A disturbing possibility: Surely many small business owners risk losing PPP loan forgiveness.
Hopefully, most firms will only lose a bit. Some will lose a lot. Unfortunately, a few may lose out completely.
Let me therefore point out the risk areas you need to stay alert to. Hopefully the fog surrounding PPP forgiveness clears up.
One note as we start: I wrote the original version of this article before the Small Business Administration published the Interim Final Rule on PPP loan forgiveness on May 22. I have updated the article for this guidance. But reader comments and my responses aren’t updated.
A Quick Paycheck Protection Program Refresher
So first, just to bring everyone up to speed, a quick refresher.
If your small business was slammed by the Covid 19 crisis, you theoretically could obtain a “paycheck protection program” loan—a PPP loan—equal to 2.5 times your monthly payroll.
If your monthly payroll runs $40,000, for example, your PPP loan amount might be $100,000.
Payroll by the way included not just wages but employee benefits, state payroll taxes, and the business owner “compensation replacement.”
And the other part of this: If you spend the loan proceeds on payroll, rent, interest and utilities over the eight weeks that followed you receiving the loan? Bingo. The Small Business Administration forgives the loan. Free money, in other words. Maybe…
But some gotchas exist. And these gotchas may limit or eliminate forgiveness.
Gotcha #1: Headcount Reduction
The PPP loan forgiveness formula makes a small business eligible for total forgiveness. You just need to spend the loan proceeds on payroll costs, interest, rent and utilities over the eight weeks that follow you receiving the money.
However, the Section 1106 statute makes two adjustments to the initial “eligible for forgiveness” amount.
The first adjustment appears in Section 1106(d)(2)(A). It says that if you reduce the headcount of full-time equivalent employees, that percentage reduction reduces the initial “eligible for forgiveness” amount.
This adjustment works pretty simply. Say you employed five full time employees and ten half-time employees last year. Converted to full-time equivalent employees, the formula says you employed 10 workers.
But say that you terminate a couple of full-time employees. Those terminations drop your full-time equivalent employees count from 10 to 8 workers.
Dropping from 10 employees to 8 employees represents a 20% cut in headcount.
That would reduce the initial “eligible for forgiveness” loan amount by 20%.
For example, say your firm had spent a total of $100,000 on payroll, interest, rent and utilities. But say you had reduced your headcount by 20 percent. In this scenario the “adjusted for headcount reduction” loan amount drops by 20 percent to $80,000.
One other thing to note: The headcount adjustment lets a business choose which period of employment it looks back at to calculate a reduction in workers. A firm can compare its current employment to employment from February 15, 2019 through June 30, 2019 or to employment from January 1, 2020 through February 29, 2020.
Gotcha #2: Pay Rate Reductions
The PPP loan forgiveness formula includes another adjustment, too, from Section 1106(d)(3)(A).
After the formula adjusts the initial “eligible for forgiveness” amount for any reductions in headcount, it looks for any reductions in employee pay rates in excess of 25%.
Note that the formula ignores pay rate reductions for employees who earned more than $100,000 (on an annualized basis) in 2019.
But for everyone else, a pay rate reduction in excess of 25% further reduces the amount actually available for forgiveness.
Suppose a firm reduces the pay rate for one employee from $8,000 to $2,000. Perhaps this employee earns a sales commission, for example. And the bad economy just destroys sales for a few months.
That 75% decrease in payroll (from $8,000 to $2,000) equals $6,000. A 25% decrease in payroll equals $2,000. So, the reduction in pay rate in excess of 25% equals $4,000.
That $4,000 further reduces the loan forgiveness.
If a small business started out with an initial “eligible for forgiveness” amount equal to $100,000, a 20% reduction in headcount might reduce that $100,000 to $80,000.
And then a pay rate reduction like that described in these paragraphs would decrease the loan forgiveness amount by another $4,000 to $76,000.
Gotcha #3: Missing the Rehire Window of Opportunity
The Section 1106 statute includes a couple of mulligans.
The first mulligan? Per the statute and a forthcoming interim final rule, if a firm either rehires or attempts to rehire employees it laid off sometime after February 15, 2020 and before April 27, 2020, it avoids a reduction in the initial “eligible for forgiveness” amount due to an earlier reduction in your headcount.
To avoid the reduction in forgiveness by rehiring, a firm needs to rehire the employee by June 30.
To avoid the reduction in forgiveness by attempting to rehire, a firm needs to make “a good faith, written offer” to rehire the same employee by June 30 at the same pay rate and for the same number of hours and then document the employee’s rejection.
Note, too, that if even a firm can avoid reducing the initial “eligible for forgiveness” amount by rehiring or attempting to rehire, such a firm calculates a smaller initial “eligible for forgiveness” amount.
For example, say a firm averages $40,000 a month in payroll during 2019. As a result, it receives a $100,000 loan. Assume, however, that the firm laid off its entire workforce before receiving the PPP loan and can’t rehire them until June 30.
Because the firm rehires employees by June 30, it avoids the headcount reduction adjustment. But without employees on the payroll during April, May and June, it lacks payroll costs to plug into the initial “eligible for forgiveness” amount.
Gotcha #4: Missing the Pay Cut Reversal Window of Opportunity
The statute includes another similar mulligan for pay rate cuts.
If a firm reverses a reduction in salaries or wages by June 30, that reversal eliminates the requirement to reduce the initial “eligible for forgiveness” loan amount for pay rate cuts in April, May and June.
Again, though, note that the pay rate cuts themselves should reduce the payroll costs that plug into the formula.
For example, suppose a firm with ten employees making $1,000 a week cuts people’s wages to $500 a week. If the employer reverses the wage cuts by June 30, the wage cut adjustment doesn’t need to be calculated. The firm doesn’t need to calculate that a $500 per worker reduction is $250 more than a 25% decrease, for example. And then it doesn’t need to tally up these excess wage reductions and subtract the total from the initial “eligible for forgiveness” amount.
But the 50 percent cut in wages means the firm pays 50 percent less payroll.
Gotcha #5: Bad Documentation
Tax accountants will tell you that taxpayers often lose audits only because they lack good documentation.
Something similar, surely, will happen with the PPP loans. The statute requires a borrower to provide rich, detailed, high quality documentation. Here’s the actual list from the law:
…payroll tax filings reported to the Internal Revenue Service; state income, payroll, and unemployment insurance filings; documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments… and any other documentation the Administrator determines is necessary.
I added the boldfacing to that last little bit.
But mark my words, many small business owners won’t be able to provide this detail. And in that case? The statute says they lose forgiveness. To quote the actual text of the law, “no recipient shall receive forgiveness without submitting the documentation required.”
One other thing to consider about documentation, too. The Section 1102 statute–the main law that creates the paycheck protection program–requires you to use the PPP funds for the approved purposes. Very possibly some small businesses will spend enough money on the appropriate expenses (payroll, rent, interest and utilities). But then lack the ability to prove the PPP loan funds provided the money that got spent.
I would worry about a situation, for example, where a borrower deposits the PPP loan funds into a savings account–and then spends money from a checking account on payroll, rent, interest and utilities.
Note: I have another blog post that talks about how to not goof up the bookkeeping: PPP Loan Accounting Tips.
Gotcha #6: The 25% Non-Payroll-Costs Rule
The statutes passed by Congress say you can receive forgiveness if you spend the money on payroll, rent, interest and utilities.
The Treasury and the Small Business Administration refined this however and say in the Interim Final Rule that non-payroll costs can’t represent more than 25% of the loan forgiveness amount.
People read this rule in a couple of ways. But the right way to read this rule goes like this…
You received a $100,000 loan. Due to state mandated closures, you could only spend $60,000 on payroll during the eight weeks the PPP loan forgiveness formula considers.
You also spent $40,000 on rent, interest and utilities. You might think you’re okay in this situation.
But you won’t get forgiveness for the entire $100,000. Even though your spending all counts as valid use of the PPP loan funds.
Rather, you will get limited to only forgiveness for half of the $40,000 you spent on rent, interest and utilities. Why? Because then, with $80,000 of forgiveness, only 25%, or $20,000, of the forgiven amount goes to rent, interest and utilities.
One other wrinkle to mention: Congress is working on an updated version of the Paycheck Protection Program which allows borrowers to spend more than 25% of the PPP loan on non-payroll-costs.
Closing Comments
A comment about how I think you process this “losing forgiveness” risk: You maybe want to unbundle the PPP loan thing from the forgiveness formula thing.
Think about the loan as a loan, pure and simple. And if you need a loan, the PPP loan works great. Well, except for the goat rodeo element to applying. But other than that, the PPP loan may provide inexpensive flexible financing that helps you get through an almost unimaginably rough patch.
The forgiveness thing? Consider that icing on the cake. If you get some or a bunch of forgiveness? Great. Count yourself fortunate. But don’t bank on forgiveness.
And a final closing comment. You probably want to read our Maximizing PPP Forgiveness blog post for a longer discussion of that forgiveness rule the Small Business Administration published on May 22. Also, you may want to read our discussion of the actual PPP loan forgiveness application.
Ready for a Break from the Covid 19 Topic?
Let me point you to a couple of lighter, uplifting blog posts…
In Defending Millionaire Next Door: What Thomas Stanley’s Critics Got Wrong, I describe why small business ownership makes sense. Maybe the post will make you feel a little less bummed out. Maybe the post will help you rekindle enthusiasm regarding small business ownership.
In Lifetime Earnings of the Top One Percent, I explain why I think you’re doing way, way better than you imagine.
GREAT JOB WITH THE ARTICLE. GIVES GOOD INSIGHT CONSOLIDATED
Do you know if federal taxes are part of the forgiveness? For example, say last payroll ran under this program was $7500 but was – $5000 wages, $1500 IRS taxes, $500 state taxes, $500 quarterly, are all these payroll elements considered as part of the payroll towards the PPP loan (just made these numbers up).
Everything works EXCEPT the employer side of the SS and MC. Oh, the FUTA won’t work either.
But the state taxes and the taxes withheld from the employee paychecks? Yes, those all work.
How do we process payroll and not deduct the taxes? This seems to be an issue when we file 941 2nd Qtr;
2nd question. When we filed , 1 employee was $97m from 2019. The PPP will put that person over $100m for 2020.
What are the dates that are used for the $100m?
Thank you
I don’t understand your question about the “not deduct taxes.” But this example may answer… if my gross pay is $4000 but my check is $3000, the $4000 counts as payroll. Not the $3000.
Regarding the employee who makes more than $100K in 2020… only the first $100K counts.
Thanks. You made my day. I got the loan but I do not have any of the signed contract papers. Will the bank mail or SBA to me?
Don’t know. I would think bank will provide the docs electronically. BTW, you’ll get the docs from bank…
My bank delivered the PPP documents electronically and put an increment into our account the next day. I also recieved the EIDL $10k. That came directly from SBA without notice of award whatsoever, and put directly into our bank account without any kind of paperwork to be signed. Nice surprise!
Great article…my question is, I got my PPP loan funded today…can I pay my guys for the time they missed? We are back working full time and I cannot find anywhere that says if I can pay in arrears.
Thanks
You want to use the PPP money to pay people for the eight weeks that started yesterday. That’s one of the requirements for getting forgiveness.
I have not seen this mentioned before and thought maybe you could speak to it. I follow your guide, the “Five Minute Payroll”. I have a single member LLC taxed as a S-corp.
I’ve just been approve for a PPP loan. I work from home (even before the pandemic), so I have virtually no overhead costs.
The only way I could pay out the full amount of the loan (based on 2.5 times my monthly payroll, which is just me) over the course of 8 weeks would be if I were to increase my salary. Any issue with forgiveness and increasing salary?
Bonus question: What if I just immediately withdrew the amount of the loan once received, then on July 1st, when it is time to file Q2’s 941, I just treated that (plus any other salary payments made during Q2’s time period) as salary. Is there any issue there? Would more documentation be required than the 941 for that time period?
I doubt you can increase your salary. At this point, I don’t have a source to cite for that statement. But I guess it’ll come.
Also I would be careful about any simplistic or shortcut-y payroll approaches.
In your case, as I noted in the PPP Loan accounting tips blog post, I would probably outsource the payroll to someone like Gusto just to get a third-party generating good documentation.
Thanks Steve, We got our PPP loan yesterday. I know I would not have gotten this far without reading your posts. Our bank will allow us to set up a separate account for our PPP funds and I will document +75% as owner compensation during the next eight weeks. Rather than trying to track paperwork for home office deductions etc. and other expenses can we just fund our SEP with the 25% if we can afford it? (We usually just fund it one each year around at tax time.) Spending the money on payroll and the SEP would be very easy to track and submit to SBA.
Excellent Lisa! Glad you were helped.
Regarding the SEP-IRA for owners, I thought originally that works. And I guess I still sort of think that. But the most recent interim rule says that these deductions don’t work for business owners who fall into the self-employed category. Given that I would probably wait to make a SEP for owners until you get more guidance on that particular subject.
Logically, a generous SEP would not fall into the category of something you need to do to maintain ongoing operations.
Agreed that logically a generous SEP contribution falls outside the maintaining of ongoing operations category, however, the timing of this in relation to funding deadlines makes contributions owed for 2019 (made in 2020) a very real hurdle for businesses.
steve, greatly appreciative of you keeping up with this. I am a CPA with hundreds of restaurant clients. many have received PPP funding but are looking at RTC as a better option. I have not seen the actual language. some sources say you cannot have both PPP and RTC. but if you do not spend any of the PPP, do you think you could still obtain RTC?
I think you’re asking about the employee retention credit right? (I discussed that in another blog post, Section 2301 Employee Retention Credit.)
What you point to makes sense. Very possibly getting 50% of a bunch of PT workers (and at the right time) makes more sense that a PPP loan that pays 100% of payroll but only for eight weeks.
Also, you’re right, you can’t combine a PPP loan with the retention credit. It’s an “either or” situation.
Stephen:
Your statement
“I would worry about a situation, for example, where a borrower deposits the PPP loan funds into a savings account–and then spends money from a checking account on payroll, rent, interest and utilities.”
My lender suggested/required that I set up a separate account with them for the PPP funds, which I did. They funded into the account. I did my bi-weekly payroll from my operating account, using a payroll service. My idea was to “invoice” the PPP account, with full payroll documentation, and write a check from that account into my operating account, “reimbursing” for the payroll. I use a nationally known payroll service so documentation is excellent.
What is your opinion of this method? Basically invoicing with documentation the PPP account.
I think that’s a great way to do it. You may be too “perfectionist” in your approach. Going way beyond what you need to do. But your approach will absolutely work. You can’t really do “more” to establish the actual funds were used for appropriate purposes. Excellent work.
Thank you so much for all your help in giving more details about all these laws interpretation and improvisation.
We have a similar situation in our small cpa firm, but we got the PPP funds on April 22. We have two employees that we run payrolls on the 1st and 16th of each month. We are two owners of an LLC converted to an s Corp and we run monthly payroll for us on the 1st of each month. The issue we have is that we already ran 8 days (from 22-30th) out of the eight weeks for ppp forgiveness together in a payroll with pre April 22 earned salary for both employees and owners. Any idea in how to maximize the potential forgiveness amount ?
Also one of the employees is in maternity leave . It’s our impression after some research and your guidance that will count as employee benefits. Is that right ?
We appreciate any feedback
So I think you just want to make sure that you incur and pay 8 weeks of payroll within the 8 weeks after you receive funding. That is really the safest approach I see.
BTW, paying someone on maternity leave seems VERY safe.
How do you think we should handle the “incurred and paid” phrasing for forgiveness in relation to pay periods & pay dates? For example, if a business is PPP funded on today, can they use that money to pay employees for the pay period 1 or 2 weeks prior to today?
I don’t think so. I think you want to use the PPP funds for payroll that occurs within the 8 weeks and that you pay the payroll within the 8 weeks.
Thanks so much for clarifying all these points. Our PPP loan is supposed to come through in a few days (approx. May 5). So it sounds like we cannot use PPP loan funds for our next payday on May 8 because those paychecks are for work done during April 19-May 2, i.e., before the 8-week period began… If this is the case, we will only have three 2-week pay periods that can be paid from PPP loan funds. Any suggestions on how to use 2.5 months’ worth of payroll in 6 weeks? Or am I misunderstanding something?
You’re right about your next payday… what I would do is begin doing payroll weekly. Or you can make sure that you do a “special” payroll the last day of the 8 weeks.
The point is, you’re going to reschedule your payroll so you get eight weeks of payroll incurred and paid within the eight week period that starts on May 5.
Ahh, OK, thank you, that makes sense.
Yikes. I was informed that there was nothing excepted on an accrual or deferral basis, that it must be strictly a cash basis. Therefore, our 5-7-20 payroll is 100% for the 2 weeks prior ending 4-30-20. Our loan was granted 5-5-20. Are you saying that forgiven expenses must both apply to the 8 week period AND be paid in that 8 week period?
I too am very grateful for your knowledge with all this confusion.
Here’s the way an accountant would say this should work: The usual accounting method would apply to the 8 weeks.
So if you’re a cash basis taxpayer, you’d look at cash transactions. And within the 8 weeks, you’d want to pay for 8 weeks of payroll. This would not necessarily mean the eight weeks people worked were the same eight weeks the forgiveness formula looks at… Cash basis accounting looks at cash flows.
Just to continue, if you were an accrual basis taxpayer, you’d look at actual eight weeks the forgiveness formula considers… and then at the accrued payroll expenses for that same period of time. Here you’d do your accounting so the actual costs of the employees over the eight weeks showed up as expenses for those eight weeks.
For a skilled accountant–so like a CPA–either approach would all work fine. (Though the CPA would prefer you use accrual accounting because that’ll make things most accurate.)
HOWEVER the problem I see with this. Your banker will probably not be able to easily understand and stamp “FORGIVEN!” any accounting that requires you to be sophisticated or complex in your accounting or that requires him or er to take the time to really dig into the details.
For this reason, I think you do your bookkeeping in a way that can’t possibly be misunderstood. E.g., for the eight weeks. do weekly payroll. And make sure that you do a payroll that ends (and pays people fully through) the last day of the eight weeks.
Bankers are typically not very good accountants. Also, just to say this, small business owners typically aren’t either. You don’t want bad to sloppy bookkeeping to destroy forgiveness.
Regarding the self-employed Gotcha #8, what about a self-employed person with no employees filing a schedule C with a 2019 Schedule C net profit of $200,000. The quoted language is vague about what happens when the net profit is above $100,000.
For example, $200,000 / 52 is $3,846. If the self-employed loan recipient paid himself $3,846/week for the eight week period, the language you quoted above would support FULL forgiveness (that is 2.5 x $8,333 = $20,833).
A related question: If the self-employed person paid himself less than $3,846/week would he be subject to Gotcha #2?
Thanks.
I looked at the April 14th guidance in more detail (especially the language quoted below) and the answer to my first question above seems to be that $15,385 of the loan would be forgiven under clause i below and the remainder of the loan would be forgiven under clause ii below.
Still not sure about my second question.
April 14 guidance (page 21750 of the Fed Reg):
f. What amounts shall be eligible for forgiveness?
The amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period on:
i. Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight
weeks, a maximum of $15,385 per individual)…
ii. owner compensation replacement, calculated based on 2019 net profit as described in Paragraph 1.b. above, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit,
[additional provisions dealing Schedule C mortgage, rent and utilities expenses]
Just a question on your reply. We do bi-weekly payroll , so I was dividing my over 100,000.00 employees by the 26 payrolls, so I counted 3846.16 on each payroll towards my 75% forgiveness, can I used 4166.67 per payroll instead even though I am biweekly for these four payrolls during the 8 weeks?
You’re limited to the $100K. So the max you can pay a Schedule C business owner over the 8 weeks is 8/52nd of $100,000.
BTW, you don’t get penalized for reducing the pay rate of someone who makes more than $100K.
Yep, thanks. I wasn’t focusing on the “2019 net profit as described in Paragraph 1.b. above” (quoted above) which clearly limits the forgiveness to 8/52nd of $100K.
Is the #2 Pay Rate Reduction only for Salaried employees or hourly too?
And if it applies to Wage earning hourlies, then does the reduction calculated apply to the hourly PAY RATE or the total pay for the week/month.
e.g. John worked 80 hours a month at the rate of $15 a hour for a total payroll of $1200
In the post PPP covered period, would we have just have to keep’s John’s $15 a hour rate in line or NOT reduce his total pay of $1200 by more than 25%.
I think if he made $1200 before, you need to keep his pay to $900 or higher after…
I’ve really enjoyed reading your posts on the PPP loans. I’ve been hunting for people who seem to have a reasonable grasp of the situation… not a lot of them out there. 🙂
Can I get your thoughts on a couple of details? I’m a sole-prop, no employees. My sched C line 31 is 91,360. I applied for, and received (in funding) a PPP for 19,033.33. I have had that deposited into it’s own business account and will be using it to draw salary for the next 8 weeks. I am aware that SoleProp forgiveness is limited to 8 weeks of salary (not two months as you point out), based on those 2019 numbers above that would be 14,055 (line 31 div 52 mult 8). Which would you recommend, assuming forgiveness is hoped for?
1) Transferring the full loan amount, divided by 8 cks as salary, to the personal account and assume that PPP will do the calculation on their own and forgive the correct amount despite overage?
2) Transfer the 8 week amount of 14,055 by 8 cks to match the exact math of 8 weeks?
3) Transfer the 75% amount of 14,274.99 in 8 cks from fear of missing out on the forgiveness because of that detail?
While I clearly want forgiveness, because – duh – digging myself out of a debt hole at the bottom of a recession is not something I look forward to, I’m not planning on it. I worry about firms I work with that are hiring employees to do nothing, with so many cautions in place. Paying 50,000 dollars to employees with no income coming in, then discovering you’d gone heavily into debt to do it… Ouch.
Another issue you might outline, I’d love to hear your thoughts on it, are simply people refusing to come back to work. A number of the firms I’m involved with have had employees who ‘decline’ to return. I’m in Oregon and unemployment here is being extended even if you refuse to work if you feel unsafe. Eventually, I’m assuming there will be some shake down on that but in the meantime, trying to get to the correct amount of employees, and payroll totals seems very hit and miss.
While I’m at it, there’s definitely a concern as well about how to meet the ‘necessary’ guidelines. For instance, would they expect us to sell a personal car? Take out and Max a business credit card? Take out a heloc on the home? Etc. Is a 25% sales loss enough? 50%? 75%?
The PPP seems like it would actually be the best used to help companies that have had a low to mid range sales drop. Then instead of bringing back employees who cannot work (such as laid off from non-essential closures) and will be helped by unemployment, it can be used to keep the retained employees working full time so that the businesses themselves continue to function protection all our paychecks moving forward. Trying to decide what the ACTUAL intent of the PPP is seems to be an exercise in frustration.
I think your thoughts are good. I don’t think you’re going to be penalized if you use 75% or 8/52nds (so only “almost” 74%).
Regarding employees not coming back, after you asked this question and after I answered it for the first time, the Treasury added this question and answer to their guidance:
Final thought: I doubt Congress expects you to sell a car, tap a HELOC, etc, to keep your firm afloat. But if they do, small guys probably don’t need to worry too much about getting caught by assuming the statute meant what it says.
Steve,
Thanks so much on your thoughts. I’ll do the 75% total then. Better for them to yank a couple hundred from me than me not meet some imaginary threshold.
I speak from experience so far on this ‘refusing to return to work’ thing. You should look at the stories online. I can only tell you that, spread across 4 or 5 companies, 5 – 10% of the staff has refused to return to work and when reported to the unemployment office we were told that likely they would continue to receive benefits regardless.
Thanks again!
The Treasury has now said you won’t get beat up quite as bad if you can’t rehire some. I’ve updated the blog post for this rule change. thankfully…
Hi Morgan, Steve –
I am so glad I ran into your comments here. I am in a bit of a similar situation and any inputs from your side would be very much appreciated:
– I am also a sole proprietor who made ~180k in 2019 (~15K per month)
– In 2020, for the past few months, my business is down to $10K per month, post covid-19 (33% reduction) and hence I applied for PPP
– I got approved for 20,833 (they capped me at $100K grant) which makes sense for 2.5 months
My question is:
1) I am making $10K per month right now, post covid and so my projected salary for 2020 at this rate will be $120K (down from last year but still > 100K). Can I still access PPP funds and pay myself from that fund even though I am still going to be making > 100K this year?
2) If yes to 1 above, how much can I pay myself per month? I am still working though business is down to 10K per month (it used to be 15K per month before covid). Does it mean I can pay myself an additional 5K per month (+ an additional 3K: I work from home and have to pay rent and now this is my workspace so rent can also be included)? I am just confused whether I can still pay myself from PPP since even at my reduced business, I am going to be making > 100k. I read somewhere that you can only compensate yourself upto 100K salary rate but if you are already making more than 100K salary rate (post covid), can you still draw salary from the PPP?
Any inputs will be greatly appreciated!
Many Thanks
Steve, thanks for all your articles and insights! We appreciate you!
For #8, can we assume the “75% rule” (At least 75 percent of the PPP loan proceeds shall be used for payroll costs) doesn’t apply for the Self-Employed since 75% of 52,000 would be $8125?
