBA guidance dated April 2, 2020 (https://www.sba.gov/document/policy-guidance–ppp-interim-final-rule) to calculate your maximum loan amount. However, you can use your loan funds to pay eligible payroll expenses, including those of your additional employees, and those expenses will be eligible for forgiveness.
My question relates not the post directly but rather the PPP Report generated by Gusto. The report includes State Income tax in the borrowing base. Income tax is borne by the employee, of course, so it is my understanding this should not be included. Only state taxes paid by the employer can be included.
Hello Steve,
Gusto’s calculation uses gross wage. Gross wages are the total amount of gross pay (salary, wages, commissions, tips, and bonuses) you paid to full-time and part-time employees during a given month. It includes employee-paid State and Federal Taxes and employee-paid Benefits Contributions. It does not include employer-paid Federal Taxes or State Taxes.
For more information on Gusto’s methodology please see this help center article, https://support.gusto.com/1840352911/Paycheck-Protection-Program-Report.htm
The report you made for me on Gusto is showing annual payroll from 01-01-19 to 12-31-19, even though I have been in business since 2018. As per the rules, my annual payroll report should be from 03-31-19 to 03-31-20 if we are required to use the the last trailing 12 months. Correct me if I’m wrong?
Hi Hassan, you are correct. We have since updated our calculator to reflect new treasury guidance.
Unless you are a seasonal business or weren’t in business (and paying employees) on or before February 15, 2020, your pay period should be 12 months from the report date. For example, if today is April 2nd, we’d recommend that you select a period of April 1, 2019 – March 31, 2020.
Thanks for reaching out!
Do we have to subtract the federal taxes withheld from the employee while calculating the loan amount ?
Hi Pratik,
Gusto removed federal taxes when calculating the loan max. They are also removed for calculating forgiveness during the forgiveness period as far as we can tell. For reference, you can look at page 12 of the CARES Act legislation where it’s made clear that chapter 21,22,24 taxes are not included in the max loan calculation while page 11 makes it clear that state taxes are included.
In addition, the guidance in the regulations is defining this for forgiveness amounts otherwise it’d be in direct contradiction of the legislation. Any time that the SBA deviated from the strict language of the legislation or acted within its authority to select from a range, it describes why that decision was made. No such explanation is made here in the regulations so this is supposed to just be calling out for the ER that any of the same taxes are still excluded during the covered period for the calculation of loan forgiveness (which would be in-line with the legislation).
You can add them back for your report and attempt to get a higher amount. It’s not in our Gusto report because we have given it much consideration and feel confident in our calculation (going with a higher potentially non-allowed number could also put the client in danger for not spending the forgivable amount and being left with a loan after the 8 weeks).
Hi there. Thanks for all of your work to keep us updated on the CARES Act and PPP — very much appreciated.
One thing that has confused our team, and the SBA lender we are working with, is whether we should be including the cost of payments to independent contractors in our “payroll” calcs. Knowing that self-employed folks will be able to apply for PPP funds next week, it seems to us that they should be excluded from our payroll calcs in the PPP application since they will be making their own applications for these funds.
We have strictly interpreted employee payroll costs as wages, benefits, etc paid to employees (ie folks on staff), but we noticed that Gusto’s PPP Report includes the cost of contractor pay. Can you clarify where you have seen this component confirmed?
Hi Julia, due to updated guidance published by the SBA late last night, we updated our reports to exclude independent contractors from our reports. We suggest you log in and re-download your report for the most up to date report.
Thank you for bringing this our attention.
Your payroll report package is great, except that it’s incorrectly including contractors’ payments in the calculations of FTE and payroll costs. Also, it is using data from calendar 2019 instead of the 12 months prior (e.g. april19-mar2020) can we get an update? Thanks!
Hello Benjamin, thanks for the feedback. We have updated our calculator and contractor payments have been removed from the report.
Hi!
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.
where on the PPP application do i add the current amount of my SBA loan???
Are you sure that if I owe $1mill on a current sba loan that i can get that as well?
