People are confused about how the paycheck protection loan formula works. And no wonder.
Simple on the surface, the formula gets complicated once you collect the inputs and try to do the math.
Further complicating the effort? As practical matter, you can’t get personalized help from either your accountant or banker. Neither has time for a personalized consultation. Both are overwhelmed.
To try to help you, your accountant and your banker a bit, then, this blog post explains the paycheck protection formula. And it provides a bunch of examples to illustrate how the formula works.
Before We Start
But before we start, let me say something.
One can’t responsibly write a blog post like this without citing the relevant bits of the statutes and the other guidance from the Treasury and the Small Business Administration.
However, the usual way of doing that won’t in my opinion work very well. I can’t imagine it’s very effective, for example, if I point you to Section 1102(a)(1)(A)(viii)(I)(aa)(AA).
Accordingly, I point you to page numbers of the CAREs Act PDF document available here from the Congress.gov website.
What you want to do is print pages 6 to 21. (This range includes both the Section 1102 statute that sets up the paycheck protection loan program and the Section 1106 statute that defines how you ask for forgiveness.)
You can then refer to the appropriate page if you want to see the bit of the law I’m discussing.
And now we start.
The Basic Paycheck Protection Loan Formula
The way to understand the formula: It provides money to pay employees and then a small business’s owners for eight weeks. Plus a little extra to keep the doors open and the lights on.
For example, suppose a small business annually pays employees $60,000 in W-2 wages. Further suppose the firm generates self-employment income for the two owners equal to $40,000. In addition, the firm provides employee healthcare insurance that costs $20,000 a year.
This firm’s annual payroll costs total $120,000: $60,000 of wages + $40,000 of self-employment earnings plus $20,000 of health insurance.
That annual payroll cost equates to a $10,000 average monthly cost. (You divide the $120,000 by twelve months.)
That $10,000 monthly payroll cost determines the paycheck protection loan. The loan equals 2.5 times the monthly payroll costs. With $10,000 in monthly payroll costs, for example, the loan amount equals $25,000.
So, it sounds simple, right? We only wish. The formula gets complicated in real life. Small business owners (and their accountants and bankers) ask dozens of questions. Accordingly, in the paragraphs that follow I share the best answers I’ve heard from others or find in the statute or agency guidance.
W-2 Wages Paid Employees
The statute obviously looks at employee W-2 wages. So, you need to determine that value.
My suggestion? Use the Box 1 amount shown on the W-3 but add to that amount the retirement account elective deferrals listed in Box 12.
A W-3, in case you don’t know, summarizes the information on the W-2s an employer gives employees.
Example: The W-3 shows $120,000 in Box 1, $150,000 in Boxes 3 and 5, and $40,000 in Box 12 for employee 401(k) elective deferrals. In this situation, you might be tempted to just grab the total wages subject to Medicare shown in Box 5. That amount equals $150,000. But don’t. If you do that, you may miss the part of the wages that represents the owner’s self-employed health insurance.
A caution: The error some of the payroll services and maybe the banks made initially with regard to wages? They wanted to deduct the federal payroll taxes shown in Boxes 2, 4 and 6. That approach? Clearly wrong. (See here for the Small Business Administration’s primary guidance on this.)
Wages More than $100,000 Don’t Count
The statute specifically limits its funding to only the first $100,000 of salaries an employee or owner earns. (See page 7 if you printed the PDF pages of the statutes.)
Further, the statute converts the $100,000 annual figure, in effect, into a monthly amount of $8,333. (If you divide $100,000 by 12, you get $8333.)
Example: A firm has two employees: One earns $5,000 a month. One earns $10,000 a month. The paycheck protection formula in effect counts $5,000 as the monthly payroll cost for the first employee. The formula counts $8,333 as the monthly payroll cost for the second employee.
Tip: To calculate the “excess” wages, the small business can look at each employee’s W-2. You want to look at Box 1 but add back the elective deferrals for things like a 401(k) shown in Box 12.
Partial Year Wages
The loan formula also doesn’t let you average wages over the year. The statute requires pro rata calculations. (Page 7.)
Example: Say a business starts operations halfway through the year and hires a single employee at an annual rate of $200,000. Because the employee works only half the year, she earns $100,000. For purposes of the paycheck protection loan, however, the payroll cost equals $50,000. Only the first $8,333 of payroll paid each month counts.