For a loan of $10,833 then, you go in knowing you’ll only get partial forgiveness and will have to pay back $2833 + interest?
I think they round up the 74% to 75% for purposes of making 8 weeks equal 2 months. So you don’t need to worry about that. And then I think you will (as you note) need to pay back the remainder.
I hope you are wrong. If you do the calculations for a self-employed individual without any employees they cannot reach 75%!
I have $100K on Schedule C. Loan is $20,833 (100/12*2.5). 8 weeks “Salary cost” is 15,385 (100/52*8). This is only 74% of the loan 🙁
I think they “finesse” the issue you point to. I.e., as noted, they say you don’t lose forgiveness because of the 74% thing.
Also, I hope I’m worrying too much too. I read the interim final rules in a paranoid way the first times I parsed through them… then changed my mind and thought “oh gosh, you’re being way too negative”… and then went through them again to see if you can make a good case the “writing is on the wall”. And I’m sorry to say the writing may be on the wall.
Also something I’m aware of… people grumbling about this now and at a volume that Congress hears might have an effect.
In response to Gotcha #8…
Let’s say a Self Employed Schedule C business (single member LLC in this case) has their 2019 Schedule C showing exactly $156,000 of profit. You earned $13,000 a month and $3,000 a week.
Your loan is capped at $100,000 payroll, so let’s say the bank loans you $20,000 to make it simple.
So you receive $20k and forgiveness equals 8 times $3,000, or $24,000.
So if you pay yourself $2500 per week for 8 weeks, you deplete the $20k loan in 8 weeks and should be eligible for $24k in forgiveness, so the loan is free and clear?
I believe the Treasury and Congress will probably rewrite the rules again so that things like this can’t happen, but this is the situation as it stands today, right?
The $100K limit applies both to the payroll costs that plug into the loan formula and the forgiveness formula.
So the most you can “pay” or “forgive” for someone is $1923 a week, or $100,000 divided by 52 weeks.
Steve, wouldn’t Jack’s inquiry be able to be forgiven by using owner compensation replacement – the same response you posted for someone else?—-
i. Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight
weeks, a maximum of $15,385 per individual)…
ii. owner compensation replacement, calculated based on 2019 net profit as described in Paragraph 1.b. above, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit,
—- So can’t he use that other $56,000 of net profit to cover forgiveness of the PPP exceeding the $15385?
I assume Jack’s sole proprietorship employs no one and that he earned $156,000 for the year. If this is case, he can only look at $100,000 of his earnings. And basically that means a PPP loan of $20,833. (I calculated this as $100,000 / 12 months * 2.5 months.)
In this case, he can get forgiveness for the payroll costs that stem from owners compensation replacement. That amount equals $15,385. (I calculated this as $100,000 / 52 weeks* 8 weeks).
BTW, if he has other employees–which I think he doesn’t based on the way his numbers resemble mine–their payroll costs get handled the same way. E.g., if Jack had two employees making $50,000 each, the numbers shown above–loan amounts and payroll costs triggering forgiveness–double everything.
Final comment: Not everyone thinks this, but I read the guidance to say that if Jack is self-employed (which appears to mean he’s an employee-less sole proprietor), he only gets forgiveness for payroll costs. Not for any rent, interest or utilities.
We got our money today, May 2nd, for the PPP. Our payday with ADP is this coming Friday, May 8th. On Monday, May 5th, I want to pay a bonus of $13,500, and have all of that money “frontload” our 401k plan. That way, the $13,500 is forgivable. It is forgivable because it is in the 8 week window. I chose $13,500 because we already put in $6,000 as an elective deferral earlier in the year. That will bring us up to the maximum of $19,500 in elective deferrals. Is this a valid strategy? Or should I wait one week from Monday, May 11th, to do the $13,500. (So that it is a fresh payroll after the PPP money was obtained. Part of the payroll this coming Friday, May 8th, predates the 8 week window.) Second question, we contribute (in addition to the $13,500) to a 401k in the form of a profit share and safe harbor contribution. It is 12 percent of the $13,500. To my understanding everything can be used to count toward forgiveness (the $13,500 and the 12 percent on the $13,500). Also, all of the above is true even though the total salary is more than $100,000 per year. That is, elective deferrals basically make the cap $119,500 per year (not $100,000). Taking it one step further, the cap is really more than the $119,500 because of additional profit share and safe harbor 401k money we add to the 401k plan. Thanks!
I don’t think you get “payroll cost” into the eight weeks simply by writing a check or disbursing money “inside” the eight weeks.
I think the payroll costs need to be for the eight weeks. Further, for cash basis taxpayers the payroll costs need to be paid during the eight weeks.
Finally, for accrual basis taxpayers, I would assume a taxpayer would need to be able to use the usual accrual basis accounting conventions to count the payroll within the eight weeks.
How about employees deny to come on work because of they received unemployment plus $600 / week and its come more than they make while they work what can be happen?
The statute doesn’t provide a workaround for this predictable and common reality. And you’re going to have less payroll to plug into the forgiveness formula if you have people off work for a period of time.
As noted in the blog post, you can rehire by June 30 or attempt to rehire and avoid the “headcount reduction” adjustment to your forgiveness amount.
But you’ll still have less payroll…
I am in hotel business in Orlando FL i gave laid-off to the people work in housekeeping due to no occpancy so may be cannot reach 75% reach so want happen that time
Not sure if you have a question or a comment… sorry. If you have a question, maybe try to reword?
Steve, once the loan is forgiven, is this money going to an income category or is it going to owner equity?
According to the rule that came out, hmmm, yesterday, the loan forgiveness won’t be taxable income… but the amounts you spend using loan proceeds won’t be deductible.
When we initially applied for the loan we filled out the extended monthly average of payroll form which included 1099 employees, we weren’t told not to include them. However now we just found out after receiving the loan that 1099’s are excluded from the forgiveness loan. Is this true? It feels like a trap.
Not really a trap. More a result of people working so quickly that they weren’t careful.
You got more money than you should have. I think you’ll in end be able to get the right amount of forgiveness.
Thanks for great post, one fundamental observation you are giving impression of forgiveness based on cash flow but it should be based on accural accounting/GAAP.
E.g. 8 weeks period start from loan deposit, say someone get loan on 4/22 and on 4/23 they do payroll (this payroll is for period ending 4/21) and should not be part of PPP forgiveness.
I don’t think you can assume GAAP or even accrual basis (such as tax accrual) accounting. Two things drive this thinking. First, the other major piece of “small business subsidiary”, Section 2301, actually references (wisely) Section 448 saying basically that you want to use your regular tax accounting method for figuring out the payroll stuff. Second, most small businesses, nearly all as a percentage of firms, don’t and can’t do GAAP.
Do you have to hire the same employees back or can you hire others as long as the number and dollar amount is the same as before lay-off
I think you can surely hire new employees if old ones won’t come back.
Also, I think if the new employees make similar amounts as the old employee, the pay rate adjustment probably won’t impact you. (You need to reduce pay by more than 25% for that to kick in.)
E.g. if you have a couple of people marking $40K each and you replace them with a couple of people making $35K each, you’ll be fine (though your payroll costs will be a little lower and so you’ll get less forgiveness.)
BTW after you asked this question and I answered for the first time, the Treasury and SBA indicated they also wouldn’t reduce the initial “eligible for forgiveness” amount if you attempted to rehire the same employee at same pay and same number of hours.
Steve,
If you have laid off an employee, do you have to offer them their job back? I would like to hire someone else for a different position instead. I would be maintaining the same number of full time employees – but not specifically the same people. Is this permitted, or am I obligated to the laid off employee for forgiveness of their salary?
The formula looks at your payroll (so in total and not by employee) and it looks at full-time equivalent headcounts (so one old full-time person same as two new half-time persons) and at salary reductions in excess of 25%.
So, as long as you don’t run afoul of one of these rules, you should be okay.
And this caveat: I suppose it’s always possible SBA and Treasury might change or expand rules in this area… but I don’t think that’d made sense.
I am the sole owner/employee of an S corp that pays me the employee $72,000/year in salary. Cash based accounting. From my PPP loan, I plan to pay myself my usual $6,000/month salary for the next 8 weeks. This $12,000 salary for the next 8 weeks will be forgiven. According to the IRS, this forgiveness is not taxable, and IRS guidance said that any expense used to obtain PPP forgiveness is not deductible. (Link at bottom.)
Q: What are my W-2 wages for the year?
(1) Are my wages $72,000, with the $12,000 forgiveness added as income? This seems to violate the idea that the forgiveness is taxable.
(2) Or are my wages $60,000 ($72,000 less $12,000 forgiven from PPP loan)? This would create a conflict with what my payroll company has on record, because they will record that I took $72,000 in salary.
https://www.irs.gov/pub/irs-drop/n-20-32.pdf
A couple of comments:
First, if you pay yourself $6K a month, you won’t get $12K of payroll within 8 weeks. More like $11,077. The formula: $72,000/52 weeks times 8 weeks…
Second, what’ll probably happen on your 1120S tax return is the $11,077 isn’t a tax deduction. Mark the shareholder-employee will be still taxed on the $72K on his W-2… but the K-1 from the S corp will show a bigger number in box 1.
BTW, we do a lot of K-1s and 1120S tax returns. So I’m not being wishy-washy because I don’t know how the 1120S returns. But because I think we’ll want to get precise instructions from the IRS about how to handle this. But we do enough of these every year that I’ve got a pretty good guess.
How does the forgiveness work for a self-employed person that has not filed 2019 taxes yet?
I think the guidance from the SBA and Treasury say you can create a mock-up of your 2019 Schedule C… but gosh it’d be a better approach to just actually file your tax return for 2019…
I have several part time employees who are now making more from Unemployment than they were making working for me. I’m now competing with Unemployment to hire them back so I can take advantage of the forgiveness. What planet are we on?? Here’s my question….can I give them “raises” for two months to match what Unemployment is paying them? Or do I have to pay them the same as they were making before I laid them off? This is nuts. Thanks for your guidance.
We don’t know if what you suggest works. It’s a good idea to ponder though. Agree this is crazy. Lots of split milk given the sloppy, slipshod way Congress patched the CARES act together.
I’ve said this several times but will repeat again. I would think you try to replace employees who won’t come back. Also it’d be good to remind employees that you would hope to have them return to permanent jobs via the PPP… and that the $600 a week bonus from the feds won’t last forever. So staying home and collecting unemployment is a very short-run tactic.
P.S. Reread the paragraphs on the “rehiring employees” window of opportunity. Treasury and SBA changed the rules for rehiring after you asked and I first answered this question. Now, you only need to attempt to rehire to avoid the “headcount reduction” adjustment.
How does overtime affect the payroll calculations? Is it exempt?
I would think overtime pay for non-owner employees might increase your payroll a bit. Probably it won’t for owner employees.
One thing about the rules for forgiveness. The rules don’t support you growing your business. The rules support you maintaining your current level of operation. So that “philosophy” could come into play.
Why can’t the SBA Or the bank be straight forward with the borrowers and create such “gotcha” circumstances?
I think Congress should tell the truth here and say, “Hey listen we did this really fast. Made some mistakes. The goal was to get a lot of money into the hands of small businesses REALLY fast. We couldn’t make ‘perfect’ the enemy of ‘fast’…”
I’m not sure that was a bad idea. But our legislators should “man up” and “woman up” and admit that’s what they did.
Thanks for doing this.
Let’s say we get $30k which we got approved for. In the next 8 weeks we pay out $20K to payroll and rent but can’t fill the rest of the amount. Can we return the $10k without penalty or any interest? After we get the loan and start spending what is the time frame to return without interest? Although if we use part of it does this change our payback conditions?
Also, our payment to business owners varied from month to month. What is the determining factor for our salaries? Is it the last paycheck before we shut down?
Tough to answer concretely your questions because you don’t say what type of entity you are…
But the interest rate is very low and there’s no prepayment penalty… so you should be able to pay back any of the loan you want to without any real cost.
Regarding owners pay, I would try to pay people 8/52nds of what they received as owner’s compensation in 2019. That’s how it works for Schedule Cs. Something like that should work for shareholder-employees too.
I’m on the board of a small non-profit children’s theatre. We applied for and just received a PPP loan. We have 2 employees who we laid off when we were forced by COVID to suspend operations. We are still unable to operate, at least until our Governor lifts restrictions.
I don’t understand the interaction between these two concepts: “you have until June 30 to rehire” and “:you must use the funds within 8 weeks of receipt to get loan forgiveness.” The 8 weeks will run for us around June 22. If we rehire on May 22 or later, what are the implications for loan forgiveness? If we cannot rehire until some time after June 30, will PPP be treated as a normal loan subject to repayment? Thanks.
So there are probably three things you guys want to think about.
1. You’re tentatively eligible for forgiveness for the amount you spend on payroll during the eight weeks that ends on June 22. E.g., if you spend say $20,000, you’re tentatively eligible for forgiveness on the $20,000. And then you’ll also based on that $20,000 be tentatively eligible for another $6,666 of forgiveness on rent, utilities and interest.
2. That tentative “eligible for forgiveness” amount? If you have reduced your headcount as compared to last spring or the first part of the year (see the blog post for exact date ranges) and you don’t rehire by June 30, you could lose a percentage of your tentative eligible for forgiveness amount. E.g., if you guys reduce the headcount from 4 FTEs to 3 FTEs, that 25% reduction would reduce tentative “eligible for forgiveness amount” by 25%.
3. Possibly–and I am thinking this is more and more likely–you may also need to pay at least 75% of the PPP loan out as payroll, period, in order to get any forgiveness. (This is unclear from the guidance–or maybe I just don’t want to admit this is the guidance.)
The amount that’s not forgiven, you’ll pay a modest interest rate on and repay over a couple of years.
I think my payroll will be about 80% of my PPP loan. I will have a modest amount of office rent and utilities, probably about 5% of the PPP. I am a home builder and I have loan interest I pay on homes I am building, could the remaining 15% of the PPP be used (and forgiven) for those loans, if paid that interest during the 8 week period.
That’s an interesting question about the construction loan interest. That may work for loans in place on February 15, 2020.
I’ve seen the previous questions regarding Gotcha #8 and read your answers, I do have a few questions and some things to point out.
Unlike the loan limitation, the forgiveness provision has no such limitation mentioned for self-employed without employees. So if 8/52 of net income is at least equal to the full amount of the PPP loan, wouldn’t the entire amount of the loan be forgiven?
If we look closely at Paragraph 1.f. from the Additional Eligibility Criteria Interim Final Rule:
f. What amounts shall be eligible for
forgiveness?
In i. The forgiveness specifically says payroll costs up to $100,000 of annualized pay per employee.
In contrast, ii. doesn’t mention any such limit for owner compensation replacement and a better read of the cross reference to 1.b. is that it’s just referring to line 31 of 2019 Schedule C.
Going with your interpretation, why would they set it up so that some portion would have to be forgiven no matter what?
And further even assuming your interpretation is correct, couldn’t a self-employed individual with no employees still have eligible rent, utilities, etc. allowing for full forgiveness? Otherwise, why wouldn’t they have just limited the PPP loan in this situation to 2 x 2019 net income up to the $100,000 annual limit? Thanks.
Sorry, that question should read … Going with your interpretation, why would they set it up so that some portion WOULDN’T have to be forgiven no matter what?
The treasury’s “logic” appears in that chunk of text I copied and pasted. Read that again. But the gist? They don’t think someone in the situation they describe has “real” expenses.
For the record, I think that’s nonsense. But it’s what they think.
This answers your question, right?
Yes thank you, It answers my question as to why you think the other expenses won’t count towards the forgiveness for those who are self-employed without employees.
But I’m still wondering why they didn’t explicitly cap the owner compensation replacement in f. ii. like they did in f. i. for payroll costs. I just thought it may have been possible that while they limited the net profit to $100,000 for the loan calculation, they may not have intended there to be the same cap when it comes to loan forgiveness. So for someone that made $150,000, for example, could use that number for the 8/52 calculation without having it capped at $100,000, In that situation, the loan could be fully forgiven for someone self-employed no employees. I know the forgiveness provision refers to 1.b. but I’m reading that just as the cross reference to indicate that you should use 1040 Schedule C line 31 for your net profit. Yes, the loan calculation is capped at $100,000 net profit but does that automatically mean the forgiveness is too? It doesn’t seem clear to me. I guess I’m just over thinking it. It seemed intentional in the forgiveness regulations they didn’t mention the $100,000 cap for owner compensation replacement like they did for payroll costs in the paragraph above it. It also doesn’t make sense to me that they would set it up so that some portion would have to be forgiven no matter what for someone self-employed with no employees.
I think the owner compensation replacement is lesser of either 8/52nds of the 2019 Schedule C profit… or 8/52nds of $100,000.
In other words, that $100,000 limit applies both to the payroll costs that plug into the PPP loan formula and the payroll costs that plug into the forgiveness formula.
I.e., Section 1106 pinballs ( or references ) Section 1102 in terms of the payroll cost definition.
Thanks Steve, great articles. I just received ppp funding, about 40k. My business is completely shut down by the govt for the foreseeable future (8 plus weeks) with dim prospects when reopening due to social interaction nature of my business. My part-time employees are on unemployment where they are making significantly more than with me. I am a sole-prop, and used my draft (unfiled) 2019 schedule C ($36k roughly) in my loan calc. I would like to access as much forgive able funds to help ride out as long as possible until business climate improves.
Can I add myself and wife to payroll (both not currently on) , and pay ourselves the max based on 100k salary, or about 32k total, Pay some rent and utilities (another 2k), and the remainder (6k) pay back or use as a loan. This would meet the loan calc payroll gross$$, but I would get penalized on the headcount/not rehiring people I think. Although maybe not exactly as intended, this is my best chance for business to survive and employees are better off on UI. Does the above seem accurate.
Thanks for considering.
Today (Sunday May 3) the Treasury said you don’t get penalized for headcount reduction if you can’t rehire people “enjoying” overgenerous unemployment. (I updated the blog post and some of my answers for this new guidance.)
That said, I don’t guess that you can bump your and your wife’s wages to create more payroll. Guidance doesn’t exist for that option. But it doesn’t mesh very well with the “vibe” of the statute and guidance. Sorry.
Thanks for the great article!
Can you point to guidance that excludes the concept of increasing wages as a way to maximize spending on payroll? I am paying discretionary hazard pay bonuses to all employees who are currently working, and I’m planning to spend 100% of my PPP loan on increased pay once we are very confident in forgiveness eligibility guidelines.
I don’t know of any guidance (unless it’s appeared in the last few hours.) But if you read through the additional eligibility criteria interim final rule, you get sense that the PPP money needs to carefully spent on maintaining on-going operations. E.g., you can’t expand your business. Only “maintain.”
So I would be very careful about doing anything to finesse stuff.
I’ve remarked that the hazard pay thing just seems so, well, common-sensed that Treasury would seem likely to allow that. I’m thinking of the grocery store workers getting paid $3 more an hour since they’re at risk of getting infected… Stuff like that.
Hi Steve,
I am a single-member LLC (S-Corp filing) that applied for and recieved a PPP loan based on my 2019 payroll report. In the 2019 report, I had two employess – myself and a family member who were paid $7,250 and $1,000 respectively. In the first quarter of 2020 due to a contract that ended, I removed my family member from 2020 payroll and paid myself only in January and took distributions as needed in the following months which I understand if suspect as it relates to the PPP.
My intention is to reactivate my payroll for the next 8 weeks using the 2019 headcount and salaries which I beleive is straight-forward. However, from a loan forgivensss perspective, will I be able to simply use my 2019 payroll data again? I see that you have indicated 2/15/19 to 6/30/19 for headcount calculation but I also read somewhere that for the wage reduction calculation this would point to Q1 2020 data. If this is the case, I would show a major salary increase between Q1 and Q2.
Thank you.
You can choose the earlier period of employment you use in the headcount reduction adjustment. (The blog post above describes that.)
Great website, fantastic PPP analysis.
I am one of those people who has an S-corp with just 1 shareholder-employee (myself) and, luckily, I took a lump-sum payroll salary for full year 2019 of $100,000 in Dec 2019. I also recently put $25,000 into my SEP IRA (contribution made in March 2020 but is going in for the 2019 tax year). I was originally nervous that my lump-sum Q4 payroll intended for full-year could limit my PPP loan, but I read one of your other replies to a question here last month and you seemed to say it is OK. So first question is do you still believe this should be OK. What still makes me nervous is that my 941’s for the other quarters indicate 0 employees, 0 payroll and I think my accountant even put “Seasonal” on a Q4 state payroll form, even though I can prove without a doubt that I am NOT a seasonal business, I operate full year with normal sales and expenses, the lump-sum payroll is just done out of convenience
Second question is regarding loan forgiveness. I applied for $26,041 PPP loan and just received an SBA loan authorization right now, but still waiting for the documentation to confirm everything before I sign and accept any funds. I intend to use the maximum amount of loan proceeds for payroll salary + SEP IRA. How are you calculating the amount to spend on payroll during this 8 week period since it looked like you arrived at slightly different numbers in someone’s example when basing it off monthly vs. weekly payroll (12 months vs. 52 weeks oddly yielded different numbers?). I want to keep things clean and simple, so 100% is immediately spent and forgiven.
Finally, regarding the SEP IRA contribution. If I end 2020 with some sales, some expenses, but roughly Zero net income, will this disqualify my SEP IRA contribution from the PPP money? Does the SEP require actual business income, or in my case just payroll salary to be made, and if just salary, does the PPP money qualify for this purpose since I believe the PPP is not taxable money. To confirm, I have an LLC treated as an S-corp by IRS nowadays with an actual salary, not just self-employed/sole propietor income.
Thank you for your guidance
So you want to make sure you pay 8 weeks of payroll within the first 8 weeks you get the loan. You want your accounting to be really clean. So banker understands. E.g., if you make $100,000, you pay $100,000/52 each of the eight weeks.
Regarding the SEP, some CPAs say that won’t work. I don’t think that’s necessarily the case. I would pay the SEP for the eight weeks. But I would be prepared that SBA may not accept.
Ok, so then given your calculation of the 8 weeks, I feel like I have the wrong loan amount even though I used the official calculation. If I am to pay myself $100,000/52 = $1923.07 x 8 weeks = $15,384.61 for payroll then what was the point of the guidelines instructing how to arrive at the 2.5 x monthly payroll number? In my case the salary portion, which I applied for and is the amount that was likely approved (although I haven’t seen the documentation yet), at 2.5 months is $20833.33 . Why wouldn’t that be the amount to pay myself? Won’t this 8 week calculation always result in money be owed back to the bank (potentially with interest) if the SBA calculation was used in the first place for loan amount?
SEP — this is extremely confusing (not your fault). If there is a chance that something is going to get disapproved in the future, then I’d prefer to heir on the side of caution, indicating I may need to get a lower loan amount here as well, or just hustle to make more income by year end (an uncertain proposition at this point). Everywhere I read online says that SEP is based on “compensation” which to me means payroll/salary, but I’m not an accountant, so that’s why I don’t trust my own interpretation of this.
The PPP loan amount was supposed to give you two months of payroll and then an amount equal to an extra half month of payroll for rent, utilities and interest.
BTW, one other minor thing the Senate bungled… 8 weeks does NOT equal 2 months.
I’m getting really confused in the weeds of this PPP stuff now. I thought I had it figured out, but now I’m questioning everything. Setting aside my SEP IRA for the moment, if I followed the SBA loan amount calculation and ended up with $20833.33 ($100,000/12 x 2.5), and they’re instructing that at least 75% of it (so this means it can be 100%), then what’s to stop me from paying myself that entire amount (100% of loan) as long as it happens within the 8 week period upon receipt of loan? Where do the rules state that you must suddenly switch to paying on a weekly calculation basis $100,000/52) for the 8 weeks– a calculation that comes out to less than the loan amount originally approved?
So see my earlier answer about why they use 2.5…
And then these three points. (1) The payroll costs you plug into the forgiveness formula can’t run at a rate of more than $100,000/52 a week.
(2) You may be able to give yourself a raise (up to that max) but guidance so far suggests to me that you won’t be able to give an owner a raise. The PPP loan is for maintaining your operation. Not growing it. Also, for Schedule C business owners, the formulas limit a firm to 2019 comp levels.
(3) I suggest you do weekly payroll so you avoid a situation where you or the banker are debating how much payroll you TRULY have within the eight weeks the forgiveness formula looks at.
Many small business use Quickboks payroll, not a big name company like ADP. I used QB payroll reports in calculating the loan amount I was approved for. I assume I can do the same for the forgiveness? I have no plans on hiring a company for payroll for the 8 weeks.
Also, employer i401k contributions(scorp) are forgivable, but many companies contribute at year end. Can they contribute earlier during the 8 week window and be forgivable. Technically, the employer(owner) can contribute when they wish. This adds on 25% to the payroll for forgiveness.
Doing payroll with QuickBooks is fine. Just do a good job. (BTW, I’m the author of QuickBooks for Dummies. So I like QuickBooks. 🙂 )
My PPP loan is supposed to fund next week. I’m a single member LLC owner with no employees (1040 Schedule C)
How often do the loan proceeds have to be disbursed during the 8 week period? For example, does it have to be disbursed weekly, every two weeks, one time at the end of the 8 week period? Should I write myself checks from my business account (where the PPP loan will be deposited)?