Hi there, you should speak to your lender about what information they may need regarding your existing SBA loan. You should still be eligible for a PPP loan so long as you have not defaulted on your SBA loan within the last 7 years.
The calculation excludes the employee portion of FICA that is paid gross to the employee. If Widgets, Inc. paid $1,000,000 gross and withheld $120,000 FICA from employees, then paid $240,000 in FICA (both employee and employer portion) shouldn’t Widgets be eligible for the full $1,000,000 (but not $1,120,000 which would include the employer portion)?
We’ve heard questions regarding our calculation methodology for PPP reports, specifically around FICA. We currently stand by our calculation and believe it aligns with the CARES legislation. 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: https://support.gusto.com/1840352911/Paycheck-Protection-Program-Report.htm
Are you using the term “covered period” two different ways? It’s defined as Feb. 15, 2020 – June 30, 2020 in [2] and then as the eight weeks from the origination of the loan in [4].
Hi Lucia,
As per the SBA guidance published on April 2, 2020, the “actual amount of loan forgiveness will depend, in part, on the total amount of 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 February15, 2020, over the eight-week period following the date of the loan.” Thus, it is important that you document the costs you incur over the eight-week period following originatino of the loan in order to have your loan forgiven.
Thanks for reaching out.
It appears that your description of “Average monthly payroll” in footnote 3 may be incorrect. The form indicates that most business will use the average monthly payroll for 2019, but you specify that it should be the average monthly payroll in the 12 months prior to the loan.
Hi Boyd,
Per the latest SBA guidance published late on 4/2/20, the payroll should be calculated using the average monthly payroll in the 12 months prior to the loan. See: https://www.sba.gov/document/policy-guidance–ppp-interim-final-rule for more information.
Thank you for reaching out!
If my business (fitness studio) has both employees and independent contractors to operate, do my “payroll costs” include the contractors wages?
Hi Cheryl,
Per SBA guidance published on 4/2/20, because “independent contractors have the ability to apply for a PPP loan on their own, they do not count for purposes of a borrower’s PPP loan calculation.” Independent contractors are not included in “payroll costs” for your business.
Thank you for reaching out!
What is the number of employees you put on the application?
Total number of employees during audit period (2019)?
Average monthly number of employees from audit period?
Number of employees when applying for the PPP?
Hi Moses, jobs are all active employees. Active employees is defined as employees who started before the start of the month and not terminated at the end of the month. Current Jobs (at the top of report) is the number of active employees as of the day you ran the report.
In PPP calculator (for Gusto customers), you include Employee paid State/Local taxes. This doesn’t seem right to me. Why would the Employer be getting credit for something that the Employee pays for?
Hi Jerry, we stand by our calculation, and we believe it aligns with the CARES Act legislation. Please check out our help center article for more info on Gusto’s methodology: https://support.gusto.com/1840352911/Paycheck-Protection-Program-Report.htm
Is wages net pay ( amount after subtracting Federal withholding and Social Security ? Or gross pay + the matching SS and FICA obligation payed to 941 ?
Hello Mark,
Gusto calculated gross wages to include the total amount of gross pay (salary, wages, commissions, tips, and bonuses) you paid to full-time and part-time employees during a given month. It includes employee-paid State and Federal Taxes and employee-paid Benefits Contributions. It does not include employer-paid Federal Taxes or State Taxes.
Please check out our help center article for additional information on Gusto’s methodology: https://support.gusto.com/1840352911/Paycheck-Protection-Program-Report.htm
Can you confirm if average payroll costs are not just W-2 employees but should also include 1099 contractor payments and/or owner guaranteed payments?
Hi Rhett — payroll costs do not include amounts paid to independent contractors. Independent contractors can apply for PPP starting on April 10.
So a small business that has employees as well as various 1099 service providers…can include in the calculation of “payroll costs” as payments to 1099s that were reported to the IRS…for both purposes of the loan amount, as well as forgiveness? Sounds good to me but just having a hard time verifying that with the SBA and/or Treasury guidelines.
Yes, the definition of “payroll costs” is the same for both loan amount and loan forgiveness in the SBA’s interim final rule published April 2. We recommend you continue to check for updates.