If my net income exceeds $125,000 can I fully disburse the PPP as 8 weeks of net income and have the full amount forgiven?
I would disburse 1/52nd of your 2019 Schedule C profit each week (end of week) starting the week you receive PPP funds. That way over 8 weeks, you’ll incur and pay 8/52nds of your 2019 business earnings.
Also note that your owner replacement earnings ignores the $125K. The max is $100K.
I am the sole owner/employee of an S corp. I am considering hiring a 2nd employee, who happens to be my adult child, to do work for my company for the next 3-4 months. This would be legitimate work and the pay would be market rate. Would the next 8 weeks of wages to this new employee be included in forgiveness for a PPP loan? I couldn’t find anything saying this is illegal, but I would think it could look suspicious to the IRS/SBA even though the job would be completely legitimate.
I don’t know. I would try it. And it may work.
SBA might look at this as suspicious. You’re right.
Also keep in mind that the PPP loan isn’t for growing your business. It’s for maintaining your business. Accordingly, using funds to bump your headcount sort of diverges from the “philosophy” of the program.
Thank you for your insight. I am particularly worried about gotcha #7 because even if I pay all of my employees in full I will fall below the 75% threshold. I calculated the FICA taxes into my amount because at that time (April 4th) my payroll company’s (Paychex) PPP template included that into the forgiveness amount to submit. Is there anything that you read or have interpreted that you cannot pay over 100% of the payroll to get to the 75%.? Whether giving someone a normal raise, or increasing pay temporarily (hazard pay when we open perhaps) or giving bonuses to get to the 75% threshold. I was told you can only pay someone 25% more then what they currently make to have it still forgiven but cannot find that in writing anywhere.
Thanks
I don’t think I’ve seen anything that says you can only bump someone by 25%… Just to get that out there.
Also, I see no guidance (and I’m watching!) that says hazard pay is “kosher”… HOWEVER hazard pay to me seems very consistent with what Congress wants. That seems like a safe bet.
1) what documentation do you need to prove that you offered to hire back a previously laid off employee and they refused to come back.
2) can you replace the employee who refuses to return with a owner who was a previous unpaid worker in the operation.
3) in reading through the loan document today I note that the borrower has no guarantee, no collateral and the lender or SBA has no recourse, but as you read through it has a confession of judgement clause and also states the Lender/SBA can change the documents in the future and you have to agree with the change.
The Treasury today (so on a Sunday) updated their guidance with this new Q and A:
Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan
forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
BTW, this is good news. But note that if someone doesn’t come back, it may reduce the wages you plug into the formula.
1) satisfaction of the 75% payroll rule, is the amount spent for just the rehired emplyoees over the next eight weeks.
when does the eight week period begin.
The eight weeks begins the day you get the PPP money.
Hi Steve,
Thanks for the very details that you can present for our consideration. We are an S-Corp with 2 employees with a company 401k plan that the employees contribute to each paycheck.
We applied and received a PPP loan in this last round. The amount they bank calculated using their underwriters using box 1 of the 2019 W3 report and divided by 12 to calculate our gross wages. They then added in our monthly 2019 medical premiums. This does not include the deferred 401k contributions that the employees made out of their earnings. Their gross wages would be in box 3.
Our bank is saying that they can’t count the 401k savings that employees withhold into consideration? Is that not part of the “Wages” as established by the PPP? I would take that as a pay cut if I was allowed to lower their wages by the amount they withhold for their 401k.
Both employees received a small raise this year which also adds to our next concern with regards to the 25% reduction and restoring from Rule #4. In April we reduced the owner/employee gross wages by 50%; but all of Q1 is at their new rate.
So the look back is going to be Q1-2020 for wages, and even though we did not receive (by our idea the proper amount) we still have enough to pay the 2 employees their full amount in their 8 week paychecks. Just not inclusive of the health premiums.
Sorry so long, but just want to confirm we are doing the right thing, If the same underwriter looks at the wages it could appear as a huge pay increase based on their calculations. We are not trying to game the system, but our take was to be able to pay the 2 employees their wages for the 8 weeks. What they do with their 401k withholding is up to them,
We are taking your advice and opened a separate account for these funds. We use a national paycheck company for payroll. I was just going to move the proper amount to the working account for payroll each month and document with the payroll/tax forms.
The bank bungled their calculations if they excluded the elective deferrals employees divert to their 401(k)s. But at this stage it sounds like that’s only (though of course very unfortunately) affected your PPP loan amount.
Surely the bank will have their act together by the time they calculate your forgiveness amount. So I think you count the box 3 or the box 5 amount as the wages.
Are you saying if you don’t hit the 75% then none of loan will be forgiven? I m not sure I’m interpreting right.
I am saying that seems like a possibility. Yes.
I received EIDL funding of $7,000, does that get added to the PPP loan amount when calculating the 75% threshold that has to be met for forgiveness?
Order matters when you applied. I got my PPP first and my EIDL second, therefore I answered no to the question about already having an EIDL on my PPP. My bank has confirmed I will not need to give them any information for forgiveness on the EIDL Gant because it was not part of my PPP loan application. The SBA has confirmed that do not need any information on the usage of the grant.
Did you get EIDL on top of PPP or do these funds overlap? I initially saw EIDL weeks ago but it looked like a regular nonforgivable loan to me but then I saw a $10,000 forgiveable advance but it seemed to say you cant get PPP and EIDL together
I’m getting really confused in the weeds of this PPP stuff now. I thought I had it figured out, but now I’m questioning everything. Setting aside my SEP IRA for the moment, if I followed the SBA loan amount calculation and ended up with $20833.33 ($100,000/12 x 2.5), and they’re instructing that at least 75% of it be used for payroll (so this means 100% can be used for payroll), then what’s to stop me from paying myself that entire amount (100% of loan) as long as it happens within the 8 week period upon receipt of loan? Where do the rules state that you must suddenly switch to paying on a weekly calculation basis $100,000/52) for the 8 weeks– a calculation that comes out to less than the loan amount originally approved since that used the 2.5 calculation
It says right here : https://home.treasury.gov/system/files/136/Interim-Final-Rule-Additional-Eligibility-Criteria-and-Requirements-for-Certain-Pledges-of-Loans.pdf
Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per
individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes
imposed on employee payroll paid by the employer (such as unemployment insurance premiums);
At least 75 percent of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll
costs (but not for forgiveness purposes),
I’m in the same boat as you. You an I either owe $5,448 or $1,601..75 depending on if Employer contributions to a SEP/IRA count above the 100K threshold (which looks like they do).
Thanks Eric! 🙂
Well, that would appear to settle it. Thank you! I assume the Banker should allow me to reduce the loan amount before I accept funds? Or is the loan amount a “done deal” once an authorization # is issued? I don’t want to risk declining the loan and then reapplying and can’t get it again. If I give back some money immediately accepting funds, do I still have to pay interest on the unused ?
Hi,
I have an S-corp with two employees, myself–the owner, and one full time employee. If an owner is an employee, does SEP IRA contribution count towards compensation above 100k?
Also do SEP IRA contributions made during the 8 week period need to be made every week? We usually pay into it several times a year, when we can.
And question 3, we run payroll monthly, rather than bi-weekly. As long as we have two pay periods within the 8 week period, I would think it would be ok. Loan funded April 17, next pay debits May 15, and the following June 12.
Thanks!
I think the SEP contribution for the owner possibly does count.
I think you should make SEP-IRA contributions for the payroll costs incurred through eight weeks if that’s possible.
I think running monthly payroll may work… but you may also find yourself arguing with banker. So, you may in end wish you’d done weekly payment.
On another note, the weekly payroll is just a CPA guidance. There is no rule that you issue 8 weeks of payroll. The cover period is 8 weeks and the CPAs are trying to cover us with the best intentions. You could pay yourself $15,385 right now match a SEP/IRA 25% and go back to sleep.
Please note this is “gross” $15,385.
🙂
Steve, my LLC (taxed as partnership) received our funds on Wednesday April 15, we ran our customary payroll on April 16 for April 17 distribution from an account established solely for PPP funds. That payroll covered 10 work days, April 6-17. June 10 will mark the 8 week deadline. I can certainly run payroll on that date. Should I reimburse the amount of April 17 payroll (or at least 8 of the 10 workdays) to the PPP account from our general account? Also, because our 2019 payroll was a little higher than our 2020 payroll due to some employee turnover I will not be able to use all the funds even though I borrowed around 10% less than the 2019 numbers would have permitted (I will meet the 75% requirement though), is there any problem with providing a mid year bonus to my employees to eat up more of the proceeds thus enhancing forgiveness?
Your guidance has been invaluable to me throughout just as if was with the 199(a) deduction previously.
Thank you.
That would be safest, I think.
I don’t think we have enough guidance from Treasury or SBA to know this. That sounds a little risky. (I’m thinking of the language you see in some of the guidance that says basically “hey this PPP money is not for growing your business… it’s for keeping your current operation going.”)
But someone asked earlier about hazard pay. And hazard pay really seems like something Treasury and SBA would allow.
On another note, the weekly payroll is just a CPA guidance. There is no rule that you issue 8 weeks of payroll. The cover period is 8 weeks and the CPAs are trying to cover us with the best intentions. You could pay yourself $15,385 right now match a SEP/IRA 25% and go back to sleep.
Please note this is “gross” $15,385.
Eric, you and I seem to have a similar payroll situation as far as I can see, I applied for $26041.67 based off my numbers and have an authorization (though I havent seen the final documents yet) but I see now I will probably be making payroll of $15,385 (max) and also putting $3,846.25 (25%) in the SEP. So that would leave $6,810.42 which either needs to be returned to bank immediately (I assume the interest is forgiven for unused, unforgiven funds?) or i need to ask them to reduce the loan amount beforehand. Bummer that the full amount cannot be used. I’m not complaining though, I am grateful for whatever comes my way,
The other thing I am wondering about is taxes. I’ve read that the PPP loan itself is not taxable. OK, makes sense, But under normal circumstances payroll expense is taxable, right? So do we still pay taxes on the salary portion of the payroll expense here? If so, seems like just another way this PPP is getting whittled down. Or is there somehow no tax on payroll expense either so long as it is forgiven?
Looking foward to going back to sleep after all of this.
Yeah, they say PPP is not taxable but if you take payroll that is taxable right? The more I read, the more the net from PPP keeps shrinking when calculated correctly. The work and thought involved in deciphering and getting this money is almost not worth the effort and hassle. Almost. I think you know what I mean.
can you replace a previously laid off employee who refuses to return with a owner who will now come on the payroll.
I would make a written offer to the former employee and document they decline (such as due to preferring to not work and receive unemployment benefits). I would probably also consider a temporary hazard pay amount. Like $2 an hour or something. Document that.
And then hire a family member.
Important caveat: I don’t have any guidance I can cite for ideas above. Merely trying to make the optics really good for the business owner. That could matter a lot.
does the 75% requirement include the entire payroll for 8 weeks or just what is rehired.
If it applies, I think it applies to the PPP loan amount.. and the PPP forgiveness amount. (See again the language I quoted in blog post.)
Steve, best site I’ve seen for information! Great questions and your answers! So I’ve seen this question covered in some ways, but not right to the point… can we add in the $600/wk?? We are small chain of fitness centers. Obviously, we’re in a similar situation to restaurants. Most of our staff is part-time, instructors paid for teaching classes, or trainers getting paid for their actual training time. Even our full-time or close to full-time staff make more money on unemployment with the added $600 from the feds. With 70% of our staff part-time as described above, we’ll never get to the 75%! If we just give them that $600/wk for the 8-week period it now allows me to put them back on payroll because they won’t lose that money if they come back. It moves them off unemployment (which is the whole idea behind the PPP, isn’t it?), and gives me a chance to get to that 75% goal? Can we pay them the extra $600/wk with the PPP funds instead of them not wanting to come back because they are just getting it from unemployment?
I don’t know, but I don’t think so. Sorry. I think you make employees that “written offer”… and then try to talk people into people coming back to a real job rather than temporarily feeding at the unemployment benefits trough… and then if you can’t get enough payroll, you’ll lose a lot of your forgiveness.
Can you hire new part-time employees in their place to use the PPP and get forgiveness?
That should work.
Thanks Steve for your excellent guidance/interpretation of this forgiveness melee. We are a C-Corp and in January of 2019 we were fortunate to be able to bonus each of our (approx) 50 employees $4000 in a separate pay cycle. We pay 26 pays per year, so if one were to simply look at this bonus, it would annualize to $104,000. I have read that when annualizing any single pay period in 2019, if it exceeds $100k, then we would be subject to not being able to reduce their salary by more than 25% during our 8 week window, Am I misinterpreting this? (I hope)
You wouldn’t annual-ize a bonus. Rather, look at each employee’s W-2. If somebody’s box 5 shows more than $100K, you can only use $100K.
Hi Steve. I”m two months behind on rent (i.e. haven’t paid April or May that were due 4/1 & 5/1 respectively) so will be paying 4 months of rent over the next 8 weeks (with PPP funds). Are there current rules that would disallow paying more than 2 months (or 8 weeks) rent?
Thank you for your thoughts.
I don’t think you can use PPP loan money to pay past-due rent. You need to spent at least 75% of PPP money on payroll for work during the 8 weeks. And you can spent 25% or less on rent, utilities and interest… but surely that’ll need to be rent, utilities and interest for stuff incurred during the eight weeks.
This is a paycheck protection program. Not a landlord protection program. Sorry.
Iif I’m within the 25% confines for non-payroll and below the total amount of the loan, does it hurt anything to ask for 4 months of rent forgiveness if all 4 months are paid within the 8 week period (even though it covers 16 weeks of rent).
Steve, great overview here.
I have an scorp. 3 employees who are all owners. Each of us owns 33.33% of the business. We took annual salaries of $120k in 2019. COVID has hit the business hard with a major loss of customers and revenue.
We received a loan for $67,500 based on the provided payroll documentation that annualized the salaries to $100k.
We are unsure how we can pay out the loan in 8 weeks to use 100% towards payroll and receive full forgiveness. If I’m reading correctly, since we each made over $100k in 2019, we will not receive full forgiveness on the PPP loan even if we used 100% of it over the 8 week period for payroll?
You can and should pay each shareholder-employee $1923 a week. That’ll get you guy to $46, 152…(Check my math: 3 guys x 8 weeks x $1923/week.)
That’ll get you to 75% or what rounds up to 75%… And I think that’ll be good enough.
And then you can pay rent, utilities and interest up to $15,384.
Note that the total forgiven, $46,152 + $15,384, equals 61,356 so you end up a little light.
P.S. Remember to add to your payroll any state payroll taxes and maybe pension fund contributions. They should bump up your payroll costs.
There seems to be two schools of thought on the 75% issue – the gotcha #6 friendly interpretation (that less than 75% of proceeds used for payroll, but the payroll cost still forgivable, which seems to be the more widely followed interpretation which we have seen in numerous presentations/webcasts/etc), and the #7 scary interpretation.. The issue with #7 is that it can lead to worse result than never having gotten the loan. If somebody had to base their PPP on 2019 wages, and that was a banner year with higher than average wage cost (which for many it was), they might not be able to get to 75% of the PPP paid out in payroll under #7 in eight weeks even if they don’t layoff or reduce pay compared to Q1 2020 (so they are okay on gotchas #1 and #2). Yet on #7 they are still in trouble because of the overall loan amount. If you get caught in that you would of literally been better off not applying at all and laying off everyone on day #1, which is obviously not what the intent of the law was. Otherwise you just saddled yourself with debt when revenue is down to pay people who could of gone on unemployment immediately.
I know you don’t have any answer, but it just seems ludicrous. Why even have gotchas #1 and #2 if gotcha #7 winds up being the case. We’ve been telling everyone of course they have to be aware of this potential interpretation/outcome, but I can’t imagine that will be the final interpretation as the uproar would be enormous.
I probably agree with you on this… but did you see Mnuchin’s comments yesterday? He seems to holding firm to a rule that describes at least 75% of the money needs to go for payroll.
One link to one story on this: https://www.marketwatch.com/story/mnuchin-rejects-calls-to-have-less-paycheck-protection-program-money-go-to-employees-2020-05-04
Thank you Steve for your post. And sorry not venting my frustration at you. I had heard Mnuchin’s comments. The whole thing makes me so angry. This should of been a clear point up front. I personally think the SBA is out of their league on this. Not that the IRS would of been a ton better, but I suspect there would of have been some clearer guidance on the front end (like there was on the payroll tax credit).
All we can do is inform our clients that there are these two interpretations out there. It’s know it’s not 100% clear, but based on my reading of the CARES Act the harsh reading does not seem to be the intent. And the SBA guidance, while not clear either, still seem to be bifurcating the the forgiveness from the proceeds use. I think the most likely interpretation is that anything you use from the PPP funds 75% must be on payroll, and that is what the forgiveness will be based on as well. If it’s not that the uproar will be such I think they will change it. But who knows. We’ve told clients from day 1 that you cannot bank on forgiveness for reasons just like this. Have you seen the new SBA FAQ about private companies with “adequate liquidity” are not eligible? Of course no definition on that, so who knows what that means?? Does a high net worth person with a Sch C that went to zero no longer qualify??
One of my clients said that for them if it wound up being the harsh interpretation it would be forgiven one way or the other, because if it wasn’t forgiven they would have to file bankruptcy the next day – they had a huge 2019 payroll because of a one time contract that went away and a number of high paid folks that retired. They haven’t laid off one person and have kept wages the same from Q1 2020, but simple math on their employees means they won’t hit 75% of proceeds (the best they will hit is 60%), and they are literally paying everyone full salaries to sit around. They almost wish they would of just laid everybody off day 1 and not even gotten into the PPP mess.
It’s funny, after the gold rush of everybody getting this, there has been a noticeable “souring” on the PPP. Not sure if you have noticed that on your end too.
Good thoughts, Brandon. BTW, I totally agree the statutory language of just the CARES act doesn’t support the harsh “75% on payroll or you lose sucker” reading. But then you read the PPP FAQ, the interim final rules, etc., and oh boy..
Regarding people souring, think I see that too… I heard South Dakota Senator John Thune say in a PBS News Hour interview last night that PPP has worked great. From my viewpoint, that’s far from true. The statutes were poorly written, anybody who’s taken the time to read them surely admits that. The banks and the SBA didn’t have the skills or scale-ability to make these loans work for small businesses–and work quickly. (Those realities probably also reflect poor drafting.) Treasury and Congress try to pretend Sec 1102 and 1106 say something different that what a plain language reading leaves shows. Which you can kind of understand given the drafting sloppiness, but very tricky to plan in situation like this.
I received notice that my PPP has been approved. I was an early applicant and when I calculated the monthly payroll I included things that since we find cannot be included. My loan amount is such that i will not be able to achieve the 75% threshold for payroll. in other words the loan is for more than I need.
Can I readjust with my bank so the loan amount is more accurate?
I think so. But you need to check with them. (I think you need to do this soon.)
I am self-employed (REALTOR) and I received a PPP based on my commission income from 2019, but I am unsure how to document the payments to myself in order to have the loan forgiven after the 8 weeks. I moved the total amount of the loan to a separate checking account. Can I make eight weekly transfers from that checking account into my regular checking account for the eight weeks, and then use the bank statement from that checking account to show that the payments were made? Or, do I have to get checks printed for that checking account in order to write a check to myself and then use the canceled checks as proof that the money was paid to cover my pay? Thank you.
I think weekly transfers, each each to the lesser of 1/52nd of your Schedule C profit or $1923, should work.
I’m a Self-Employed independent contractor. Is it necessary to pay myself in order to receive forgiveness for my eight-week share? If so, would a simple weekly transfer (instead of a check) from my business account to my personal account qualify as the appropriate documentation?
Steve,
Great job with this. Super helpful. Actually, the only helpful info on PPP loans that I have found to date.
A few questions:
(1) For “Level of Payroll” or payrate deductions: (a) What time period is used as the reference point for (weekly?) wages? (b) For tipped employees, do they need to be compensated 75% of their previous “gross earnings” which included tips?
(2) Regarding #4, “If the employer reverses the wage cuts by June 30, the wage cut adjustment doesn’t need to be calculated”: (a) Does reversal of wage cuts by June 30 (or I’m assuming within 8 weeks of receiving the funds) constitute a return to full wages (or maybe 75%?) by the last registered payroll of the period or does it mean that their gross wages for the period need reach 75-100% by the end of the period? (b) For instance, “Employee A” normally makes $1,000/wk. Can his/her wages be $500 for weeks 1-7 of the loan period and restored to $1000 for the final week of the loan period and this would not result in any reduction in loan forgiveness? I understand their would be a reduction in Payroll Expenses, which leads me to my next question(s).
(3) Can new employees be hired in replacement of or in addition to the previous staff? (b) Will their payroll expenses be forgivable and factored into the overall calculations? (c) Would either of the following scenarios qualify for 100% Forgiveness?
Based on… Pre-Covid weekly payroll: Employees 1-8 are full-time and make $1,000/wk. Employees 9-12 are part-time (20 hours) and make $500/wk. FTEs=10. Gross wages=$10,000/wk.
Scenario 1: Employees 1-8 are rehired and work 30 hours/wk ($750/wk). Employees 9-12 work 15 hours/wk ($375/wk). Employees 13-16 are new hires. Emp 13 works full time and makes $1,500/wk. Employees 14-16 work 20 hours/wk @ $17/hr ($340/wk).
Loan Period Total: FTEs=10. Weekly gross wages=$10,020. All employees make 75% of pre-covid gross earnings by the end of loan period (June 28).
Scenario 2:: Employees 1-6 are rehired and work 40 hours/wk ($1,000/wk). Employees 13-16 are new hires. Emp 13 and 14 work full time and make $1,500/wk. Employees 15 and 16 work full time (40 hours/wk @ $13/hr or $520/wk). Employees 7-12 return to work on June 14th (two weeks before end of loan period) to their pre-covid schedule and earnings.
Loan Period Total: FTEs=10+. Weekly gross wages=$10,020+. All employees make 100% of pre-covid weekly gross earnings by the end of loan period (June 28).
(4) (a) What does an employer do if their employee(s) chooses to not return to work? (b) What about employees who live in Mexico and are unable to commute? (c) How can that missing payroll be accounted for and used in a way that is forgivable?
Thanks so much for this information. You’re a lifesaver.
Gratefully and sincerely,
Brian Divine
Hey Brian, I think the specificity and number of your questions make them ones best answered by your accountant. (There’s a lot of detail there…)
But I want to answer one question that is more general and could apply to a lot of people. I think the wages that plug into the PPP formulas need to wages paid to people with a principal residence in the US. That’s in the actual statute.
My bank linked me to an SBA webinar today, I joined in and it was very informative. The head of the local (Houston) SBA led the webinar, it was about 45 minutes long. I am sharing, in case anyone wants to listen in one day this week.
“The SBA’s Houston District Office has announced that it will host a series of webinars to provide borrowers with official guidance on the PPP loan forgiveness process. These webinars are titled PPP Loan Forgiveness – “Have you received or applied for a PPP loan? We will guide you through the official guidance related to PPP loan forgiveness,” and will start at 9 a.m. CDT daily, beginning May 4 – 8. You may dial-in by phone each day by calling 1-469-225-3127. Additional information including webinar links can be found on the SBA Houston District Office website. Click the link below for Meeting ID.
https://content.govdelivery.com/accounts/USSBA/bulletins/2898375?utm_campaign=PPP%20Application%20Email%205.3.2020&utm_source=hs_email&utm_medium=email&utm_content=87338707&_hsenc=p2ANqtz–wqXS1fAUD7bpVyBDvimGbvB3DnC8BZ2ry3b0HmbDWZVQgNVbmzcDpdvKhsSYEKwZDA2pxK7b3m-3chPN5PxX0rKaZiQ&_hsmi=87338707
Thanks Allan. Good link resource. 🙂
Steve – Tremendously helpful and thank you! Single member LLC (one employee-me). PPP loan of $18,800. Pay myself $8,250/month, so assume $15,320 (99,000/52*8) is forgiven. Can I open a SEP IRA and put $4k ($2k per month) in it to get me to the $18,880?
I can either do that (SEP IRA) or add spouse to the payroll. I’m thinking opening a SEP makes the most sense? What are your thoughts?
A SEP-IRA won’t work for you. Per the additional eligibility criteria interim final rule.
BTW, a SEP-IRA would actually, in effect, already be “in” the Schedule C profit number that plugged into the PPP loan amount.
E.g. roughly, if your Schedule C equals $100K, that’s before the $20K SEP.
Thanks! I should have stated that the LLC is taxed as an S Corp. Does that change the equation on the SEP IRA and loan forgiveness?
Maybe. I would do the SEP percentage for the eight weeks.
E.g., if you pay someone $1000 a week and the SEP percentage is 10%, $100 a week.
BTW, my gut tells me that a SEP-IRA contribution that looks like a 401(k) match might have more chance of being accepted than a 25% match.
Also, the additional eligibility criteria interim rule describes owner pension and health insurance as amounts that are not included in payroll costs. That may reflect simple fact that these amounts don’t appear on Schedule C… or something more conceptual like Treasury doesn’t want to cover owner health insurance or pension, only non-owner employees.
Steve – can employer add spouse to payroll to keep the FTE headcount?
I think that’d be a little risky. Just because it might raise questions. But if all the other optics are good and it’s not a sketchy arrangement, gosh, why not try… There’s nothing in the current guidance to say you can’t do this. And employing family member is a standard procedure in small firms.
What if you use the 75 percent for owner income replacement but during that 8 weeks make a sale in your business? Do sales then count against what you received during that 8 week period?
No, I don’t think so. I think you get to “replace” 8/52nds of Rick the sole proprietor’s 2019 income.
Hi, I appreciate the info that you’ve listed above, it is one of the better / clearer sources that I’ve found, thank you. I am a sole proprietor and have received notification that I have been approved for a PPP loan, I also have figured out that only 8/52 of that loan will be forgivable as my ‘owner replacement compensation’ along with whatever qualifying expenses I can document for the 8 weeks following the funding of the loan.
My question is this: work has started to slow down to around 75% of what it was pre covid and I am assuming it will continue to slow on into summer and beyond. I am thus far able to cover my expenses on this lower income so technically the loan is not ‘necessary’ but any chance for additional funds would be a great help with the future being as uncertain as it is. As I’ve now read about possible criminal charges being brought to those that haven’t honestly represented their condition I’m wondering if its legit to be taking the loan at all if I’m currently able to stay afloat. I feel like sole proprietorships are not who these rules are aimed at but can’t help but feel nervous about taking the money. I realize you can’t answer this but was interested in an outside opinion. Thanks.
I don’t think you need to worry about not being “legit”. You sound like exactly the sort of situation the PPP loans are supposed to help.
Thanks for the response and again for the information, nice to know that I’m at least somewhat on track with this.
Good afternoon and thanks in advance for any assistance.
My company recently got the PPP loan and I have questions regarding how they are using the funds. All the employees of the company are sales reps essentially and paid through a draw program normally. To clarify we each get paid around $1235 biweekly in a draw and then when we make commissions we pay this draw or “loan” back to the company and then get the additional commission on top of that.
For example if I personally didnt have any commission for 4 weeks I would owe the company $2470 ($1235 every two weeks). So when I had a sale pay out and would make $5000 off of it I would first pay back the company the $2470 and then get the remainder $2530 as my pay.
Anyway, currently the companies plan is to pay employees with this PPP money as a larger draw for each pay period. Over the 8 weeks it would be about 16k total or 4k per pay period. This would mean however that the employees arent benefiting from this PPP grant in anyway because they technically are having to pay this back to the employer before actually making commissions. This seems like a loophole where the company can get this extra money for free by paying it out in payroll without taking it as loan and not truly helping their employees out. This money once it gets paid back from sales each employee makes gets put into the companies profits now. It seems like this should not count as the grant part and have to be paid back since the money goes to the company then instead of its employees. Is this actually allowed? Are there any guidelines currently that prohibits this to qualify for the grant portion?
Thank you again for any information you can provide. I also realize this might be confusing typed out and would be happy to provide any additional information.
I think the company won’t get PPP credit if they don’t actually pay payroll.
Loaning employees money won’t count as payroll, for example.
Not sure what you do with that commentary though…
This information is so helpful. I still have questions I have not been able to answer. 1. When we applied for the PPP, we could not find guidance on the payroll allotment for the owner of an LLC. We decided to use the draw, which is considerably less than the total profit for the year. So we may have received less money than we could have if we used the owner’s profit up to 100K. Is the LLC owner’s portion (8/52 of the profit up to 100k, or $15, 384.62) forgivable? Does that count toward the payroll portion of the loan? I have had a hard time finding documentation on that. We have 4 employees if we include the owner.
2. If an employee was furloughed April 23, and brought back 4 weeks after the PPP funded, and paid at regular rate, is all his pay forgivable? That is only 50% of his total normal pay for 8 weeks. We have 4 employees including the owner. Owner would be paid $15, 384.62, Employee 1 full regular pay, Employee 2 full regular pay, Employee 3 would be paid 50% of his regular pay over the 8 weeks. If the total payroll amount including the owner is 75% (or more) of the total PPP loan, is it all forgivable? Or does Employee 3 need to be hired back within 2 weeks, and be paid regular pay, in order to reach 75% of his regular total over 8 weeks? Hiring him for 4 weeks would allow the owner to make up his difference between the draw we used in the calculation and the actual allowed pay of $15,384.62. (We do not have work for Employee 3 regardless, we would be creating tasks). The guidance says you can wait until June 30 to rehire, but then the employee would not be paid 75% of usual total. Is the total not important, just the rate of pay? So four weeks at regular pay is ok?
Bump –
I think you want to read through the blog post again. You’re maybe making this more complicated that you need to…
But here’s the basic approach you use…
First, you need to calculate the payroll costs, remembering to include the owner payroll costs (so 8/52nds of 2019 Schedule C but not more than $1923 a week)…
Then if you’ve rehired or attempted to rehire everybody and “undone” pay rate reductions,, you’ll only have 2-3 other things to worry about.
1. The documentation…
2. The 25% rule
3. The possibility that there’s a 75% rule
By “the possibility that there’s a 75% rule” do you mean, the possibility that the pay rate reduction concerns the total over the 8 weeks per employee? That’s the crux of my confusion. Basically we applied for too little money. I’m trying to move the amounts around within payroll, and I am concerned if I give one person too low of a total, by hiring them after 4 weeks at full pay (about 50% of his usual total) that I am risking forgiveness in some way. So the less risky thing to do, would be to pay the owner less than his 8/52, and hire the employee back in week 2, which gives him a total pay over 75%. I can easily get to a total of 75% of the total loan for payroll, but if the owner is trying to maximize his portion, by using all 25% for rent, and pay his full salary, do I risk forgiveness on the employee we hire back after 4 weeks instead of less than 2?
I’m not sure if this is the correct place to post, but I have a question for you. Is my math wrong or my thinking flawed?
S-Corp owners will be double taxed on their pay during the 8 week forgiveness period
For example if the S-Corp owner is paid $100K/year (or $1,923 per week) they pay taxes on that income through their W2. But if they use that money for forgiveness, and it is NOT deductible, their net passthrough income is increased by $15,284 which means that money flows through to the owner as taxable income AGAIN. Doesn’t that mean that they are paying taxes twice on the same dollar?
I don’t think you’ll be double taxed. Remember that the W-2 amounts will reduce the K-1’s box 1 amount.
So, and just keeping the example simple. If you have zero revenue, received a $100K PPP loan, and paid out that $100K as payroll, you have a PPP loan which creates no income… you have $100K in W-2 which creates $100K of income to the shareholder…and your K-1 shows ($100K) loss from the payroll.
And what the Treasury’s guidance says is, that ($100K) loss? You don’t get to to deduct that. So in the end you pay taxes (once) on the $100K of W-2 wages.
I am confused on the forgiveness for a seasonal business-self employed seasonal business one employee- 80 percent of my yearly income falls in the March 1 2019-June 30 2019 window and another 10 percent the first 2 weeks of July . I used the Feb 15-June 30,2019 to figure my average monthly payroll-my bank took the 12 weeks payroll and divided by 4.5 to come up with my amount( $30000)
Now I am reading that I can only take 1/52th per week and it is not based on the seasonal income .
I normally make about $25000 in months of May and June and now I am seeing where i should write myself checks for $577 per week for 8 weeks for a total of $4616 which is nowhere near my income loss-
looks as though a “seasonal business” should be based on the 12 week period that was used to apply for the loan? Any advice?
If I used a 12 week period of April 1-July 15th it would cover 90 percent of my yearly income from this business
Also when I applied my bank included 1099-MISC employees and my actual loan amount is for a lot more than it should be -I know Its a 1 percent interest rate loan –so do I just leave balance in the independent account after the 8 weeks or do I write a check for the balance if I want to keep it all?
I am guessing all the rules will change in the next 8 weeks -just trying to avoid any legal ramifications at a later date from the SBA
Regarding the over-funding due to incorrectly including 1099 contractors as employees, I would ask the bank about that. It seems possible the over-funding in and of itself may create problems. (See the discussion of the 75% rule in the blog post.)
Regarding the seasonality, I don’t think the PPP loan program (at least in terms of current guidance) handles that very well. Sorry. The SBA did offer an alternative in its interim final rule for seasonal employers so they got enough payroll, saying that if you’re a seasonal employer you have,
So your PPP loan amount should be okay… But I don’t think we yet know if or how you can make the forgiveness formula work right if your “high season” doesn’t match the 8 weeks the forgiveness formula looks at.
I am just thinking out loud, but I suppose that you can pay the owners for eight weeks in spring even if high season is eight weeks in summer. But that approach doesn’t work for non-owner employees. Obviously. 🙁
Hello,
If I have a PA S Corp and am the single member of it with a K-1 disclosure at my annual 1040, is this treated as self employed /sole proprietorship for the purposes of PPP forgiveness ? Or do I need to document differently ?
Similarly, can we assume forgiveness for the 8 week using schedule C or you actually need to draw or pay yourself ?
Thank you
I think your S corporation W-2 (the one that Benny the shareholder-employee receives) sets the payroll costs the PPP loan can fund and replace.
Thanks for your work on this topic, very helpful. A couple of questions or thoughts.
I own two businesses with three physical locations that have been shut down since the end of March due to shelter in place orders. Like many others, it is going to take time for my businesses to bounce back as they are somewhat tied to the travel industry. I am more worried about the next eight months than the next eight weeks, particularly since we couldn’t even be open during the first two weeks of the first PPP loan.
I am just looking at this as a two year loan at a low interest rate, with the stipulation that 75% of the proceeds must be used for payroll. I’m not planning to pay people to not work just to achieve forgiveness as I will definitely need to use that money past the eight week period to pay folks who when we will be open but overstaffed with significantly diminished revenue stream; it’s going to take time to ramp back up and that realistically could take a year or more. I’m struggling to understand why everyone is almost exclusively focused on the forgiveness/eight weeks component?
It seems very risky to me to attempt to spend the money just to get it forgiven, and then likely be needing an additional capital infusion after eight weeks. Other than the strict guidance on what the funds can be used for, I don’t see any requirement to spend everything within the eight weeks other than for the forgiveness. Maybe I’m reading it wrong, but I think long-term payroll protection should be a priority. And with the federal PUA subsidy, it is counter-intuitive to me to try to rush people back in.
I’m keeping meticulous track of the funds and have a different account for the PPP amounts, but it also seems like you can pay payroll for a few months of ramping back up with the proceeds of the PPP loan and any revenues received could be used to pay expenses not allowed by the PPP such as back rent and debt service. Maybe that’s an optimistic interpretation but that seems a more realistic way to preserve the viability of the businesses long-term.
These “gotcha” scenarios could have disastrous consequences; if I get some amount foregiven, fine, but I’m going to assume it will be zero and anything else is a bonus. Sorry for the novel
Okay, I think you’re thinking about this the correct, strategic way. I.e., this is a loan. Pure and simple. That’s the main thing…
And the forgiveness thing? Yeah, that might play out for a business owner… but that’s icing on the cake.
Also, I agree that it maybe makes more sense to forgo forgiveness and use the PPP loan to ramp up once your can truly restart.
Hi Steve! Thank you for the very comprehensive information. We got our money a week ago and still under government mandated closure, what is your thought of hiring/paying employees even though they don’t come to work to help make sure we get to 75% spending and have the same FTE? If we don’t reach the same FTE during the 8 week (say 20% reduction) and by June 30 (25% reduction), which reduction will apply. Also, if you may, say i took a $100k loan, spent $60k in payroll and $15k in other allowed expenses, at 10% reduction of FTE, how much is my forgiven loan? If you’d generously do one more, say.. we spent $40k in payroll and $10k in other expenses at 50% FTE reduction, how much do you think is forgiven?
Hi Steve, great blog!
LLC (c-corp, 2 part-time employees and 2-4 contractors depending on season, with some retained earnings).
I applied for PPP including payments to contractors and SEP-IRA contribution. I applied April 3 (prepared application on April 2nd) did not get it in first round, then yesterday got the transfer.
The 2 employees have been laid off April 1st (are on unemployment), the contractors come in 1/10th of the regular hours mostly for moral support and to check in, as business is shut down (at least until June 1st), mostly pro-bono.
I’ve almost no expenses (no rent, no utilities, only internet), as it is a virtual consulting business.
Yesterday, I got $30k PPP.
Asked the employees to come back no regular pay, but one does not want to come back, makes more on unemployment. Asked the contractors to go on payroll, but they don’t want to. They said they prefer to skip it until we go back to business as usual, will help pro-bono if needed. I’ve considered hiring someone but can not find anyone. I’ve a enough refined earnings to cover 6-9 months of payroll.
I’ve considered adding a $1000/wk hazard pay for the two part-time employees, until June 30. They would be fine coming back with the extra pay, but I am not sure if it will be forgiven…
My questions are:
– If I rehire to re-establish headcount (2) and increase weekly pay to more than double, so that I can use these funds to pay my employees, will it be forgiven?
– or just better to return the loan untouched before May 7th?
Thanks
AJ
I don’t know the answers to your questions. But I think you’re thinking about this the right way. E.g., yeah, as crazy as this is, you may be better off just returning the money.
The 1099 contractors thing goofs up your ability to spend at least 75% of the PPP loan proceeds on payroll–which may or may not be a problem.
The unemployment benefit thing? That may also mean you don’t actually have payroll to replace…
The $1K a week hazard pay, just first impression, seems overly generous. Unless you’ve got some really special situation (like you guys are driving ambulances carrying Covid 19 patients). And I don’t think we know whether hazard pay “works.” It seems reasonable. It might work. But we don’t know.
Thank you Steve for the quick answer.
I think I just return it to be on the safe side.
Thanks
AJ
I did end up returning the PPP today.
I got it via PayPal and it was a little complicated to get in touch with them. Finally got an email with the info on where to send the wire.
Thanks
Sorry this has been such a circus. I think Congress meant well… but this thing seems to have been bad policy… followed up with sloppy drafting… topped off with inept administration. Very disappointing…
I have a question regarding a situation when your 2019 Schedule C only covers 3 months. My daughter started her interpreter business on October 1, 2019 and had earnings for 3 months. She qualified for a small PPP loan as her work at a local school was completely shut down – and no unemployment benefits.
Since she worked only 3 months in 2019 – when we calculated the loan forgiveness amount – it seems wrong to take the 2019 Schedule C and and apply the 8/52 guidance to her earnings. Do you think there will be some rules regarding new businesses that started in 2019 that didn’t operate for a full year?
Your daughter’s one option would be to look not at 2019 bu at the 12 months ending 3/31 or 4/30. That might get her a better number. But that’s about as good as you’ll get. Sorry.
Steve,
You are doing an amazing job with this site, I just wish I had found you before applying for the PPP.
I have a sole-proprietorship with 3 employees and 2 part-time 1099 contractors.
When I applied for the PPP loan, for the payroll estimate portion I only used the employees pay from 2019 in the calculations. I did not use my owners profits from 2019 Schedule-C in the calculations because I did not know that I was allowed to do that. I also did not use the 1099 contractors pay in the calculations.
This month I have hired one of the contractors.
But now that I have the funds and per your guidance they are placed in a separate account for easy accounting, I have Two Questions:
1) Since I would like to continue to run all pay together, can I pay myself (my draws) out of those proceeds and allow them to be part of the “payroll” numbers for these next 8 weeks? Or since I didn’t use them in the calculations for the loan, am I prevented from using them in the calculations for obtaining forgiveness for the loan?
2) Having added an employee and potentially paying my draws out of same funds, am I at risk of having too high a payroll cost when settling up for loan-forgiveness determination?
Thanks,
Bruce
To answer question #1, that’s fine to pay Bruce the proprietor out of the PPP funds. The correct weekly amount, paid as a draw, would be 1/52nd of the Schedule C profit from 2019.
To answer question #2, you’re not going to have a problem with too much payroll.
Hi, I disagree with Gotcha #8. My reading of the guidance leads me to conclude that the full loan can be forgiven to the extent that the business owner has the expenses listed.
I disagree. It seems pretty clear to me. But let readers decide. Here’s the interim rule language. I boldfaced the phrases I find particularly relevant to this question:
Thanks for your article! We have a small sole proprietor business with my husband as the sole proprietor and we received a PPP loan in the amount of $7937. The funds were deposited Friday, May 1. Naturally, we want to have as much of this forgiven as possible. I’m very confused as to how much to pay my husband weekly (for documentation purposes) since he normally doesn’t write himself a paycheck. Do we just take Line 31 of Schedule C and divide that by 52 weeks? Our business fluctuates and we have busier months and slower months, so May and June are typically our busier months. Is it OK for me to pay him an average of what he makes for May and June or do we need to stick to the Line 31 divided by 52 weeks? We just want to do this by the book, but things are not very clear. Also, we normally use the Business Use of Home form and 24.9% of those expenses are deducted on our Schedule C. Can we document payments on rent and utilities and use 24.9% of these expenses to put toward operating expenses?
Also, in regard to writing him a paycheck, should we just write out a check to him from the business account for him to deposit into our personal account? We do all of our banking with Chase. Should we write the check now? Any help would be appreciated
Yes. So if Schedule C last year showed $52,000, that would be $1,000 a week.
And then I think you pay out a $1K draw each of the eight weeks.
Note that you will not get full forgiveness. Self-employed folks don’t get to get forgiveness for rent, utilities and interest.
Thanks for your reply! Sounds good. Should he just write himself a check from the business account payable to himself, starting now?
We are self-employed (sole proprietor with employees. Employees on W2, Sole proprietor-schedule C. Income on schedule C is above 100K, loan was calculated based on W2’s plus 100K). We have rent agreement, do not use our home. We are eligible to pay rent and internet/telephone towards PPP, correct? We have rental agreements.
Hello Steve, What if a spa type business receives a loan and legally can’t open . Can the employees receive W2 wages from PPP loan for sitting around the house and ostensibly watching webinars etc.? And if so, whats to stop the bookkeeper from paying 9 people for 50hrs of “work” per week. Instead of 12 people for 38 hours. (this is to satisfy the FTE req.) ? Has this been answered already? sorry, new to your wonderful website. Thanks so much.
Because we don’t know the full set of rules for forgiveness yet, I would be wary of doing anything that will look funny to a regulator.
Hi Great blog so far
I was wondering for loan forgiveness calculations .
PPP loan $40k
Eidl grant $3 k
To figure out 75 percent of payroll for forgiveness is it$ 40k-3k=37k
$37k x 75% =$27,750 to achieve payroll threshold
Also is S Corp owner who has employees and also pays himself w2 allowed to count pension contributions toward 401k/sep ira from w2 portion of salary toward forgiveness since owner is employee with w2 documentation.
I
Eidl
Grant take Away from ppp loan forgiveness fund
If funded 40k ppp and eidl grant 3k
If ppp fund now equals 37k
So for payroll forgiveness is it $37k x75 % now
Hi Steve!
Thank you so much for this article! The article and the comments have been very insightful!
We applied for the PPP for self-employed people, and put in “0” for the number of employees as stated in the guidelines for our situation.
From your calculations I’ve determined my husband should get paid once a week for the 8 week period as you suggested. We recieved the money this morning, Tuesday. 1. Should we pay the first check this Friday, even though it isnt a full week?
2. Since the PPP loan was deposited into our business checking account, do we pay him with a check from our business account to our personal account to show “payroll” (because we dont have payroll being sole member of business)?
3. Since we normally dont have payroll, do we have to use quickbooks or another program like that, or is a business check with the paid week in the memo section enough information?
Thanks again for any clarification you can give in this manner!
Samantha
I would pay him weekly at the end of each week with a business check. By the last day of the eight weeks, you should have written him 8 checks for the 8 weeks of work.
That should be enough documentation once you include your 2019 Schedule C…
So this will sound completely stupid me asking, but I’m just trying to cover my bases here:
So if we pay him a check from the business account to personal account for the 8 week period to make “payroll”, once the money is in our personal account can we do with it what we please? Such as pay off misc bills?
Not “completely stupid.” Good question. The answer is you can use the owner payroll for whatever you want once it’s in the owner’s account and out of the business.
Similarly, employees can spend their payroll amounts on whatever they want once the money is in their hands… same thing.
Thank you so much! I know all of us appreciate all the guidance in this uncertain time! We want to do things honestly so that we have the best opportunity for forgiveness, but all the legal jargon gets confusing. Thanks again!
There may not be any guidelines yet regarding this but I just wanted to get your thoughts. I’m a single member LLC member without employees. I make over $200,000 a year. My business has been completely dead since mid March due to COVID. I applied for a PPP Loan in the beginning of April and it was finally funded this week. Last week I was able to file an unemployment claim (PUA) when the state was capable of accepting claims for self-employed individuals. I was able to file for the back 2 weeks in March and all of April that I had no income at all – and if I receive the PUA it should also include the extra $600 FPUC pay for the applicable weeks.
Now that I’ve received my PPP Loan, my question is should I close my unemployment claim completely and consider myself employed again, or should I continue to file for the next 8 weeks and report the weekly income from my PPP Loan? I’m not sure that reporting my PPP income for the 8 weeks would eliminate any unemployment money (PUA and FPUC) I would’ve received but that doesn’t matter to me. I just want to do the right thing. Since my PPP loan was capped, the weekly amount I’m paying myself from PPP is well under what I would typically make in the normal course of business. So even with the PPP payment to myself, I still wouldn’t consider myself fully employed or working full time if that’s the better way to put it. I think as long as I report my PPP income for 8 weeks then they can determine if I’m owed anything additional based on my 2019 income. I don’t think that would be considered double-dipping. Do you think it’s ok to handle unemployment this way for the 8 weeks I’m receiving PPP? Thanks.
I would think you rehire yourself and try to restart your business. The PPP loan will let you pay yourself $1923 a week for 8 weeks. That’s got to be better than unemployment. (If you can’t restart in week 9, maybe you return to unemployment?)
Received my PPP loan yesterday. For sole proprietors, do you think home office can count towards rent for forgiveness? My home office is 300 square feet, home is 1500 square feet, so can I claim 20% of my monthly rent for home office rent forgiveness when I file for forgiveness in 8 weeks?
Also, sole proprietor assuming a $20,000 loan and 2019 Schedule C Line 31 was greater than $100k, to get 75% forgiven you just need to show your 2019 Schedule C again, right?
No, home office doesn’t count. Re-read the last Gotcha…
Question from Sole Proprietor:
Is there any rule for PPP forgiveness purpose regarding replacing employee A with 2 part time employees B+C with the salary of B+C equal to the salary of original employee A?
That probably works, though you read people say this doesn’t work. (I don’t read the guidance that way, for what that’s worth.)
Note that your FTE headcount doesn’t decrease: 1 full time employee equates to 2 half time employees. Either one, one “FTE”.
Also, if you pay the two new fifty-percenters the same amount in total as you paid the old full time person, that’ll mean you have enough payroll to make the forgiveness formula work.
Steve, Wow, what a blog! I’ve been reading for 2 hours and realize how little I know about this.
My questions are probably obvious but I do not see where it was asked/answered.
LLC file as an S-Corp. Last year we had 10 W-2 employees but 1 quit in December 2019 and took work elsewhere. We have had 9 W-2 employees since 1/1/2020….though a few are getting partial unemployment from State of GA due to the slowdown.
Question #1. I believe I should be using a starting headcount of 9 W-2 employees. The problem is that when the loan was calculated using 03312019 – 06302019 period and the employee that left was employed at the time and part of the calculation so now we have received funds on her behalf and of course have no way to pay her since she is gone and we did not replace the position. What should I do? Should I give back part of the loan , the part that was related to her income?
Question #2 my plan is to pay out to each employee 100% of their wages for the 8 weeks. Which means 80% to them paid as pages (8/10 weeks) – myself being one of the employees. What happens to the remainder (about 20%)? Do I pay that to myself? I take a nominal salary of $5k per month and this would result in an additional payout of about $23k to myself
This part is confusing to me and I want to be sure I am doing this correctly. Thanks
Tom
You should be fine. If you had 9 employees in first part of year, I don’t think you’ll get hit with a headcount reduction adjustment. (Read blog post again and look for part that says you can compare Covid 19 employment levels with either of two possible historical employment levels.)
The other 20%? To get forgiveness for that, assuming you don’t have wages, you’ll need rent, utilities or interest on loans.
Also, very possibly you won’t get full forgiveness. So don’t waste any of PPP money. It isn’t really “free.”
And to tag onto the question: is there a rule regarding replacing an employee A with employee B with the same salary for 4 weeks out of 8 (for in case employee A can’t work first 4 weeks due to child being at home and employer found a substitute for the first 4 weeks after loan origination date)
Steve, I noticed from the link that Eric provided above in the Interim Final Rule where it states:
“Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums);”
The line about “covered benefits for employees (but not owners)”. I have a single member LLC treated as S corp where I am the sole 100% shareholder/owner/employee whatever that normally is classified as. Does this mean I can, or cannot do 25% SEP contribution? Because technically I’m the owner and employee, I suppose.