Thank you for the helpful article! I do have a question and, thus far, I have been unable to locate anything specific regarding my question. As a small business that works regularly with a handful of independent contractors, I’m curious if “average payroll” as defined here can include the amounts paid to them. We have 2-3 independent contractors for whom we have filed 1099-MISC’s for the last 3-4 years. (1) Can the amounts paid to these independent contractors be used to calculate the “Average Monthly Payroll” on the application? …and (2) will amounts paid to these independent contractors from the proceeds of the loan be included in the “forgiven” portion of the debt?
Hi Marc — average payroll for a small business does not include costs paid to independent contractors. Similarly, those costs wouldn’t considered when applying for loan forgiveness. Independent contractors are free to apply for a loan on their own starting on April 10.
Can you clarify which federal taxes should be excluded from Gross Wages? Is it Withholding, FICA and Medicare withheld? I ran the Gusto COVID report and it looks like they are taking total Gross Wages, less all taxes withheld and then adding back state taxes.
Hi Andrea, Gusto calculated gross wages to include the total amount of gross pay (salary, wages, commissions, tips, and bonuses) you paid to full-time and part-time employees during a given month. It includes employee-paid State and Federal Taxes and employee-paid Benefits Contributions. It does not include employer-paid Federal Taxes or State Taxes.
Please check out our help center article for additional information on Gusto’s methodology: https://support.gusto.com/1840352911/Paycheck-Protection-Program-Report.htm
Are you limited to $100K of payroll costs per employee, or $100K of salary per employee?
A short example might make this clear. Let’s imagine you only have 1 employee, who gets paid $150K/yr. You also pay $500/month for healthcare and $1000/month to a retirement account for the employee. So average monthly is either $8,333 or $9,833; and your max loan size is either $20,833 or $24,583.
Do you know which it is? Thanks!
Hi Kit — Under CARES/PPP, payroll costs include: 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. (You can refer to footnote 1).
For a sole proprietor or independent contractor, “payroll costs” include 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. (Footnote 2)
Is Payroll expense for Part Time employees covered? What about pay for Independent contractors?
Hi Daniel — yes, payroll costs for part-time employees are included. Pay for independent contractors is not. Independent contractors are eligible to apply on their own starting April 10.
When excluding FICA tax – are you updating the tax rate for salary examples above $100,000 down to the $100,000 level?
Hi Courtney — based on new guidance, Gusto has updated our PPP report to allow customers the flexibility to customize their date range, as well as choose whether or not they want federal taxes to be included in the calculation of Payroll Costs. The new report defaults to include federal taxes, which increases your Average Monthly Payroll Costs, thereby increasing the loan you could be eligible for. However, if you, your PPP lender or CPA prefer to exclude them – you may choose to do so when running your report. You can learn more about how to run your report with Gusto here: https://support.gusto.com/1840352911/Paycheck-Protection-Program-Report.htm
The calculation of average salary example is incorrect. You have deducted 2 x $150,000 for highly compensated employees. They should be capped at $100,000 not completely excluded.
Glenys, thanks for the catch! We’ve updated the article to correct this.
The amount reported for salaries for me and my employee for 2019 was 130,330 do I divide that by 12 and Multiply by 2.5 to calculate the loan amount?
Hello Tammy,
Thanks for writing in.
We’ve calculated the monthly payroll cost as following, Monthly Payroll Cost = Adjusted Earnings + employer-paid State Taxes – Employee paid Federal Taxes + employer-paid Benefits Contributions.
For additional information on Gusto’s methodology, please see our help center article, https://support.gusto.com/1840352911/Paycheck-Protection-Program-Report.htm
Your example excludes 100% of salaries that are over $100K; however, all of the sample calculations I’ve seen only exclude the excess over $100K. Using your example with two employees with $150K annual salaries, only the $100K ($50K x 2) would be excluded from the loan eligibility calculation. Is your interpretation based on new guidance from the SBA and/or lenders?
Hi Tawnya — thanks for pointing this out! We’ve corrected this in the article