I don’t know. Some CPAs point to that exact chunk of guidance and say it says health insurance and retirement benefits for owners don’t count.
HOWEVER that chunk of guidance is talking about self-employed folks using Schedule C tax forms (so NOT business owners with businesses that report their taxes on 1120S corporate tax returns) and for those “Schedule C” folks, health insurance and owner retirement benefits come out of the Schedule C profit number.
Another way to say the same thing: For a Schedule C business, the Schedule C profit pays all of the following: the owner draw, the owner’s retirement benefits and the owner’s health insurance. So you wouldn’t add back adjustments since they’re already included.
Well, I’ve always had a Schedule C and still do but in the last couple years since the S corp election I now take formal payroll salary at the end of the year lump-sum nowadays. So I assume that is not considered “owner draw”, or is it? I’m still relatively new to this stuff, so still learning the ropes. My understanding has been that in the past couple years I am now formally the employee and employer/owner.
Eidl
Grant and ppp funds
Does EIDL GRANT reduce PPP loan forgiveness
If funded 40k ppp and eidl grant 3k
If ppp fund now equals 37k
So for payroll forgiveness is it $37k x75 % now?
Sorry to repost
You want to read through the loan calculation examples that show how EIDL impacts PPP. Here’s link:
https://home.treasury.gov/system/files/136/How-to-Calculate-Loan-Amounts.pdf
Steve,
The uncertainty is the scary part, at this point I don’t want to spent any of it. LLC with the equivalent 8 FT employees. Our company received $24,000 in PPP last week. If I don’t touch the money at all for anything and just let it sit, Let’s say after 10 weeks or so will it turn into a SBA loan at 0.5% for 24 months? the terms of what I signed for at our local commercial bank. The unfortunate part is we had 3 full time and 10 part time employees, all of the ten are making more $ on UI, because of the add’l $600/week. As you can imagine some are reluctant to come back.
I think you can turn it into a regular loan. But I would make written offers to employees so you’ve documented that you at least attempted to rehire them.
Hi Steve -Very valuable information- great site!
I am a partner in a retail operation considered ‘essential’ & we rec’d our PPP loan yesterday.
We are a Sub-S corp & pay our rent to our other corporation( we own the business & the
building). Can we use any of the loan for building improvement? Need to replace non-working
AC unit.
Thanks!
I think you can… but you have a couple of things to consider. First, you’re supposed to use at least 75% of the loan for payroll. (What happens if you don’t do this isn’t clear… but you could as discussed ni post maybe completely lose forgiveness.)
Second, you won’t get forgiveness for amounts you spend on repairs, only on payroll, rent, utilities and interest. So if you had any other funding, you would want to use PPP loans for these items. Then use that “other” funding for the repairs (like a new AC unit.)
I work in a bar where the owner has been tiptoeing his way in to reopening for takeout and asking staff back. As we’re now around 2 weeks into our 8 week time frame, is it possible to give 4 weekly paychecks but for bi-weekly 2/52 amounts? Or would that look unsavory when we request forgiveness? Also it’s pretty clear not everyone will be willing to come back and would rather stay on UI; is there any recommendation on what to do with the gap in money dedicated to payroll that will occur due to their absence? I saw hazard pay mentioned in a favorable way, but will giving a $5-10 hourly raise to employees willing to comeback be questioned? Lastly, has there been any stipulations in the loan agreement about what happens after June 30 in regards to layoffs, reduced hours, etc.? Hypothetically, could the staff who agreed to come back for a month be then laid off again to continue receiving UI while we try running at a break-even capacity with a skeleton crew?
Sorry if this has been answered, but I don’t remember anything specific while I went down a rabbit hole for four hours reading comments. But I learned a ton, so thank you!
I think you guys avoid anything “unsavory.”
What you do with people who don’t want to come back is make them a written offer… then if they don’t come back, you don’t have your forgiveness amount reduced because the headcount declined.
This comment I keep making: People should return to their jobs (which hopefully will go on for many months, etc., even years) rather than take the short-term option of more unemployment. The Treasury and SBA also warn that if you decide not return to work, that will often disqualify someone from UI.
Final comment: I think some firms will need to lay people off after the eight weeks if they can’t restart…
Great post!! So informative. And appreciate all the Q&A!!
Looks like we’re getting a PPP based on 6 full-time employees not including two 50/50 LLC S-Corp owners as per the initial SBA rules when we applied. Now that we are getting approved can we apply the owners guaranteed payments towards the 75% even though it wasn’t part of the initial calculation. I haven’t read anything about this specifically. Thoughts?
Thanks
The LLC members, if you guys are treated as an S corporation, should get W-2s if they’re employees in the business. (They shouldn’t get guaranteed payments. Those would be if the LLC was treated as a partnership.)
Any amounts paid to shareholder-employees and reported on a W-2 (the right want to do this) will count as payroll.
Your dedication to helping all of us sort through this has been amazing. I truly thank you for your time. I am a partner in a law firm with several employees. have 2 questions:
1) Many of my legal colleagues are using the $8,333 figure as the monthly partner draw that can go towards “payroll”. From reading your comments, it looks like you are using a weekly amount of $1,923? Which should I use for calculating partner draw that count toward payroll?
2) If i have an employee that earns more than the $1,923/week, can I use PPP funds to pay the excess. I understand that I am not allowed to count the excess as payroll but can I use to pay him?
You’re not going to get “credit” for payroll costs in excess of $1923 a week. (That’s 1/52nd of $100,000.)
You can use the PPP funds to pay any excess. But it won’t count toward anything.
My only worry about using monthly draws is a draw at the end of the second month won’t necessary be “inside” the eight weeks.
If your workers don’t want to come back, try paying them a decent wage. Just a thought.
In my state, to use an example, someone who makes $40K a year working (and paying daycare and commuting costs) can go on unemployment and make $50K (and avoid daycare and commuting costs).
So this isn’t really about paying people a decent wage to start with.
Hi Steve– I transitioned from a sole proprietorship to a single owner S Corp last quarter of 2019. I applied for a PPP Loan based on my 2019 Schedule C. I just received $14k PPP Loan on 5/2. Last night I discovered another $1k deposited for the grant portion of the SBA EIDL I also applied for.
My 2020 compensation is supposed to be $42.5k year salary + HSA Contributions + 25% SEP IRA Contributions + Health Insurance Premiums ($813/mo) paid throughout the year. However, to date I have not paid myself a salary.
I’m ready to run my first payroll through Gusto, but I don’t know how to distribute this money. 7-8 weeks of salary will not get close to 75%. Will paying less than 75% toward salary + health insurance forfeit all forgiveness? Can I pay myself for March or April with PPP funds? Is it problematic that I haven’t been running payroll to date? I know there’s murkiness around some of this. How would you handle disturbing the funds?
Thank you very much– You are a beacon in interpreting the PPP!
Steve, first and foremost, great article and very detailed answers to. 200+ comments. Hope these questions and answers help thousands. I have read all comments (questions) but can’t find few of my mine. So, can you please take few minutes to help us out.
1. Received the PPP loan on May 4th. So, the 8 weeks period is May 4th through June 29th. Right?
2. Our next payroll is on May 8th for the pay period Apr 20 – May 02, So, we will be using the PPP funds starting May 22 payroll. So, can we have our last payroll on Jul 3rd for the 7th and 8th weeks? In other words, can the pay day be out of the 8 weeks?
3. Biggest question is “What is the Pay Level” we need to follow? The loan was based on 2019 averages and so can we use the same for these 8 weeks pay? Or should it based on Q1 of 2020 before this pandemic? Kindly clarify.
4. Irrespective of what pay level, can the employer pay bonuses to some employees whose income isn’t capped to $100K. Looks like you cannot pay less but is there a clause that says that you cannot pay more? (We need to make it attractive to retain the employees)
5. If the answer is “No” to question 4 and if we loose employees, is it okay to use less than 75% of these PPP funds? What if is use 60% (for example), will this 60% be considered as forgiven?
6. Is there something like “Owner Compensation Replacement” that is considered for the loan forgiveness? If so, can you explain how this works?
7. Last but not least, can we hire part time employees as full time employees during these 8 weeks as they lost their other full time job
Thanks in advance for taking time. Greatly appreciate it.
The eight weeks starts when you get the loan. And just to make this easy, you need to have paid your payroll by the time the eight week timeclock runs down. Do not, for example, schedule that last semi-monthly payroll for the day after the eight weeks ends.
I don’t think you need to worry if you’ve given people raises in 2020. I would be cautious about anything that looks sketchy of course. (E.g., the business owner hires her or his kids and pays them $1923 a week… or paying an uncustomary bonus that just happens to show up this year…)
You do get to pay owner compensation replacement. For an S corporation, that’ll be the shareholder-employee W-2 wages (or 8/52nds of this amount if the pay is more than $100K). For a sole proprietor or partner, the amount equals 8/52nds of the self-employment earnings from 2019.
Finally, I think you can hire new employees. Or bump people’s hours. E.g., move the part-time person to full-time status.
Thanks Steve. Greatly appreciate your time/response.
Actually the 2019 pay levels are higher than 2020 as the business is down. So, can we pay the employees based on their 2019 averages?
If the owner is already in the payroll, can we do get owner compensation replacement? as the percentage of the earnings are higher than the wages!
And, is it okay to use less than 75% of these PPP funds? What if is use 60% (for example), will this 60% be considered as forgiven?
Great article!
I didn’t get it.. As you mentioned, a self employed-1099, who will pay himself 8 weeks for payroll, It will only be 74% of the loan…
Not to mention that he will have to repay the 25 %(or perhaps 26), he might not qualify for forgiveness at all, since less then 75% was for payroll…
,
I am reffering to this..
Reuven I Rubinson CPA says
MAY 1, 2020 AT 6:31 PM
I hope you are wrong. If you do the calculations for a self-employed individual without any employees they cannot reach 75%!
I have $100K on Schedule C. Loan is $20,833 (100/12*2.5). 8 weeks “Salary cost” is 15,385 (100/52*8). This is only 74% of the loan 🙁
The guidance from the Treasury and SBA–I discuss this in the blog post–roughly up the nearly 74% to 75%.
Agree with you about the math… but again as noted in the blog post, the Treasury and SBA have said that they’ll consider 8 weeks as equivalent to two months. Even though it falls slightly short.
Also, Is there a need at all, to write yourself checks each week? wouldn’t it just be forgiven.. blank..?
I read the guidance that way. But even if you don’t, why risk it? As I’ve said in another comment nearby, why not just write the checks?
I own an LLC that earned over $200,000 for 2018 and again for 2019 (although I will have to ask for an extension to file my 2019 taxes). After limiting my income to $100,000 for the PPP loan and adding in payroll for part-time employees that made 2.5 x monthly payroll around $26,000, deposited in my account on May 1. The part-time employees will be hired back in the next two weeks. It will be clear how much they make based on their paychecks so that payroll paperwork (checks and payroll stubs) is easy. They will probably make half of the PPP amount ($13,000) over those six weeks they will work during the 8 week window. I do not take a specific amount each pay period. Do I need to pay myself a specific amount each pay period by check? How do I account for my earnings within those 8 weeks to qualify for PPP forgiveness? Thank you so much for your informed voice!
I think you should take a weekly draw equal to $1923… that’s 1/52nd of $100,000.
You’re right that maybe you don’t need to do this. (Though I think you can most reasonably read the guidance that you do need to do this.) But why would you risk losing forgiveness? Why not just write 8 checks?
Thanks Steve!
Can we take an owner draw for multiple partners? We didn’t include them in the application paperwork but since so few people can return to work, we need them to work full time.
Yes. BTW, if you didn’t include partner compensation in the original PPP loan amount, guidance provided yesterday says you can ask bank for an increase in the PPP loan for this “missed opportunity.”
More detail: https://home.treasury.gov/system/files/136/Interim-Final-Rule-on-Loan-Increases.pdf
Just when we think we have this figured out, a new wrinkle appears and confusion again rears it’s ugly head.
Sole Proprietor. Store has been closed since mid March. Employees all collecting unemployment. Owner just became eligible for unemployment as well.
We have PPP funds in the bank, but can’t spend them on employee payroll until the store re-opens. If we only paid owner’s share, there would be zero forgiveness if we read the guidance correctly. Owner actually would only collect a little less in unemployment benefits given the PUA Federal supplement.
Option one, preferred, would be to hang on to the PPP funds, not dispersing to either employees or owner and forget about any forgiveness unless fresh guidance appears which widens the 8 week time frame from date of dispersal to date store re-opens or we are actually able to re-open at some point during the 8 week window.
Option two, obviously, would be to just return the PPP loan before May 7th and soldier on, if sitting on the PPP funds until they can actually serve some useful purpose would put us in an “awkward” position with the SBA.
So two comments to add to your remarks…
First, easy for me to believe optimal course is to ignore the forgiveness… and then use the PPP money when you’re able to restart the business. This will give you a chunk of cash as you ramp up. That’s really not a bad idea. Cheap money… already in hand.
Second, yesterday, that May 7 date moved to May 14. So a little more time.
Had not heard about the extension to May 14th.
Should have added to that last sentence: …or in an “awkward” situation with Washington State ESD. Your thoughts?
Steve,
I applied with 3 different fintechs, 2 of them deposited $$ into my account. In other words i got 2 times ppp.
How would you recommend I processed?
Btw, I applied as a self employed..
I would return the money to at least one.
BTW you may also want to return the money to both. As you may remember, you certified while applying that you had not applied for another PPP loan…
This idea: See if you can call one of the fintechs and ask them?
Thank you for you hard work, Steve.
1. In the loan application we wrote 5 employees counting Sole Proprietor (schedule C) as one of FTE. We have 4 employees on W’2. If we have 4 employees and biweekly draws by SP which will line up with 75% in salaries does that line up with initial application in terms of 5 FTE? Will they be comparing all W2’s from the comparison period (2019) to 8 week period? Or what is the procedure for the bank to do a headcount (we were not asked for any headcount proof when we did PPP application)
2. Is there any update on employee sep IRA contribution? If 2020 SEP ira contribution for employees made within 8 weeks counts, does it have to be prorated (:52×8) or is it the whole amount for employees?
3. Group health plan: if the owners (sole proprietor) children are employees, but they are on sole proprietor’s group health insurance, how would their portion of health insurance count into forgiveness if the SP portion of group plan doesn’t count?
I just read all the comments and didn’t see this covered. Hope I didn’t miss something.
We are a small company (s-Corp) and we pay ourselves as the only 2 employees monthly payroll. We just received about $5385 for PPP loan. Monthly payroll totals about $2000. So paying two months payroll will be $4000 which makes 74.2%. Do I need to get it up to 75%?
Other question, what can the funds be used for after the 8 weeks? Can we use them for other business expenses if we plan to use it as a regular loan?
Also, we received an EIDL grant after applying for the PPP loan. We received the grant just a couple days before. Will that amount be subtracted from the full PPP? Or subtracted from the 75%?
5,385 x 75%=4,038.75.
So 4,038.75 – 2000(eidl) = 2038.75 would only be forgivable? So 3,346.25 needs to be paid back at 1% loan rate?
Or
5,385 – 2000= 3,385 would only be forgivable? So $2000 needs to be paid back at 1% loan rate?
What you ask about is covered in many messages and in the blog post… See for example the blog paragraphs labeled “can you round 74% to 75%?”
Wow. Did you even read my questions? I sat for probably over an hour (with a 4 & 7 year old really needing my attention) reading your whole page and ALL of the comments. Sorry if I missed or misunderstood one paragraph.
But my confusion is more importantly over what to do with fund left after payroll, and what about the EIDL grant that came after PPP application. Neither of which you addressed. And in all the comments and paragraphs, it did not seem clear.
I’ve read on many pages the EIDL grant will reduce forgiveness. Your page (in comments) mentions the timing of the loan/grant is what matter, before or after PPP. I would like that clarified. But if you can’t reply, I will keep searching for my answers.
Steve-
Thank you very much for your time and insight.
Our restaurant is banking on the “Exemption For Re-Hires” section in the CARES act, as we terminated 80% of our workforce between February 15-April 26. Our 8-week covered period on our loan is April 24-June 18, and our goal is to achieve maximum forgiveness. Commencing on April 24 we attempted to hire back our terminated staff, however with UI so plentiful, many of them said no. We were successful in rehiring some, and along with new hires, we have started rebuilding our business through takeout and delivery (since on-premise dining is currently restricted in our state).
In SIMPLE terms, we understand the “Exemption For Re-Hires” section of the act to mean that as long as our FTE and/or salaries and wages (our election) “not later than” June 30 is the same (or higher) than it was on February 15, and we have spent a minimum of 75% of our loan on labor during our covered period (which we plan on doing so), then we will qualify for full forgiveness (assuming we have followed the definition of payroll costs during our covered period). We find the single day test period for FTE a bit odd in establishing the FTE count, especially since it is such a significant data point for qualifying for this exemption, but as no new guidance has been given, we are moving forward with this current definition.
As our firm moves towards the end of our covered period on June 18, our state is permitting restaurants to reopen next week, which will allow us to rehire more staff and continue increasing our FTE. We are budgeting our FTE to continue its growth trajectory throughout our covered period with the goal to match (or exceed) our FTE count by June 30, in order to qualify for this “Exemption For Re-Hires” clause. Also to note, during our covered period, we are currently projecting to spend approximately 85% of our loan on labor and we expect that by the June 30 target date, we will have met or exceeded our February 15 FTE.
I am a bit surprised that more firms are not focusing on this exemption, as it appears to allow you to solely focus on getting your FTE (or salaries and wages) to match on June 30 vs. February 15 by following this strategy: Build up your labor during the covered period through rehiring and new hires, spend a minimum of 75% of your loan on payroll during the covered period, continue your FTE or salaries and wages trajectory until you match or exceed these figures by the June 30 target date. If you accomplish this, have you qualified for forgiveness?
Am I missing anything, or based on the current guidance and what I have reported to you, would we qualify for this “Exemption For Re-Hires” section in the act, and ultimately maximum forgiveness? I am hopeful my understanding of this clause is correct!
Thank you,
So it sounds like you’ve carefully read the statute and available guidance. Which is great.
I agree with the attractiveness or relevance of the rehire thing…
But I read the guidance differently in a couple of places…
1. I don’t think the FTE and pay rate reduction stuff is “or”. I think it’s “and”.
2. Also just to point this out, you guys can avoid the FTE reduction by making written offers to employees. I.e., if I don’t want to come back to work for you because I’ve got a sweet UI deal, if you make me a written offer and I still refuse, my preference for unemployment doesn’t goof up your FTE numbers. (It may screw up your payroll costs.)
Is there any reason to believe we will be penalized (or forgiveness reduced) if the people hired are not the same as the ones we laid off when this started? Only some of our staff are willing to return so we are taking hands where we can get them. Our city still has a stay at home order in place, and we have no direction as to when we will be able to reopen so we plan to use the $ and 8 weeks to make repairs to the restaurant and get as ready as we can.
To address both of your questions, here’s how I think you use current guidance to dial down your risks related to forgiveness.
1. Make written offers to employees who don’t want to come back to work so you don’t get dinged with a “reduction in FTE” adjustment.
2. Plan to pay working partners what the formulas say you should have gotten PPP loan money for but for which you apparently did not get PPP loan money (possibly due to lender errors or cautiousness). E.g., if two partners each get K-1s that show (say) $52,000 a year in self-employment earnings, that’s a $1000 a week. And you should be able to pay each partner $1000 a week for the 8 weeks.
3. If you have additional payroll you need to spend to get forgiveness, I would try to hire people.
4. If you still need more payroll? Possibly you might consider doing hazard pay (maybe copying what local bigger employers are doing–like the grocery stores paying amounts like $2 or $4 more an hour)…but who knows whether this works from Treasury’s or SBA’s point of view.
5/14/2020 update: The SBA yesterday said you can go back and ask for more money if you requested too little:
https://home.treasury.gov/system/files/136/Interim-Final-Rule-on-Loan-Increases.pdf
Thank you so much for your newsletters. You have been so helpful navigating us small business owners through this PPP process.
I do have one question. I have an LLC but I am taxed as an SCorp and I pay myself a reasonable salary.
With the PPP, can my salary be included in the forgiveness program?
Or is it just for the employees?
Thanks in advance!
All employees. So Wayne. And all the people (W-2 recipients) that work with Wayne.
I am a sole proprietor small business owner, closed down due to covid. I currently have no employees and was encouraged to apply based on my Schedule C self employed wages from 2019. My understanding is that I can pay myself the weekly amount I made in 2019 through owners draw? I have paid myself sporadically that was for the past five years.
Or should I write myself a check? What would be the best way to have documentation and was the bank correct in telling me I could use the funds to pay myself?
I would divide your Schedule C profit from 2019 by 52. E.g., if you made $52,000, you divide that value by 52 and get $1,000.
Then at the end of each week, I would write myself a check for this amount. So in my example, a $1,000 a week. Make sure that you write 8 checks by the end of the eighth week.
BTW, some people say what I’m suggesting above is wrong. Too nit picky. But if I’m wrong? Only “bad” thing is you’ll have written and fiddled with 8 checks. If the folks who say you don’t need to do this are wrong, you will lose forgiveness.
HI Steve, I just got approved for PPP Loan for $15,000, which is based on my 1099-MISC.($82,000)
I am an Uber/Lyft driver, I am an independent contractor who is contracted to Uber/ Lyft.
My 2019 1040-MISC Schedule C line 31 is significantly lower because of car rental, gas, lyft fees, uber fees, tolls, services and all the expenses incurred. My “net profit” is $17,662 for the year of 2019 which comes up to $1,472 a month on average.
Base on this, it doesn’t look like I will meet the 75% rule for loan to be forgiven. What should I do? Because I cannot afford to get myself into more debts.
But what boggles me is that, if I reduce my loan to $3680 ($17,662/12*2.5), I am essentially cutting out car rental expenses $350 per week) (after the deduction of gross to reach line 31) and using the $2944 as payroll cost and $$736 for the car rental?? I mean $736 will only cover 2 weeks of the car rental!
Also, in Cares Act, the definition of payroll cost is
“Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation. ”
it says “or net earnings from self-employment or similiar compensation”. The word OR signifies that you don’t have to use net earnings, right? So by this statement, can I still use my 1099-MISC as the basis of my income from uber/lyft?
I would wait to see what the forgiveness rules actually say. Your situation is one where the short-cut approach taken by the Treasury and SBA result in a pretty harsh outcome.
But note this: Even if you get to deduct your utilities (which oddly would include gas on your vehicle), you’re still going to be very limited. The owner compensation replacement ends up being very modest in your situation. About $2800. The non-payroll part can’t be more than 25% so that’s barely more than another $900.
The real problem in your situation is that the bank calculated the PPP amount wrong. You should have, per the statute, received a roughly $3700 as you calculate above.
Even if she received the proper loan amount of $3,679, the 8 weeks of payroll only amount o $2,717 – which is still only spending 73.8% on payroll. It is mathematically impossible for 1099’s to both use 75% of the loan proceeds on payroll and base the allowable payroll of line 31 of schedule c. Literally ZERO independent contractors (with no employees) will be eligible for any forgiveness if this hold true.
We are not permitted to pay ourselves more than our 2019 schedule c dictates for the 8 week period, is that correct?
Like, we is it possible to simply pay yourself a little extra during the 8 weeks to meet the 75% of loan proceeds must to payroll – or must the payments be limited to only an an exact 8 week average based on the 2019 schedule c line 31. Again – if we are not permitted to do this, it would be mathematically impossible to get the loan forgiven at all.
Most people have no idea what they are signing up for!
The treasury specifically says they will round up 73.8% to 75%. So I wouldn’t worry about that.
I would, as per Gotcha #7, worry about being less than that. Note there’s a comment with an email message from an SBA manager that seems to indicate Gotcha #7 is “real”… Ugh.
Two questions –
1) How were you approved for a PPP loan for $15K on a Schedule C Net Profit of $17,662??? You should have only been approved for $3,680. You are quite lucky. Let me explain. This is not ideal for you on the surface because the majority of your loan amount will not be forgiven. HOWEVER, use this as an opportunity to utilize a 1% loan which is UNBELIEVABLE!!! Maybe invest in a couple of car leases and expand your Uber/Lyft empire or upgrade your car…whatever allows you to grow your business.. It’s a 1% loan and you will never have an opportunity like this again.
2) Based on your 1099-MISC and Net Income…….it doesn’t make sense to continue to be a Uber/Lyft driver. Costs are much too high. Consider a career change. Uber/Lyft are the real winners. I only know what you told me above, I have no other opinions.
Thank you SO very much for all this fabulously helpful information. I am a sole proprietor with no employees. I received my PPP $$ on Monday May 4th, but given what I now understand about forgiveness for sole proprietors, the 25% “utilities” allocation will mostly not be forgiven. Can I pay that back immediately (now) to avoid interest accruing? How would I do that?
Also, I wrote myself a May “payroll” check from my business account to my personal account yesterday, but I wrote it out for the monthly amount that was used in my PPP application (1/12 of my 2019 net earnings), and I now appreciate that a small portion of that will need to be repaid.
1. Going forward, does it make a difference if I write monthly checks (so one more check at the start of June), or should I be paying myself weekly?
2. If I should be paying weekly instead of monthly, is there anything I should do about the May monthly check that I’ve already written (and that was for too much $$)?
3. If it’s OK to write two monthly checks, should I reduce the amount for June so that the total that I’ve paid myself equals 8/52 of my total loan amount?
Thank you for any guidance you can provide!
I think you probably can pay back some portion quickly, but at 1% annual interest on a small portion of your loan, the interest charge will not be very big. I would wait until the forgiveness rules come out.
Regarding payroll for the owner, the fact that you’ve paid yourself for a month is fine… and what I think you need to do before the eight weeks end is pay yourself enough more (so somewhere between 3 and 4 weeks worth) that when eight weeks end, you’ve paid yourself for eight weeks.
Thank you
The last day of our PPP is June 26. If we run payroll on June 26 for the period June 15-June 26, the funds are deposited into employees account on July 3 (that is how it always worked), does that payroll not come out of PPP? Should we run extra payroll on June 22 that will be paid on 26 (last day of loan) an give a week advance?
I have seen the calculation question come up, but still can’t figure out this situation. Thank you for all your answers.
Hi, I keep reading the posts on this site.
We are a bar and have no idea when we will reopen. We just got approved for PPP. What if just used the money to pay for rent and utilities and returned the rest. Would at least 25% be forgiven if we can show we used it properly?
thank you.
Very informative article.
I am a single member LLC and received a PPP loan. After I used the 75% for payroll, can I use the rest for a 401k or to pay my yearly liability insurance?
That should work according to the current guidance we have… BTW, you spending at least 75% on payroll is key.
What if we terminate an employee for reasons NOT related to COVID-19. For example, policy violations. Does that reduce the amount of forgiveness or would this fall under an employee terminating their own employment for reasons not related to COVID19?
A reduction in headcount of FTEs will reduce forgiveness. And then having less payroll will reduce forgiveness obviously.
You need to rehire a replacement in order to get full forgiveness.
this is a 2 part question
I have owned a childcare center for 23 yrs, became an LLC about a yr ago ,but never officially put myself on Payroll.. We are still open and caring for essential families. I had 11 employees when this started (some were part time) however due to SIP orders we can only care for 10 ( capacity 39) so I did lay off all but 2 plus myself I have been in the center everyday working ,cleaning ,spotting breaks , preparing food and curriculum packets for kiddos that can not come. My husband said I need to put myself on payroll . Can I do that right now and would that be counted in the 75% forgiveness amt .?
second
I have 2 payrolls ( one is pay period March 16- 31 and the second one is April 1-15 ) I have not processed yet I did give the teachers draws but I did not have the money for the payroll taxes , so my question is I am about to process those so I can pay those taxes , can I apply these to my 75% ?
I just received my money yesterday
You will get some payroll “credit” for your own work… but the thing that’s going to hit you is your loan was based on 12 employees. And now you’ve got only 3 people working (when you include yourself).
I know daycare workers don’t make $1K but let me use that number since it makes math easy. With 12 people making $1K a week, you maybe got a PPP loan equal to $130,000…
But you won’t be able to spend much on payroll because now you’ve only got 3 people. Your actual payroll costs may be $3K a week for 8 weeks. That’s $24K on payroll. With $24K on payroll, you could potentially spend another $8K on rent, utilities and interest (if you have those)… so that’d be $32K eligible forgiveness…
But the other thing is, the roughly 75% reduction in headcount will potentially reduce the actual loan forgiveness by 75%.. So from $32K to $8K or $24K.
I don’t think the loss of forgiveness means you shouldn’t use the PPP money to keep your business going. But be alert to possibility you may receive little forgiveness. Sorry.
Hi-
Is there anything in the CARES Act that precludes me from hiring a contractor during my covered period to fix the plumbing in my bathrooms, apply a new seal to my floor, and make some other small improvements to my restaurant? As long as I am paying for the cost of the supplies (not with PPP money) and only using my PPP labor dollars for his wages (on payroll), would this qualify for forgiveness? I figure since the goal is to hire people and pay them with PPP loan proceeds, I would be within my right to take this position. Or am I stretching the intent of the program?
Thoughts?
You’re supposed to use PPP money to protect the paychecks of your employees. Also, the guidance from the Treasury and SBA say you should not use the money to grow your business but rather to maintain ongoing operations.
So, unfortunately, what you propose may be problematic. (You may not find out whether what you’ve done works well until after you’ve spent the money.)
Hi, I’ve just finished reading all of the post and comments and still have not found a clear answer to the question is it okay to pay bonuses to bring payroll up to 75%? We applied for our PPP Loan on 4/3 based on the guidance at that time for calculating the loan amount of 2.5 times monthly average and yes I did remember to subtract Federal Employer Taxes. All our employees are salaried and we pay once a month on the last day of the month. We have maintained all employees at there usual salaries, so no problem with reduction in FTE or wages. But still, find that we are coming up short of 75%.
I thought I was very careful and conservative in my calculations for our PPP loan and calculated that we would be at 78% for payroll and 22% for rent/utilities. Now calculating the forgiveness using the 8 weeks formula it is around 72% and worry that means we would not receive forgiveness on any of the PPP note. A couple questions for you.
1.. The bosses suggest we give each person a bonus. This would not be unusual, in 2019 we paid employees 3 separate bonuses throughout the year, but no bonuses yet for 2020. Would it be possible for us to pay bonuses to bring our payroll amount up?
2. Our 8 week period will be 4/23-6/18. Would paying the full 6/1-6/30 payroll on 6/18 be considered “accelerated payroll” and okay?
3. Do I pay on my normal pay dates and transfer funds for only the amount of the weekly equivalents like 4/23-4/30, 5/1-5/28 and 5/29-6/18? Or, do I change to a weekly payroll for the 8 weeks? If I have the records to back it up does it matter?
Thanks for your guidance!
The issues you ask about are discussed in a bunch of comments btw… you might find it useful to look for and through those again.
But two general comments… First, you may need to move to a weekly payroll and even accelerate some of your payroll runs to EXPLICITLY get 8 weeks of payroll incurred and paid within the 8 weeks that follow PPP funding. Second, I think doing anything to artificially bump your payroll (e.g., bonuses) creates risk that the bank or SBA or someone will later look at your spending and conclude you did something nefarious.
There is plenty of info out there for employers and the ppp loan. As an employee who is going back to work for an employer who received a ppp loan I would like to know what to expect? How do I know my employer is paying me what I’m supposed to be paying? Is there someone keeping employers accountable? Is there a set amount my employer must pay me? Example my employer has cut my hours from 30hrs a week to 10 hrs a week . Does my employer only have to pay me for the 10 hrs of work or is she liable to meet 22.5 hrs worth of pay on my check? These are the questions us employees deserve to have answered ASAP.
The basic rules are employees need to employ the same number of full-time equivalent employees and at a pay rate that’s at least 75% of pre-Covid-19 pay rate in order to be eligible for forgiveness for the money spent on payroll. Further, the law really only protects paychecks for people making $100K or less.
BTW, a careful reading of the PPP related blog posts here will give you a better understanding of the law.
Steve- My business, an S-corp received 75,800 in PPP loans. Only 5 employees including myself ( I pay my myself part w2 wages, part distributions). Most of the talk is about cutting employee wages and getting back to the same amount of employees and their wages (at least 80% of them) before furloughs started. Assuming I hire my crew back and keep their wages the same( my intention), what about adding new employees (like my out of work daughter and wife) and paying them more ($8333 per month = 100K per year) for a few months during the 8 week period. This way, it satisfies everyone involved correct? I have upped my employee account ( assuming a few are making more on UI benefits–including myself), I have also knocked out an additional $8333 x 2 employees per month to help reach the 75% threshold minimum of forgiveness and created an opportunity for my business and my family members to do their things in marketing and SEO stuff that they know and I never wanted to spend the money on. If come, July or August they end up losing their jobs with my company, well we gave it a shot right?
Think this will count? Alternatively, if you think the family members won’t work here( although I don’t think it’s against any rules to hire your family members) what about givjng my my die hard employees who return a raise ( vs. a cut) up to the threshold of $8333 per month/100K per year?
You’re right, I think, that nothing in the existing guidance says you can’t do what you propose. But I wouldn’t do it.
My two concerns:
1. The guidance we’ve got so far does say the PPP money goes toward maintaining ongoing operations and not growing the business. And so adding employees would be a little risky, I think. Same thing true if you use money to pay off loan, buy new equipment, etc.
2. The optics of a business owner adding family employees and at the highest possible pay rate seem bad (like, Shake Shack bad) and easily something later guidance could prohibit.
Steve- Thanks for your time and effort here. So i certainly don’t want to go “Shake Shack/or LA Lakers” on this deal. But what about the second part of the question about giving well deserved raises not just for myself (now having to come back full time from being part time ( ie coming back from $3500 month to max 8333 per month), but also giving my managers who will have to make up for the few people who are dragging their feet coming back to work ( UI benies being pretty good and all). Can I give my GM a raise from 75,000 per year to 100K per year for the 8 week period and my 40,000 per year Ops Mgr a raise to cover some more payroll and at least match UI benies with the 600$ per week Fed kicker! The ones who agree to come back and come back asap will have to doing the work for the ones who don’t come back or don’t come back a while.
Think the SBA will forgive? Keep in mind we are in the adventure travel business and we don’t know what is going to happen. Best case scenario our business takes a 50-70% hit in revenue! It’s a goat no matter how you look at it…Thx, ian
The us treasury just published this.
Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
Under this does that mean if my employer with the ppp loan does not offer me my same hours but in fact reduced my hours by half and gives no guarantee to restore them to previous level I can continue to stay on unemployment? If I in fact return to work but with less than 75% of my hours/pay guaranteed can I still receive partial unemployment?
The impact of the rehire stuff is explained in the blog post… and that rehire stuff mostly impacts the employer.
Your question is really about how your unemployment benefits work if you’re only working part-time. And I’m sorry, but I don’t have an answer for you there. I suspect you’d have your best answer from your state’s unemployment office?
Steve, Thank you for helping us interpret the PPP requirements, it is a true public service.
Our daughter has a preschool in New Jersey. The state has mandated that all preschools be shut down. She has applied for the PPP and has received $62K. Her teachers were laid off when she closed the school. The teachers are also gladly receiving the extra $600 per week UI.
So far there is no announcement on when these preschools and child care businesses will be permitted to reopen.
The question is, In order to qualify for the loan forgiveness, does she need to put as many employees as possible back on the payroll asap and pay them for doing nothing in order to achieve the 75 percent, or is there any other way to handle this? It seems wasteful and wrong to put them on the payroll if the school is still ordered to be closed.
You understand the situation perfectly. You (or your daughter) seem to have two crazy choices… pay people to do nothing … or return money.
The best option may be to return the money.
BTW, it may also make sense to keep the money, forget about the forgiveness, and use the money to restart in fall.
What if the offer is partially accepted, like they employee wanted only 4 hours instead of 6 hours?
That will impact both the FTE calculations and also your total payroll costs.
Hi
I you receive a loan for the maximum one employee making $100,000 with the loan being $20,832 -and you meet the 75% rule for that payroll in 8 wks. $15,624 leaving you the balance to justify spending for total forgiveness correct? Can you hire someone else to help fill in the difference with their salary since my rent, utilities etc will not make up the difference.
Steve can you please let me know about hiring an extra employee or will that not count?
Can cell phone, internet, employee SEP be a part of the 25% forgiveness totals?
I read one area that home office expenses might be included if was on Schedule C/12 months. I am not sure of this fact.
I don’t think home office expenses work because there’s probably not a rental agreement in force prior to Feb 15, 2020.(That’s a requirement for rent.)
The telephone and internet should work (as long as service agreements in force before Feb 15, 2020.)
The SEP should work… and I love SEPs… but I’d personally be a little nervous about a big SEP contribution that mostly goes to owners. E.g., you do a 5% SEP and it benefits all the employees? That seems pretty safe. But you do a 25% SEP contribution that only benefits owners? You can read the guidance available so far as saying “Sure, that’s okay because it’s a retirement expense…” But that seems like something Treasury could say isn’t really for maintaining ongoing operations.
Hiring an extra employee maybe works… but I’m alert in this answer to the possibility that someone hires a family member or that someone might hire someone to grow their business. Either of these choices, I can imagine, might be frowned on. The family member because it might be a sham to get forgiveness at Treasury’s expense. The new employee for expansion because the PPP money is supposed to go toward maintaining ongoing operations. Not expansion.
This thought to leave you with… I am more and more thinking the right way to think about spending the PPP money goes like this. Thank of this PPP money as purely a loan. Assume you’ll have to pay every dollar back. As a result, only spend the money on stuff that’s essential to keep your business operating. No wastefulness. No splurging. Treat the money like it’s coming out of your pocket, one way or another.
Then, when we have the final forgiveness rules, absolutely, get as much forgiveness as you can. But let the worst case scenario be you used funds for something essential to your survival.
Thank you Steve for your insight, your website blog is one of the few on the internet with reasons and ideas on how the law should be followed.
Thank you so much for this info!!!!!
I’m a full time church administrator not a CPA but do bookkeeping, payroll, etc… Salary and Housing Allowance for licensed ministers was used in calculations for PPP application and we were approved for that amount. Got the money on Apr 30. Housing allowance is not included on quarterly 941’s so I submitted 941, w2, w3, etc… with application to justify amount requested. I will change payroll frequency to weekly and thinking about making pay for ministers all salary for next 8 weeks so it will show up on 941. Then, later in the year make 8 weeks of pay for ministers all housing allowance so the math works out for the year. You probably can’t answer specifics but since lender approved the loan amount even though housing wasn’t on 941, but was is box 14 of w2, will they forgive it if it’s not on 2020Q2 941? I will have paycheck stubs & PowerChurch accounting software documents but not a W2, of course. Or will it look like I gave bonuses since 941 totals will be much higher than normal?
Thanks again!!
Hello-
We have 3 restaurants and they are all set up as separate entities (LP’s) with different shareholders. The same General Partner manages all of these entities. Each of these entities received separate PPP loans.
We have an individual employee who works at all 3 of our restaurants. Would this employee be limited to the $100k cap if you combined all of his compensation from the 3 entities. Or since each entity is a separate LP, would this employee be limited to $100k PER ENTITY?
Regards-Tony
We pay ourselves every two weeks. Our provider is ADP. But we received the money after one week that the pay period started. Will ADP be able to give us a report that corresponds to this 8 weeks? Will ADP pro-rate the week that was not in the covered period window? Also, can we cut a check to our solo 401k and have that money counted toward the forgiveness?
Liked your article +++. we have the same comparative Headcount at 16, however we have a situation where 3 employees were laid off due to COVID-19, one was employed for only 1 week, the second was on Disability for 6 months and we never received a return clearance to work, and the 3 rd one was not as efficient . do we have to rehire them back even though we currently have the same headcount of 16. we don’t need them nor do have a space for them, and they will definitely show on the Unemployment records. Appreciate your valuable advise. Thanks.
I work for an auto dealership. My employer applied for, was approved and received their loan. (Based on employee averages, including salespeople) During the lock down, we were allowed, legally, to work by appointment, with certain criteria to follow, set thru online interaction. As commissioned salespeople, we earn a percentage of profit. The employer is taking that amount and rounding up to the average. (example – A salesperson averaged $5000 per month last year. During the lockdown, by appointment etc., he sold several cars and earned $2,000 in commissions. The employer is rounding that up to $5000, calling it his average) I believe that goes against the spirit of the loan, I believe they are breaching the agreement by doing this. Question: Shouldn’t this salesperson receive the $5000 as compensation, that the employer took as a FORGIVABLE loan and pay him his commissions on fresh business. I believe if not, they are breaching the contract which is his pay plan. I earn over $100,000 and as such am receiving a reduced salary to cap at $100k ($8,333 mo). Should I not my receive commissions, on fresh business, under my pay plan? ESPECIALLY since I am taking a pay cut. It seems to me if the employer rounds up, then they are breaching the PPP contract by claiming a false amount of compensation, if they don’t pay on fresh biz, they are breaching the pay plan. In essence, they are double dipping. They are earning $$ on the fresh business, I believe they are obligated to pay the commission percentage.
What did you mean by Payroll Cost also includes : “ Business Owner Compensation Replacement “ ?
I am the owner of a medical practice, I perform administration functions and receives only K1, no W-2.
Does this qualify me to be included in the payroll cost up to $100,000/ year In calculating the payroll
Costs. Thanks. And if there has been an error in calculating the payroll cost and ended up with an excess amount of PPP loan. Will I be penalized? Do I have to recalculate and return the excess loan amount now before May 14, or I can wait to the forgiveness decision and return the excess amount then ? Thanks
I don’t know what you do if you got a bigger loan amount that you should have. But I’d call the bank and ask about returning excess by that May 14 safe harbor date. The safe harbor date isn’t for returning the money btw. It’s for “fixing” a bad certification.
Thanks for your Fabulous articles and answers on your Blog.
In a Medical Practice, can Malpractice Liability Insurance, and Electronic Medical Records Monthly
Subscription and Maintenance be considered Utilities for the purpose of calculating Payroll costs ?
Also, is Workman Compensation insurance paid for the employees considered Payroll Cost?
Thanks.
Your Article and answers to the questions are Fabulous and very informative. In Medical Practice can Malpractice Liability Insurance, Electronic Medical Records monthly subscriptions and its Maintenance be considered Utilities ? And how about Workman Compensation Insurance can it be added to the payroll Costs. What did you mean by “ Business Owner Compensation Replacement “ in calculating the Payroll Costs ? The owner is performing Administrative functions and receiving K1 instead of W-2 up to 2019. can that also be added to the payroll Cost up to 100,000/year and he can be cut a check from now on ? Thanks for entertaining the answers to these points
I think the medical records stuff probably counts as storage. Not the malpractice insurance or maintenance though.
Probably the workers compensation counts as insurance. But that’s not explicit that I’ve seen.
If you have a K-1 from a partnership tax return that shows self-employment earnings, you should be able to count as weekly payroll costs the lesser of 1/52nd of your annual self-employment earnings or $1923.
I am sorry. Had to repeat myself as my previous posts were not showing that they were saved and received (Erro). Thanks.
Wife and I received PPP under sole proprietor, I was listed as 50% owner and she was listed as 50% owner. The bank used the total net from our combined schedule C’s to calculate loan amount, the funds were deposited into our business checking Monday 5/4. Regarding “owner compensation” will that amount be forgiven automatically upon 8 weeks of schedule C used to apply for the loan (simply provide the 2019 SC when applying for forgiveness or do I physically need write a check for that amount out of the business acct with “PPP owner compensation” in the memo and if so do I write one check for me and one for her each with “1/2 PPP owner compensation” in the memo? Thanks in advance, Steve
I don’t know. But the guidance available says to me that you want to write checks to you and your wife to document the draws. That’s safest. And why risk losing forgiveness just to save yourself from writing a few checks.
I am the sole employee for an S-Corp (using contractors), and I am worried about being able to use our full PPP loan because I work out of a home office. I love your site and have some questions for you:
1) Health insurance — those costs were included in the calculation for our 940 in 2019, however I just saw that employers can’t count their own health insurance premiums as payroll. Is that true?
2) Rent – I know I can’t count a home office, but what about the internet affiliated with that home office that I use for my business? That’s considered a utility cost, right?
3) Can I add a new employee converted from a contractor who wasn’t counted initially in the payroll calculation?
4) What if I use part of the loan exactly as I should and return the rest. Would the part I use be forgiven, or are you required to use all the money in order for it to be forgiven?
5) Could I give myself a small raise?
Answers: 1-no but you don’t need to worry about this because your health insurance is “in” your W-2 and your W-2 will count.
2-yes I think so.
3-yes
4-I don’t know. The open question is that 75% rule. what’d do is wait for more guidance
5–I wouldn’t. Understand it would have made sense but bumping you salary after you get the PPP money seems like bad optics. Sorry.
Thank you for sharing your expertise Steve on this very confusing topic matter.
My husband and I have an S-Corp that we are both paid W2s through. We had 5 employees between February and June of last year. As of January this year, it is only my husband and I on payroll, due to employees quitting, not hiring certain ones back due to poor performance, etc.
The bank suggested we apply for the maximum amount based off the payroll for the five employees. They said we could just return any unused money.
After reading all the above comments, I think they may have unintentionally placed us in a bad position in terms of the forgiveness.
Am I correct in assuming that if we don’t use 75% of the total amount offered, we definitely would not be approved for any forgiveness, even if we only used what’s applicable to our own salaries?
Thanks for your time in advance:)
The 75% thing is a possibility. Some folks don’t think that risk is real. But I think you can read Mnuchin’s comments to say there is a risk.
As self employed that has no income do due the situation, but have about 90K in my bank account, can i consider myself eligible for the loan, due to the lack of work…(I can technically apply for unemployment..)
Or because I have money to support myself, the application might not be in good faith?
Seems to me like the original statute would have let you get a PPP loan.
Seems to me like the new rules (or at least the rules today as I type this) maybe don’t.
Sorry I don’t have a better answer for you. This is just one of the ways the PPP statutes display their “poor quality.”
I have a ton of question about the ppp, but will keep it to only a few. I am a schedule C business. I do rent an office space and so have a few utilities. Being a schedule C, can I use the 25% for the rent and utilities? Is a cell phone considered a utility? Secondly, when it come to the 75% payroll, I have an insurance plan that I do pay for out of my business account, can that premium be used as part of the payroll calculations? Can HSA contributions be used?
Thank you for your help.
You probably want to reread the blog post. It actually answers your questions the best way I know how…
But to quickly restate its info, you will get forgiveness equal to 8/52nds of your 2019 Schedule C.
And I don’t think you’ll get much additional forgiveness. (I read the interim final rule to say you won’t be able to get forgiveness for rent, utilities and interest…) BTW, some CPAs disagree on this and think you will get forgiveness for rent, utilities and interest.
I’m a little confused on your Gotcha #6…Can you please help me answer a couple question’s?
We are a seasonal business in a seashore community with operations running the second week of May to October. We received our PPP funds this week and I’m not even sure if I can spend any of it. Our original application submitted in March included 1099’s which is what we received the funds on. Ok so I received too much money. Let’s say my PPP loan was for for $100K. I assumed I could spend “up to” $75K on payroll expenses and $25K on “other”. If I only spend 40% of the $75K on payroll costs, does that reduce my percentage of allowed “other”? AKA reducing my $25K of other forgiveness by 40% as well? Or can I still spend the $25K and return the unused portion of payroll proceeds to the bank? Make sense?
Question #2: We were forced to close by state mandate in March. I have unpaid utility bills that were due in April. Since I did not receive the funds until May, can I use PPP funds to pay back utilities and still have them forgiven? Thank you very much for your time!!!
Why is this dam loan so difficult?
I’m not sure what you do about getting a loan amount that is WAY too large. If that 75% rule applies, you’re in trouble because of the 1099s.
I would therefore ask the bank about that. Maybe you return the excess (erroneous) money? Perhaps by the May 14 date that’s used for the “I goofed my certification” correction?
Regarding spending on utilities for bills incurred before the 8 weeks? I don’t think those should count. Sorry.
P.S. This is all way, way too complicated. That’s the fault of Congress (both parties!) BTW… but to be fair, they slopped through this to get you money ASAP…
My PPP came through in an amount that was higher than Sched C / line 31 figure. It’s $15,810 and should have been about $300 less. (sole prop. no employees)
My questions:
I understand I can pay myself for 8 weeks of 2019 net profit, but that is LESS than what the loan is for x 2. The total payroll for 2 mos is $12,355 but the x 8 is 11,408 which is LESS than 75% payroll of my loan… so I am wondering if I just give myself a raise to clear 75% can I just pay myself 12,355 or should I do less?
Also, how do i account for the mistake in the loan amount? Just save that extra $300 and not spend it? I am planning to pay back the rest since rent and utilities is low.
I would ask the bank about the $300 error. That’s really on them. (Maybe you’re wrong and they’re right?)
The issue about 74% versus 75%? The Treasury has said basically that that’s close enough. They round up. You should need to worry about that.
Thank you. I think I will pay myself the higher amount and just plan to pay back a few hundred $$. I honestly don’t believe they will round up. It freaks me out to have that be a possibility!
It was my mistake – I had used 2018 line 31 before my cpa finished my 2019 return. and I had been instructed by another online financial person to include my payments for health ins which were personal payments, so when I applied I had the wrong number. I am just going to save the difference and show the bank whre the calculation came from.
Hi, company has 400 employees. Based on math for amount of loan, we received $4M which means for all of the loan to be forgiven, $3m minimum to be spent on payroll items and a max of $1m on other allowed forgivable items if the $3M spent on payroll. Simply due to PPP loan analysis criteria provided by Treasury using prior 12 months and 2.5x monthly average, and work load being less in 2020 than the preceding 12 months gross and not a result of FTE reduction, the amount for payroll that will actually be spent will probably be $500k less than the $3m. Just a business volume issue, not payroll or FTE reduction as everyone is still on payroll but OT has been less so far this year due to less projects. More than one accountant has said that we could start a new 401k retirement account for the employees and put that otherwise unused $500k into the new 401k for the qualifying employees as a single time disbursement and it not be anything associated with future matching portions in the 401k. I know that retirement plan payments are considered payroll under PPP and not counted against the $100k max salary, but since this would be a new retirement plan put in place and funded during the 8 week payroll, would that be prudent and still forgivable under PPP? If not, and thus payroll expenses paid out will probably total only $2.5M, then would the allowed other forgivable amount then be reduced to $750k as long as we gave back the other $500k at the end of the 8 weeks payroll period?
I don’t think you can get good answers to your questions. Sorry… 🙁 But these thoughts:
Right now, and especially given the size of your PPP loan which Mnuchin has said means it will be audited, seems risky to do the 401(k) plan thing. PPP was for maintaining ongoing operations. Not expanding. You’re not expanding per se… but you’re doing more than in past at least for retirement.
I think you should be able to return the unneeded $500K… but that darn “at least 75%” thing scares me. Given your dollars you want to be alert to that.
The only thing I think is perfectly safe is to pay the money out as payroll–ideally to the folks you paid in 2019. Sorry.
P.S. Not sure I understand the last part of your question… But if you spend $2.5M on payroll, I think you can get forgivenness on another $833,333.
The math: $2,500,000 / .75 – $2,500,000…
Thank you!
Great blog. First I spoke directly to the SBA this morning and the person claimed that if you use 25% on rent and use basically nothing on payroll you still get the full 25% rent deduction. He of course would not put it in writing saying more guidelines are coming out.
That aside, here is my question. I got a loan for about $200,000 with 12 employees. I am going to keep right now 2 employees on payroll both making the max of $15,384.56 (times 2=$30,769.12). Also health insurance is $5,000. I am going to pay rent in the amount of $25,000.
1. How much of the loan do I still have to pay?
2. If I rehire the other 10 by June 30th how much of the loan do I have to pay?
Thanks,
Alan
I hope you’re right about the 25% on rent thing. That’d be great. (The guidance is vague…)
Regarding the loan forgiveness, I would think you would get about $48,000 of forgiveness: Roughly $31K payroll for the employees. Another $5K for insurance. So now we’re at $36K. Roughly. The non-payroll piece (rent in this case) can only be 25% of the total, which would be about $12K.
I.e., with $48K, 25% equals $12K… the leftover $36K is the payroll.
You won’t get penalized on the headcount thing only because you bring people back on board by June 30.
Thank you very much for the new ideas.
Regards Daniel
Hi Steve,
Thank you so much for all these information. It helped me understand a lot of things.
I have one question. I have an S-Corp. I used to rent a space for $1200 a month before COVID. In Feb 2020, I moved out of that space and did my business at home. I’ve been paying myself $1200 for rent. Can I use the PPP to continue paying myself rent? Do I simply issue myself a check from the business checking where the PPP was deposited? And also utilities?
Thank you,
Mark
The rental agreement needed to be in force February 15, 2020. So the rent to your “new” landlord won’t work. Neither will the utilities and for the same reason.
Ran across this today, # 1 of part III regarding forgiveness, really confuses me.
“Recommendation: Align beginning of 8-week covered period with beginning
of a pay period, rather than the date loan proceeds are received.”
I received funds April 27th, did my bi-weekly payroll April 29, paying employees for period April 15 – April 28. I think the most conservative position is to count April 27 & 28 as covered by PPP, and not April 15-28.
https://www.aicpa.org/content/dam/aicpa/press/pressreleases/2020/aicpa-ppp-recommendations-letter.pdf
I think that says the AICPA thinks Treasury and SBA should let borrowers start the eight week covered period (the time the forgiveness formula looks at) on the date the next payroll period starts. I.e., for your firm they’re saying formula should let you start the 8 weeks on, e.g., April 29, the first day of the payroll period that starts after you receive PPP loan.
Are there penalties or issues than can arise from not applying for forgiveness? Is applying for forgiveness a requirement of getting the loan? It seems like it’d be easier to just pay the money back than to jump through all these hoops and landmines.
You should apply for forgiveness, I think. Why not, as long as you follow the rules (whatever they will be at the time…)
However, I think you’re really on to something with your approach. One should treat this as a loan, spend the money as if you’ll need to pay it all back, and be super-alert to the fluid nature of the rules… Take this approach and you won’t be blindsided with a disappointing outcome. On the contrary, you’ll probably end up better than you plan for.
Steve,
Wonderful blog! this is the only source I have found that has up to the minute info on the PPP and what to prepare for. After reading through all posts up to 5/8/20, and elsewhere on the ‘net — something I have not seen discussed:
The SBA clearly states no collateral is required for the PPP loan in their documentation. However, there was a huge uproar about lenders requiring a current banking relationship in order to apply for a loan (unfair). The banks stated that it was due to having to verify the legitimacy of the documentation, but seems there is more to it, if my closing doc is par for the course. Usually with a current banking relationship you have ‘some’ funds in an account.
My concerns apply to those with more than one account at their PPP lender, e.g.: One account for PPP funds, the other(s) personal or business — and use PPP funds without clear guidance and assurance of some forgiveness. I expect forgiveness to be 0% and have funds on hand to pay back the loan. Here’s why:
Lenders “Right of Setoff” — Anyone else have this clause in their closing documents? Is this not ‘collateral’? – here’s an example: https://www.sec.gov/Archives/edgar/data/1717556/000149315220007115/ex10-8.htm
12. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower(s)’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower(s) holds jointly with someone else and all accounts Borrower(s) may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower(s) authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.
Is this standard in an SBA lender PPP loan agreement? Or another gotcha that may have detrimental consequences for those counting on a goal of 75% forgiveness with limited funds?
Isn’t this the same clause that was disallowed for the stimulus checks? Why is the PPP different if no collateral is required? https://www.ccul.org/news/4100-requesting-ca-guidance-garnishment-liens-and-right-of-setoff
Isn’t the Lender the one who decides if the loan is forgiven, and Lender (or SBA?) may request whatever form of documentation is deemed necessary?
The purpose and spirit of the PPP loan is to protect paychecks and use it in 8 weeks for that purpose. Most small businesses seeking the loan have limited funds. But if forgiveness is reduced or not granted, it’s no protection to the small business if they can’t reopen, the economy doesn’t bounce back, and the loan can’t be paid back in full starting in 6 months. If requesting the loan ‘due to economic uncertainties’, why is this clause allowed to exist in a PPP? Especially if the government and taxpayer dollars are backing it?
Maybe I am confusing collateral with the right to collect?
Most will be granted some forgiveness I am sure with decent documentation. Most lenders are above-board and trying to help.
My paranoid side recalls banks making a large profit foreclosing on homeowners in droves without due process in the last recession. The banks eventually were brought to justice somewhat, but by that time it didn’t help the millions who’d lost everything they worked so hard to achieve.
I may pass on the loan, even though I have adequate funds at the moment to cover it (who knows in some months).
Thoughts?
I don’t have any practical experience dealing with the issues you raise. (Sorry.)
But just between us chickens? Yeah, you might be a little bit on the paranoid side. (Er, don’t tell anybody, but I am too…)
That said, agree with your general sense that these loans may not give small business owners the result they want (and need). Also agree with your concern one should not count on full forgiveness–at least on the front end when it’ll really matter.
Hi Steve,
Thank you for all your help and advise. If we ( two owners of the S Corp ) make 5K a month each, and we haven’t got paid for last two months, even though we worked and just made enough to pay company’s bills to survive. can we claim for these two months or can we max our payroll to 8/52nd of $100,000 without any problem.
Thank you
I think you need payroll incurred and paid within the eight weeks that follow you getting PPP money. I also think the right payroll amount will be what you paid owners last year or at start of the year.
E.g., if you paid yourself $30K in W-2 wages and then another $30K in distributions in 2019, paying yourself $30K in 2020 seems fine. Maybe even a bit more as a ‘cost of living’ adjustment. But I don’t think you could safely (in effect) say “when it’s PPP money, we pay ourselves $5K a month in W-2 wages… and when it’s our money, we pay ourselves $2500 a month in W-2 wages.)
I mean, maybe that works. But I would think Treasury writes rules that prevent that manipulation of the payroll by owners. (They should.)
Have a question on Gotcha #3:
Do we have to offer the SAME employee their job back? Due to a reorganization, we really don’t need that person or position anymore and they are not qualified to do anything else. We have hired two more people in different positions so our total employee numbers and salaries are good but we didn’t hire the exact SAME person back. Will this leave us ineligible for forgiveness?
I think that should be okay. Nothing in the statute or in the Treasury and SBA guidance thus far requires you to hire back the same people.
The only thing that’s close is the guidance that lets you NOT make a headcount reduction adjustment if you make a written offer of “reemployment” to someone (same hours, same pay rate) and they decline…
On the last comment about a self employed.
To illustrate this, if your 2019 Schedule C shows exactly $52,000 of profit, you earned $4,333 a month and $1,000 a week.
Your loan equaled 2.5 times $4,333, or $10,833. But forgiveness equals 8 times $1,000, or $8,000.
Do you just have to type this out for the documentation and or mention it or is it something that will already be calculated when you ask for forgiveness?
Thanks
I think the forgiveness formula will do the calculations for you in this way. I.e., you describe the way I think this works.
Thanks Steve for your great post and answers. To Clarify in Medical Practices the Electronic Medical records are the Computer tools to document Patients encounters and communicate with Other Providers and Healthcare facilities, and and have been mandated and encouraged by the government following the Obamacare Act. They are not documents storage. So can this be considered Utilities
as our tools to take care of patients. Thanks again
Hi Steve. In Medical practice Billings and Computerized Practice Management Software can be outsourced to outside Vendors for a monthly Subscription to cover both items, therefore saving extra Employees in the office. Could this be added to Utilities ? Thanks
If you had a rental or service agreement in force before February 15, 2020, maybe…
I think I understand the criteria for forgiveness, but just thought about another issue. If in looking at reasons for forgiveness, does the lender or SBA drill down to the shareholders/owners of an S-corp, or do they just look at the company itself (who received loan) and the various economic factors, financial conditions, etc related to the company. If shareholders had assets (example retirement accounts, real estate, some cash etc) but company who received loans clearly needed the loan, do they stop at the company level.
Great question. And I think we don’t know
The way I read the statute: No you don’t need to consider this stuff… basically, the statute said to me, “hey, given uncertainty, would a loan be a good idea? Just so you can maintain/support ongoing operations?” A “yes” answer meant you were good to go.
The way Marco Rubio and Mnuchin and others from agencies talk now, the new rule is something far far different… and it looks at a firm’s ability to access liquid funds from other sources.
We have terminated a couple of employees from after 2/15/2020 and before 4/27/2020 due to disciplinary issues, i.e. fraudulent charting. We also have lost employees due to their client’s passing (may or may not be related to covid). We also have one employee who got upset and moved her client to another agency. Would all of these scenarios require that we offer to re-hire them in order to avoid reduction in forgiveness? In the case of the termination due to fraudulent charting, we cannot in good faith re-hire them? Please advise.
We also have an employee who was working 40 hours prior to this pandemic. During the pandemic, her hours were increased to 75 hours due to adult day cares being closed. Her client passed away recently. Are we suppose to re-instate her wage level now at 75 or 40 hours?
Two issues appear in your situation. First, you got money to pay the folks who have now left… so you may need to replace them simply to have payroll spending that generates forgivable uses of the PPP money. I.e., if you have 20 people with payroll whose wages plugged into the PPP loan formula but now you’ve got only 16 people you’re paying wages too, in effect, you have too much PPP money for the 16 people.
A second related issue… you have a headcount reduction of 4. So say you went from 20 people to 16. That 20% reduction in headcount would also reduce your forgiveness. E.g., maybe you had $100K in payroll before the PPP loan for the 20 people… you now have $90K in monthly payroll for the 16 people… but you only get forgiveness for 80% of the $90K and not 100% of the $90K. The reason for the 20% haircut? Because you have a 20% cut in your headcount.
You could solve, partially, this issue by making written offers to one or two of the people. E.g., make a written offer to the person who left for a new agency. (That solves a little bit of the headcount reduction problem. but not all.)
Gotcha #8 re self employed Schedule C business without employees:
1. What kind of documentation do you foresee will be needed when they apply for forgiveness? I just don’t see what will be expected from them, as the income they lost during this pandemic is solely the net income from their self employment business. They wouldn’t be expected to account for where they spend this money on, right?
2. On your example, 8k will will be forgiven our of the 10,833. Would the self employed then would need to pay the balance of 2,833 over a period of 2 years?
Thank you very much. This article is so helpful! Thank you very much.
The unforgiven part will need to be repaid. Someone can do that ASAP… or over a couple of years.
Will you please respond to the first question, as to what documentation will be required from a self employed individual in order for the loan to be forgiven. The loan amount was solely based on Schedule C, which
represents the net income from self employment?
Steve,
I received PPP money for two of my businesses. With Payroll ( I dedcuted FWH, SS and MC), Utilities and mortgage interest I can easily proof, higher than 75% of the PPP money to be used.
If I understand it correctly, that means that the loan will be forgiven?
For my other company, that is a 1099 company, I can use owner compensation and utilities but that doesn’t add up to 75% of the loan.
I saw your advise to keep the remainder at 1% if you can use it as a low interest loan. Can I use that part at 1% to even put in a savings account that is giving me more than 1% interest as right now I have one, or put it in the stock market and risk having to pay it back with a loss or hoping on a gain. Just as an example. I do not need the additional money but got your idea from the advise you gave to the Uber driver about the low interest loan.
Btw, how and where do we pay back the loan part that we do not qualify for in order to avoid the 1% interest? I got both PPP approvals from BoA.
Confirm with bank, but you should be able to repay the bank you received loan from…
In order to get 100% forgiveness (so like for the first company), you’d need to use at least 75% of the PPP loan for payroll costs and then 25% or less for the other stuff. You should read or reread the blog post for forgiveness details… also the PPP loan formula explained blog post.
BTW, the forgiveness you get for the other business will work as described in the last gotcha in the blog post… I think you’ll get less forgiveness than you hoped for. Sorry.
Thanks for your reply. I know for the other business I will get way less forgiveness which is kind of logical. But your advise to the Uber driver/business owner to use the 1% as a loan which can be a benefit. Can that be used for anything you want with repay with 1%?
Well, you’re supposed to use at least 75 percent of the loan for payroll. So to comply with the law, you need to do that. But maybe if you can use the 75 percent for owner compensation replacement (perhaps over the next year?) that frees up other funds for rent or utilities or interest. Note that this could easily mean you do NOT get forgiveness. But maybe this cheap funding source works purely as a loan.
PPP Loan Forgiveness Calculation for S Corporation : Is this correct?
Total Employees in 2019 =6 ( 3 FTE, 3 PTE)
Total Employees in 2020 now =5 ( 3 FTE, 2 PTE)
Loan amount ~ 100K
EIDIL Advance 5K
Eligible PPP loan for forgiveness ~100K
Payroll each month 25K x 2 Months =50K
Retirement Contributions( 401K profit sharing+ safe harbor match+ Cash balance plan ) = 25x 2 Months=50K contributed to 4 eligible employees based upon 2019 calculations?
Loan received May 7, Last day to run payroll June 30, 2020?
Thank you for providing expert guidance.
You want to review something with this much detail with your accountant. But two tips… You probably need to convert your FT and PT headcounts to FTEs . Also, I wonder if you’re going to get limited to $100K annualized payroll costs…
I asked local sba manager if there will be Partial loan forgiveness if you don’t use 75 percent on payroll and only use 70 percent as example
His reply
You have to spend a minimum of 75% on payroll in order for the loan to be forgiven
Vince LoPresti
Senior Area Manager
> On May 8, 2020, at 11:51 AM,
>
> CAUTION – The sender of this message is external to the SBA network. Please use care when clicking on links and responding with sensitive information. Send suspicious email to spam@sba.gov.
So that’s not official guidance. But that’s an example of the 75% rule… something people like me worry about.
FYI, that’s not part of the law. But Treasury and SBA have said, or hinted strongly, about this.
It’s bad news… Bad, bad news.
P.S. Thank you for sharing.
Steve, thanks again for all the valuable answers!
We’ve been waiting for funding of the loan. Because of forced closure, our last payroll was April 5th for period ending March 31. To help get closer to that 75% my intention is to pay all employees, (that were NOT getting unemployment), back to April 1st through the pay period we get funding. We pay semi-monthly so right now it’s two pay periods behind, and halfway into the 3rd. I would resume normal payroll for the remaining three payrolls in the 8-weeks. I assume there’s no issue with doing that as it’s not any sort of pay increase, just paying them for all unpaid time since the crisis began?
So I don’t know that what you propose works. If you get the loan on, say, May 11, I think you want to pay payroll for the eight weeks that state on May 11.
Correct, we will run payroll for the 8 weeks, but in that first payroll…can I pay them the money they lost for the previous two payrolls, assuming they were also not collecting unemployment? So someone making $500/wk before Covid… they lost 5 weeks of pay since we closed… can I pay that person $2500 in the first check, then the normal $500 for the final 7 weeks?
Thanks, Steve!
First of all, great article answered a lot of my questions but I am still confused on the $100,000 cap.
I have several employees that make over $100,000 per year and have 2 employees that have already reached the amount in paid wages.
Does this mean that I can’t include them as part of the PPP for forgiveness? For employees who haven’t reached the limit yet but will before the end of the year does it mean I can only count $15,384.56 ($1923.07 X 8) for each employee or is all their salary excluded?
If I can only use the $15,384.56 amount but pay their regular salary from the PPE funds will the entire amount be excluded or just the amount over the limit?
I had the PPP funds deposited into our payroll account to keep separate and be able to track and I really don’t want to have to pay checks from a different account.
Thanks
No, it means you can only count as their payroll costs $1923 a week per employee.
Continuation to my questions on the $100,000
I don’t know if it makes a difference but we are an essential business and have been working the entire shut down.
Thanks
Cathy
My business is an LLC with employees that files as a sole proprietor. I did not include
my “compensation” in my PPP loan application because I did not know that I could. I received
the PPP loan this week based on my employees wages only. Can I include my compensation
as part of forgiveness?
Yes, you can. Your weekly payroll costs equals the lesser of either 1/52nd of your 2019 Schedule C profit or $1923.
Steve I forgot to mention I receive my income not from salary, i just withdrawal money from my LLC. If this is the case, I can refile for me as separate or amend my application for myself? If not, can my employee wages plus SEP to be drawn in 8 wks (based on which i received $20,832 in PPP) plus my withdrawal equal 100% in forgiveness since i make over 100,000?
Thanks again for all of your great advice!
Can you contribute more then 75% towards payroll? could it be for instance 90%
Also please clarify retirement benefits are part of of the payroll expenses.
Thanks!
Probably. (I would only be nervous about this is the payroll or retirement stuff looks sketchy. E.g., the payroll is all to owners, you’ve raised payroll for 2020, there’s a new pension plan for owners, etc.)
Thank you again for your help.
1. Will HSA contributions by employer count towards Medical expense for PPP forgiveness or is there no ruling yet (we always paid them monthly)?
2. It is my understanding that if I pay in 8 PPP weeks 2019 SEP IRA to employees, it will count towards 75% forgiveness.
What about 2020 estimated SEP IRA payment to employees? Does it have to undergo /52*8 formula? Is it eligible forgiveness expense? We are Sole Proprietor company and generally pay SEP IRA during tax season of the following year. Will this look strange?
Hello Steve,
Can you please clarify is you can contribute more then 75 % lets say 90% towards payroll?
Also payroll includes also benefits such as retirement plans as well?
Please clarify.
Thank you!
That should work.
My wife and I have an LLP, filing S-Corp and no other employees. We are 50/50 owners of the business. Our income is paid via 1099 – Sales related. 2019 we received $43,509 in income. This was filed on a 1120-S with the IRS. We pay ourselves as money comes in, and usually just once a month, the amounts always varying. Our business income is stated on a Schedule K-1. The income is based on print-ad sales and that is drying up very fast until this passes. Am I eligible for a PPP that would be forgivable?
See the discussion in blog post https://evergreensmallbusiness.com/paycheck-protection-loan-formula-explained-and-illustrated/
It should answer your question. But I think you won’t qualify for a loan if you don’t have W-2 payroll for the shareholder-employees.
Steve, great information, thanks!
Does this look right? For the salary calculation piece, we’re comparing Q1 2020 to the 8 weeks during the PPP period. The calculation would be (Q1salary/13)*8*.75 to find the minimum salary/wages an employee needs to receive to avoid the penalty.
As for gothca # 7. Our total PPP loan is $316. so 75% is $237k.
Assuming we max out the other 25% and we spend $216k on payroll would we lose 100% forgiveness since we’re short of 75% of does $21k get turned into a 1% loan?
It’s hard for us to get to 75% because half our employees earn over 100k.
TIA for the reply!
Frank
We are a tour company in Hawaii. We have received funding for the PPP loan a couple weeks ago. We plan on using the funds as a 2 year loan at 1%. But I had a question about partial forgiveness. Can I get my 8 week payroll cost, rent and utilities forgiven so I would only need to pay back the rest. Suppose i got 100,000 loan and used 30,000 on payroll, rent and utilities, would I just need to pay back 70,000?
Maybe. But see the above post’s Gotcha #7… that could throw a monkey wrench in the works.
Tip: The practical response to Gotcha #7 is to ignore the forgiveness, consider the PPP money as a loan you’ll probably have to pay back 100% of, and then be wise about how you use the money.
Hi I was wondering about sep/401
K pension contribution. Is it based on max $100k so $25k divided over 8 weeks Or based on 2019 sep contributions . For example
Salary $14ok for 2019’ so sep was $35k .
Can pension contributions be based on 2019 salary that was Over 100k .
Plus max salary of $15384 for loan forgiveness ?
Thanks
I am an independent contractor who filled out my application in late April. The loan amount was based off my 1099 rather than my schedule C – as full guidance was not yet available. As such, the total loan 43% higher than it should be. I alerted my bank to this before they submitted it to the SBA and they refused to adjust it saying its “already approved’ and “too late”. The SBA also approved the loan.
Based off my 1099 the approved loan amount is $15,600, but should be $10,880 if based off Line 31.
Lets assume that 100% of any money used will be spent only on compensation replacement, (No utilities rent etc.)
I understand that only $8,000 is eligible for forgiveness based on the line 31 – 8/52 calculation. However, if I only use the $8,000 I am entitled to forgiveness on, than only 51% of the “Loan Proceeds” will be spent on “payroll”. Does the 75% of LOAN PROCEEDS on payroll apply to 1099 Independent Contractors? Or is the 8 weeks of Line 31 a set number for forgiveness regardless of loan size. As you point out, it is mathematically impossible for independent contractors to both spend 75% of the loan PROCEEDS on payroll in 8 weeks and use no more than 8 weeks of the 2019 Line 31 number. In every scenario it will work out to less than 75%. Further, you mentioned something about 74% being rounded to 75%, but if even if my bank did use the proper numbers or if we use the maximum $100K example – it actually works out to less than 73.6% – so a round up to 75% is more of a stretch than you even pointed out earlier.
My plan was to get the $15,600 – repay $7,600 immediately – pay myself $1000 a week for 8 weeks and claim forgiveness on the amount equal to 8/52 of line 31. My bank initially told me this would be fine, but they refused to put it on email to me and would only communicate it verbally.
Separately, i had written an email to the head of the SBA to complain about banks that take applications and never file them or contact the applicants. (I actually had an approved PPP loan in the SBA system for 10 days and the bank never even told me!) Anyway, as result of this complaint i was put in direct contact with someone at the SBA who provided constant communication on my other issue. But…. as soon as asked for specific clarity on the 75% of “PROCEEDS” or “AMOUNT REQUESTED FOR FORGIVENESS” topic she had no idea. She they went to a SBA supervisor and promised to give me a clear answer, and while her intentions were genuine, after speaking to the supervisor she emailed me “Guidance has been given to your lender please deal with them directly.” I asked my bank what the SBA said and they told me they had no clue as to the answer. Neither the bank or the SBA is able to provide any clarity on this issue or interpretation of the rule.
If the “75% of total loan proceeds must be spent on payroll” applies to 1099’s and failing to meet it totally eliminates any forgiveness potential, than its mathematically impossible for any 1099 to have any portion of their loan forgiven. My bank has offered to 1. pull the overly high approval and cancel the loan altogether, 2. pull the approval from the SBA system and let me reapply from square one but risk money drying up and getting shut out, or accepting the loan for $15,600.
My colleagues who used paypal were approved and funded in 2 days, and 2 weeks into the program with no issues at all. I used a major bank who ive been banking with for 20 years and applied day 1- and now I am considering cancelling the approval that finally came for this reason.
What would you recommend that i do and do you have any other guidance on the 75% issue for 1099’s and how if impacts forgiveness. (Partial forgiveness vs.. total forgiveness ineligibility etc) Thanks! What a disaster!!!
I don’t know what to suggest. But you understand the issues. So that’s good.
One question I’d ask myself is whether I need the money. If so, I think you keep it. I.e., ignore the forgiveness issue. And then let the chips fall where they may.
A random idea: You might want to play this by ear and watch carefully for additional guidance. That guidance might let you see some new or clear path. E.g., maybe you return the overfunding amount..
Sorry, this paycheck protection program has really been an “amateur hour” presentation. From start to finish, I’m afraid.
Pension for sep/401k max for ppp loam forgiveness based on 100k max salary so $15384x 25 percent
Or can you use 2019 pension calculations if employee was paid $140k x 25% for pension potions toward ppp.
Thanks
Hi Steve
I am a LLC sole proprietor and I applied for the PPP for one employee with W-2 which I received on Monday. I didn’t know i could apply for myself, if that is the case ,making over $100,000 in my Schedule C form for my business. Can I submit another one for myself? or ask to revise it?
I am trying to advise clients on this whole mess and finding it very difficult-so my one of my questions is(I am sure I will think of more after this posts!)-So an employer got a PPP loan and even though the employee is only working 20 hours a week until things pick up, they are being paid for 40 hrs since the employer needs to keep their p/r costs at the 75% of the loan. Question is-since the ee is only working 20 hrs but being paid for 40-would that ee “owe” the employer back the 20 hours per week they got paid for but did not work???
I don’t think so… that accounting would mean the employer hadn’t really paid the employee. He had only loaned the employee advances in effect.
BTW what we’re all confronting with these payroll cost timing questions is (a) the shoddy drafting of the statute and (b) the apparent lack of accounting and bookkeeping knowledge on part of SBA. Hopefully we get way better guidance (like with examples such as treasury regulations give taxpayers) before the final accounting needs to be done.
Thank you for your Blog, it is most helpful!
We are a one owner LLC (Construction Co) with one employee. I am the 100% owner of the LLC & my wife works full time in the business doing design, office work, etc. Neither of us are on payroll. We received $14,608 from PPP based on line 31 of our schedule C. I have two questions:
1. Where does Workman’s Compensation premiums fit in? Do I have to pay 8 weeks of premiums if we have no work? It would seem the answer would be NO, because there would be no chance of injury if we are not working.
2. From previous posts, you say I can use some of the money from the $14,608. How about my wife? We were told early on by the bank that Sole Proprietors can not use the funds, it is only for our employee. How do I calculate what I can draw from the amount, how much goes to the employee & what about paying my wife?
My best answers to your questions appear in this blog post: https://evergreensmallbusiness.com/ppp-loan-accounting/
Also, in the Gotcha #8 discussion in the above blog post…
TLDR summary: You should be able to take a weekly draw equal to lesser of 1/52nd of 2019 profit or $1923.
If my PPP money was deposited into my account on Monday April 27, is my 8 week period up on Sunday June 21 or Monday June 22. In other words, if I do payroll on Monday June 22, does that count towards the 8 week period which began on Monday April 27.
Because of the way the guidance is written, I think you do payroll on Friday June 19.
Hopefully they won’t be requiring this… but why take a chance.
Hi Steve,
We own two separate entities and they both received PPP loans. The companies are managed by the same management company and there is some common ownership between the two entities. We have an employee who makes $100,000 annually from each entity. Are we allowed to pay him $15,384 from each entity during the 8-week period?
Thanks, Brian
I guess that works based only on your description… but the optics won’t look great. So if there was anything else sketchy about the arrangement–for example, the person getting paid is an owner–what you describe seems problematic.
Hi, I am very confused about the forgiveness rules for self employed (LLC not S corp)
My self-employed LLC business got a ~17-18k PPP loan, based on last year’s 1099. I was approved based on a ~$7k monthly salary response, when I was asked that question in the PPP loan form, and the amount was suggested by the bank.
I have some receivables from last year, so the 2019 Schedule C Line 31 was low, less than $10k, net income after expenses. I should get those receivables during this year.
I find kind of senseless that the forgiveness amount is based on last year’s Schedule C Line 31, because last year’s performance does not reflect the average performance of a business and it also does not reflect the monthly “salary” (owner’s draws) of the employees/owners.
My understanding is that the only written rule is that to get forgiveness the company must spend 75% on payroll. My question would be how does a self-employed LLC (not S corp) can demonstrate payroll payment to the owner? Should I enroll in a payroll service? Should I issue a W2 or 1099 to the self-employed?
Thank you
My best answers to your questions appear here: https://evergreensmallbusiness.com/ppp-loan-accounting/
I’ve trying in that blog post to be very safe based on what we know now.
Hi Steve –
I am so glad I ran into your comments and post here – Thanks for all the insights here. I am confused about PPP (from a sole proprietor point of view) and any inputs from your side would be very much appreciated:
– I am a sole proprietor who made ~180k in 2019 (~15K per month)
– In 2020, for the past few months, my business is down to $10K per month, post covid-19 (33% reduction) and hence I applied for PPP
– I got approved for 20,833 (they capped me at $100K grant) which makes sense for 2.5 months
My question is:
1) I am making $10K per month right now, post covid and so my projected salary for 2020 at this rate will be $120K (down from last year but still > 100K). Can I still access PPP funds and pay myself from that fund even though I am still going to be making > 100K this year?
2) If yes to 1 above, how much can I pay myself per month? I am still working though business is down to 10K per month (it used to be 15K per month before covid). Does it mean I can pay myself an additional 5K per month (+ an additional 3K: I work from home and have to pay rent and now this is my workspace so rent can also be included)? I am just confused whether I can still pay myself from PPP since even at my reduced business, I am going to be making > 100k. I read somewhere that you can only compensate yourself upto 100K salary rate but if you are already making more than 100K salary rate (post covid), can you still draw salary from the PPP?
Any inputs will be greatly appreciated!
Many Thanks
You can pay yourself. You should get forgiveness for $1923 a week of pay for 8 weeks.
The answer to your question about home office rent is unclear. I think it’s safest to assume Gotcha #8.
Thank you so much, Steve! Really appreciate your insights here! I feel so grateful for your knowledge and helping us all out here – sending you good vibes and my best wishes!
Our business has been closed for a month, reopening on Monday. Our PPP loan funded last week. We have a small electric bill due next week (small due to being closed). Is this the utility bill we should pay from the separate PPP account and ask forgiveness or should we pay it from our normal account and wait and pay the higher July 15th bill out of the PPP funds? 7/15 will be outside of the 8 week window but it will actually be for utilities used during the 8 week window. Thanks for your thoughts.
I think you pay bills for the 8 weeks that follow the PPP loan funding.
I.e., last month’s pre-PPP-loan funding utility may not work.
Pension for sep/401k max for ppp loam forgiveness based on 100k max salary so $15384x 25 percent
Or can you use 2019 pension calculations if employee was paid $140k x 25% for pension potions toward ppp.
Thanks
Sorry to repost
I am not sure this is true. It might be. But I would set my expectations low… Sorry.
Steve, how about seasonal business with revenue in just 4 months?
My loan was based on 3 months(12 weeks) of salary at $9k/mth(scorp, 2 owners). We each have w-2 income of $36k. Are we still limited to $15,384 for forgiveness over the 8 weeks even though we don’t make $100k a year?
Also, how about employer i401k contributions? There is guidance for sch c filers, but not scorps. This would be an additional 25% on top of our salaries.
Steve,
As others have pointed out, this truly is an awesome blog; helping us find a path through the PPP craziness. Thank you !!!
Since It is such an important issue for many of us, could you please let us know exactly where in the SBA’s PPP rules it says that the 73.8% that results from using the 8 weeks of pay calculation will be rounded up to 75%, to meet the requirement that 75% be spent on payroll.
I would like to make sure there is no wiggle room on this, since for a very large number of PPP recipients this can make the difference between forgiveness of the 8 weeks of payroll or no forgiveness at all (due to it being 1.2% less than the 75%).
It seems like in a sense it is a double rounding, since the 73.8% would typically only be rounded up to 74%. For the SBA to treat 74% as being okay to round up to 75% seems somewhat suspect.
It would be great if the SBA would issue precise guidance that the 73.8% does qualify as the 75% of the loan amount required for payroll.
I know this has been discussed in this blog already: in your “A Tip Related to a Harsh Reading of the 75 Percent Rule” section, and in your response to DS this morning at 6:29; but I would really like to know where the SBA has mentioned this “rounding” issue in the PPP rules and any formal guidance they have provided. Could you imagine if the SBA at some point latter says that they didn’t really approve of the 73.8% to 75% rounding up; and instantly thousands of loans have no forgiveness.
The really great support on this blog, is very much appreciated, Steve.
The interim final rule (available here) says this:
I added the boldfacing to show where they “round”…
HI Steve,
Can you pease confirm that the maiximum forgivable allowable gross payment per employee is $1923/week or $15,923 for the 8 weeks period?
Whether the employee has already reached the $K100 per year or will make that amount before teh end of 2020 is irrelevant. Please confirm.
If an emplyee has already reached $K100 earnings YTD in 2020, they will still qualify for the $1923 a week forgivable payroll? Please confirm.
Thank you!
We received our PPP loan on 5/1 for a single owner LLC. I appreciate your comments regarding partial vs full forgiveness, it sounds like we will likely have to pay back a portion of what we received.
Given that we received our loan deposit on 5/1 is that the start of the 8 week period or some other date, possibly the day we filed?
Thanks.
The eight weeks starts on May 1.
BTW, keep your fingers crossed on the full-vs-partial forgiveness. The guidance in this area is unclear. It may be the SBA says something different when they issue additional guidance.
Hi Steve,
I am a small business owner in New Jersey formed under sole proprietorship. I have two full time employees. We were approved with an online lender for our PPP, but they only based the loan on my net income from the schedule C and did not take into account my two employees. The loan amount was for the maximum $20,833. Our 2020 average monthly payroll through the end of February was 4590. Therefore our loan amount should have been 32,308. We were unable to modify the amount of the loan before it was approved and we were advised to just accept the loan as is and try to adjust it on the backend. My question is, since this loan is only based on my own salary off of the schedule C net income, do I still need to bring back my full-time employees for 75% of this to be forgiven? Or do I need to bring both my employees back on full-time or at least pay 75% of their wages for this to be forgiven which will be reducing my portion of compensation because the loan was not calculated correctly? I do understand that I would only need to pay 75% of their payroll for the 8 week period, but what are my overall options since we are underfunded? This would also allow us to use 100% of this loan for payroll only. Thank you, any guidance would be appreciated..
So I think the bank’s bungle here does potentially goof up your PPP loan.
I.e., say you pay 75% or roughly $15,600 of the loan out in payroll for Doug the proprietor. Because you show a 66.666% reduction headcount, you may find the PPP loan forgiveness ratcheted down by 66.666% percent. So from roughly $15,600 to roughly $5,200.
Two possible workarounds. One, you can avoid the employee headcount reduction by making a written offer to the employees. (Even if they decline, that’ll be good enough.) Two, you can rehire them by June 30…
Steve I find your blog and website the most informative on the internet!
So I have received $20,832 which i am the sole proprietor receiving $20,832 which i can easily write a check to myself in 8 wks of $15,384 (75%) leaving a balance of $5448 (25%). I have rent of $2780 leaving the forgiveness needed difference of $2668.
To justify this balance, can i write more to myself, write a SEP contribution during the 8 wks to use up the difference?
Thank you for reviewing this question.
I think you want to write yourself a weekly draw check equal to the lesser of 1/52nd of your 2019 Schedule C profit or $1923.
Not sure if you’ll get forgiveness for anything else as discussed in Gotcha #8. Sorry.
Regarding the SEP, that won’t really work. Or least not for your own SEP-IRA account. Using the 2019 Schedule C profit amount already indirectly “addresses” that.
I.e., say your made $52,000 in 2019 or $1K a week. Your SEP would have come out of the $1K and amounted to roughly $200.
So you can count as payroll, in effect, either the $1K a week, or $8K over 8 weeks…
Or you can count the $200 SEP each week… and the net of SEP $800… that adds up to $1K a week or $8K over 8 weeks.
A commentator above was the opposite of my situation. When I applied for my PPP Loan through my Commercial Bank, it was 4/7/20. The information online did not mention including my sole proprietor draw from taking line 31 from my schedule C, dividing by 12, & taking times 2.5. This SBA ruling came out on 4/14/20 prior to the closing of my line, which was 4/23. I only received a PPP loan for 2 months of last years Payroll plus payroll taxes. We have no rent, as I operate from the house. My bank never contacted me regarding additional funds eligibility. I just spoke with my local banker & I was told that I’m likely “SOL.” He said he would inquire, but I checked off on the DocuSign at closing that I would not apply for another PPP. This is sure disappointing that things weren’t clearer from the outset and/or that this PPP loan couldn’t be adjusted. Your thoughts are appreciated Stephen. Thanks.
Sorry. I think you are SOL. If it’s any consolation, at least you got a PPP loan. Even if it wasn’t the right amount. Most folks didn’t.
Hi Steve-
Regarding the Exemption for Re-hires clause for forgiveness, please let me know if I understand this correctly.
Based on the recent guidance from the Treasury, if I offer one laid off employee his/her job back (same salary/wages and same number of hours) and he/she declines the offer, does this mean I can reduce one FTE from my February 15 FTE count? Ie. If my FTE for February 15 was 35, and my FTE on June 30 was 34, if this above referenced individual declines my job offer, would this reduce the February 15’s FTE to 34, and in turn give us forgiveness to the maximum amount (assuming we have spent 75% on labor) because we matched the FTE on June 30 to February 15?
Thank you-
Brad
I think it ends up working the way you want. But let me describe how I would phrase it…
You’re tentatively eligible for forgiveness on the money you pay on payroll and those other costs… but the other costs can’t be more than 25% of the forgiveness amount and then I think the payroll amount needs to equal 75% of the PPP loan amount…
And then possibly you’re at risk because you reduced your headcount by 1/35th… (roughly 3%)… so you could be forced to reduce the tentative eligible forgiveness amount by 3% (roughly)… except that that written offer gives you an out.
Steve — Yes, thanks for being informative and willing to help. I am helping my son who is the sole owner of an LLC which is a restaurant. The loan was based on 4.5 FTE.
My question: Do we have to hire the same people back? Some of our part time student workers (we are in a college town) have moved on. Others have decided to get out of the food service industry. If we maintain the same 4.5 FTE (albeit with perhaps 2.0 FTE of different people) will we run the risk of not having eligible payroll expenses associated with the “new” people?
Thanks
You don’t need the same people.
Thank you so very much for this information.
I am an independent contractor who made over 100K last year but $0 since March 15th. Recently, I was approved for a PPP loan for $20,800. I would appreciate it if you can guide me on the following questions:
1. If the maximum dollars I can use towards payroll $15,385? If so, $15,385 is less than 75% of the amount of my $20,800 loan, which is $15,600. Does that mean that my loan cannot be forgiven based on the amount I have requested?
2. If I claim $15,385 for payroll and the max for SEP of 25% at $3846 for a total of 19,231. Could I give back the remainder of the loan and be forgiven for $19,231.
3. I read that if you are self employed, your 2019 Schedule C is adequate documentation for your own payroll. Is that your impression or is it better to withdraw a weekly pay at $1923 for 8 weeks?
4. Do you know who notifies us when and how the loan is evaluated for forgiveness? I understand this occurs at 60 days after receiving the funds.
5. Since I use a home office, I do not have other costs for my business aside from internet and electricity bills, both of which are on autopay from a joint checking account with my husband.
Thanks for your help.
For answer to question 1, read the Gotcha #7 discussion and about rounding from 74% to 75%…
I don’t have an answer for question 2. It should work but I don’t know if in the end the SBA or Treasury to let you do that. Would not be surprised if we find out that doesn’t work. (Because it isn’t necessary for ongoing operations.)
Regarding question 3, I think the SBA guidance can be read that you only need last year’s Schedule C. The statute doesn’t say that. So I would be super-cautious.
Regarding question 4, the lender.
Do you think there might be partial forgiveness for the max payroll $15385 if the loan amount does not allow for the 75% rule to be honored?
Hi Steve- Thanks for the helpful info-
One question for clarification:
As an independent contractor claiming the max for payroll at $15385, can you add 25% of this number for SEP to be forgiven or is only the payroll forgiven?
Common question… but you wouldn’t add the SEP. It’s already “in” that $15,385.
Think about the way your SEP works. Essentially, the SEP looks at the $15,385… lets you deduct (roughly) 20% of this as SEP contribution and then makes you pay income taxes on the (roughly) the remaining 80%…
Do you think there will be partial forgiveness of the loan? For example, I have a loan of 20,800 and can take the max of $15385. Do you think I can have the payroll amount of $15385 be forgiven and give back the rest?
Hi Steve,
Thank you for the information. Much appreciated.
Do you think there could be partial forgiveness of the loan? For example, if I use the max for payroll $15385 since I earned over 100K last year, but my loan was $20,800. Can I return the remainder and have partial forgiveness for payroll?
Thank you for all of the information!
Do you think there may be partial forgiveness if the total loan amount does not allow the max payroll of $15385 to meet the 75% rule?
Thank you Steve
Do you think there will be partial forgiveness for max payroll of $15385 if the equation dictated that our loan amount will not work with the 75% rule ?
I’m confused as to whether the forgiveness penalty for headcount reduction will apply in addition to a penalty for reduced pay for those individuals ‘reduced’. As an example, 10 FTE headcount gets reduced to 8. So my forgiveness amount will be multiplied by .80. The remaining 8 employees’ pay stays the same. Is the .80 multiplier my only penalty, or is the forgiveness amount also reduced by the pay eliminated for the 2 reduced employees (both went to zero pay)?
I think you lose twice. At least twice, I should say.
E.g., say you start with 10 employees making $10K for the typical eight weeks. In this case, you have $100K of payroll costs to plug in the PPP loan amount formula…
If you continue to employ 10 people and pay them the same pay rate, you also have $100K to plug into the forgiveness formula. So nice and clean. Exactly what Congress and the SBA want…
But now say you cut your headcount from 10 to 8 but make no other changes… here’s what happens.
First, you automatically see your payroll costs in the forgiveness period drop to $80,000. So that cuts your forgiveness down. A lot.
And then the other shoe drops. Because you reduced your headcount by 20%, you also reduce the $80,000 by another 20%, or $16K.
So in end, you’ve only got $64K of payroll costs to plug into the forgiveness formula.
And then also be sure to recognize the effect of the 75% rule… probably that’ll come into play and totally blow up the forgiveness formula. E.g., if you got a $125K loan on the basis of $100K of payroll costs, paying out “only” $80K in payroll means you completely lose forgiveness. (The 75% rule says if your loan was $125K, you need to pay out at least 75% of this amount, or $93,750, as payroll.)
The above is an example of how the “forgiveness” adjustments just snowball. 🙁 And how the thoughtless additional requirements from the SBA and Treasury destroy the PPP loan for many small businesses.
Aloha!
If I use 100% of the PPP Loan for Employee Payroll – Will this be forgiven? Or will it be seen that I am expanding my business because they are being paid more than before?
I have Mortgage Interest on several properties – so I could deduct that but – I just thought I would rather give 100% of the funded PAYCHECK PROTECTION money to my employees, as a Thank You for continuing to work during these difficult times.
I have looked EVERYWHERE for an answer to this question – so Mahalo for letting me know your thoughts.
Your articles have been invaluable over the last several weeks!!
You aren’t limited to 75% toward payroll. That’s just a minimum. Assuming you can certify safely (described here, https://evergreensmallbusiness.com/ppp-certification-and-the-new-safe-harbor/ ), you should be fine with 100% going to payroll. It’ll make your documentation for forgiveness pretty easy…
Steve,
I am self-employed and I received my PPP funding; however the 1/12 X 2.5 of my 2019 earnings number that I asked for was not what the bank calculated. They gave me more money than that, and I have no idea why. Of course, I will not touch that extra amount. Of the correct amount, I will allocate 8/52 to pay myself weekly, transferring from my business to my personal account every Friday. I am wondering if 1) this sounds like the correct approach and 2) have you heard of anyone receiving more than the calculation allows?
Gigi, what you describe as your approach sounds good. And your experience of receiving more than you should have seems pretty common. That banks didn’t know what they were doing. At least at the start.
Thanks Steve. just came across your site and trying to absorb as much as possible.
A few questions for you .They seem dumb but like I mentioned I am just trying to understand.
1)S corp with three employees
2)Cash system with once a month a payroll
3)Recd a PPP on May 1, ran a payroll and disbursed funds on 5th may.
My question now:
I have one employee who makes 120 k. May 1 payroll was as usual for 10 k.
I will have only more payroll that is June 1 as by July 1 I run out of 8 weeks time.
How much should I run for that employee on June 1st? Do I run the usual 10k but take in 120k /52*8 for forgiveness?
Thanks in advance
You want to read the paycheck protection program formula explained blog post. You want to make sure you know how the payroll costs stuff works. Example: Only the first $100K someone makes each year (looking at their annualized pay rate) counts. Another way to say this same thing: Only the first $1923 a week someone makes counts.
Also, only payroll costs incurred and paid within the eight weeks counts. So that May 5 payroll you run? Looks like that was for April. So it doesn’t count. And that Payroll for June which it looks like you’ll pay out after the eight weeks? I think that won’t count either.
BTW, we may get more guidance about the timing cutoffs from the banks or SBA. But I think you need to move to a weekly cycle for all your payroll related costs… and then make sure that you pay your final PPP payroll on the last day of the eight weeks.
Steve:
We have seen your web site and Joined. Great advice. I have a question.
I own four moving and storage companies in four states. Our banker in March advised us to generate our payroll numbers for a year and the Jan 1 thru Feb 15, 2020. Get an average employee payroll and employee count. We did and turned it in to the bank and filled their forms out. Then a week later ADP made a report available for our companies. Their report included the employee benefit cost. We called our banker and said , you did not tell us to include the health and welfare, etc, and we were leaving $441,000 in unclaimed PPP Loan Benefits.
Our banker advised us that we should not pull or amend our application because we did not get an SBA number on the first roll out of PPP Funds and we would lose our place in line for the second funding. We submitted the amended forms to our banker anyway. Now we hear nothing. It is a large bank. I went to two smaller banks and submitted our Amended loan request forms. They immediately submitted our PPP Loan requests to the SBA. They called me back and said the SBA numbers had already been issued for my companies. We did not hear from the larger bank for a week that they had the numbers and then they funded the lower, no benefits included amount. A week later.
We have asked them to Amend the application and get the $441,000. Now, again we hear nothing. We think we will need the funds to survive. We service multiple hospitals, military bases and service most of the product to our State Department Embassies in the Pacific Rim.
Any advice?
Chris D
Hi Chris, I thought I answered this before. Sorry. Maybe it didn’t get posted.
In any case, I think you can’t do anything at this point. I know that sucks. But the banks bungled lots of loans. Mostly, just to say this, because the statute Congress passed was sloppy writing and because the SBA was pretty inept in its administration of the program. But also, the banks don’t really know enough accounting to handle the details.
This maybe doesn’t help, but at least you got some money. Most small businesses didn’t get any.
Steve
Great info so far
Question if I got $35,000 ppp Loan and $2000 Eidl grant . What I can’t figure out is if the ppp loan forgiveness calculations for payroll
Is it $35,000 x 75%
Or $33,ooo x 75%
This will determine if I make 75 % threshold for loan forgiveness.
I think it’s probably 75% of the $35K… but ask the bank. How the EIDLs work depend on timing.
BTW, I need to do a blog post on this, but we are getting more and more reports of the banks and the SBA shorting small businesses on the “payroll costs” number… so, fingers crossed, you may have more payroll costs that you think.
Do you thing employee who made $120,000 In 2019 and had 25 % pension employer pension $30,000 already paid out. So for ppp payroll forgiveness
can you use 30k divided into 8 weeks or is the new max $100,000 x 25= 25k divided into 8 week period
As you can see a few dollars can put you over 75% requirement
If you had employee that made $120,000 in 2019 and pension contribution from employer of 25% already paid out so $30,000
Can you use $30,000 divided by 8 week or is the new max amount capped at 100,000 x 25%= $25,000 divided into 8 weeks for loan forgiveness
Steve,
Thanks for all the info on this. Two questions:
1. For single-member LLC with only “payroll expenses” to fund during 8 week period should entire loan amount be divided by 8 and paid to single member on a weekly basis rather than using the 1/52 of the loan amount in the hopes that rules will change in favor of 100% loan forgiveness? If no, I’d obviously only be spending 73.8% of the loan amount.
2. For single member LLC with monthly rent and utilities (reported on 2019 schedule c) should payroll expenditures still be based on the 8/52 calculation even though the portion of the loan spent on payroll is 73.8% and the amount spent on rent and utility is over 25%. Or, should I adjust the number to try and get as close as possible to 75% and 25%?
Thanks, in advance, for your input.
Carl
I think you need to pay 8/52nd each week to “sole proprietor”… aka the member in the single member LLC. That’s the most you can pay. And as noted in blog post, the SBA says 73.8% is “enough.”
It’s possible that additional guidance might give you some forgiveness for how you spend the other 25%-ish… keep your fingers crossed. But other than hiring another employee and paying them wages, I don’t think you’ll get more than 8/52nd for payroll.