Independent Contractors Receiving a 1099-MISC
Much confusion has occurred with regard to how a firm treats its independent contractors. These are the folks the business sends (or should send) 1099-MISC forms at the year-end.
The interim final rule from the Small Business Administration states payroll costs do not include 1099-MISC.
Your 1099-MISC contractors should get their own paycheck protection program loans (PPP loans.)
Note: If your bank funded your PPP loan to include amounts you pay to 1099 independent contractors, you may want to hire these contractors as W-2 employees. Talk with your accountant about this. The PPP loan forgiveness formula, something I’m not talking about in this blog post, reduces the PPP loan for employee W-2 wages but not for 1099-MISC contractor payments.
S Corporation Shareholder Payroll Costs
An S corporation owner’s compensation–including appropriately accounted for self-employed health insurance–counts as payroll cost. The amount to include then? What the W-2 shows in box 1 (as adjusted for any elective deferrals to things like a 401(k).)
Example: An S corporation shareholder-employee earns $48,000 in her business and this amount shows on her W-2 in Box 3 and Box 5. Box 1 shows $60,000 because her compensation includes $12,000 of health insurance because the IRS says the S corporation counts this amount as wages. Use the box 1 value, or $60,000, for the payroll costs.
Example: An S corporation shareholder takes no wages from his corporation. Only shareholder draws. His K-1 shows $60,000 of income and distributions. The S corporation unfortunately counts his payroll costs as zero.
Sole proprietors
The statute and the agency guidelines only precisely described how to calculate the payroll cost for a sole proprietor on April 14. (That guidance appeared in a document that discussed additional eligibility criteria related to paycheck protection program loans.)
The approach the new guidance says you use? Look at the Schedule C form’s “business income” amount. (The Schedule C tax form appears inside a sole proprietor’s 1040 tax return.)
Example: A sole proprietor’s Schedule C form inside her 1040 return calculates $52,000 of business profit. That $52,000 counts as her annual payroll cost. In combination with any other W-2 employee wages, it determines the total annual payroll costs and the average monthly payroll costs. If the sole proprietor also paid another $68,000 in W-2 wages to employees, for example, the total firm’s annual payroll costs equal $120,000. The average monthly payroll then equals $10,000. The PPP loan amount then equals $25,000 or 2.5 times the $10,000 average monthly payroll.
Partners in an Active Trade or Business
The “Additional Eligibility Criteria” document just referenced also describes how partners in an active trade or business calculate their payroll costs. For these folks, self-employment earnings count as the payroll costs.
Example: A working partner in an active trade or business receives a K-1 that reports $50,000 in Box 1 of the K-1 and another $50,000 in Box 4a of the K-1. Box 1 shows the partner’s share of the partnership’s profits. Box 4a reports on the partner’s guaranteed payments received for working in the business. Assuming both of those amounts count as self-employment earnings–they probably do–the partner’s payroll costs equal $100,000.
Health Insurance
The statute says that group health insurance counts as a payroll. But two questions pop up regarding health insurance and the PPP loan amount formula:
- First, whether health insurance counts toward that $100,000 limit.
- Second, whether self-employed health insurance counts.
With regards to whether health insurance counts toward the $100,000 limit? The answer is “no.” On April 7, 2020, the Small Business Administration published an FAQ that said the $100,000 includes only cash compensation.
With regard to whether self-employment insurance counts, I think it doesn’t… The statute says group health insurance counts (see page 7.)
However, indirectly business owners actually do get to count it because of the way the self-employed health insurance works. Why? For a business owner, the self-employed health insurance gets baked into another “number” that explicitly counts as a payroll cost.
Example: For an S corporation shareholder-employee, self-employed health insurance gets included in the W-2 wages and so is included in payroll costs because it’s part of the wages.
Example: For a sole proprietorship, the self-employment health insurance deduction doesn’t reduce the Schedule SE calculation of “self-employment earnings.” Rather, those “self-employment earnings” provide the money that gets used to pay for health insurance.
Example: For a partner working in an active trade or business, self-employed health insurance counts as a guaranteed payment. That means it counts as self-employment income. And of course self-employment income counts as a payroll cost.
Retirement Benefits
Pension costs count as retirement benefits. And further, they don’t count toward the $100,000 ceiling. (This guidance comes from that same FAQ mentioned in the preceding discussion of healthcare costs.)
Example: A small business has two employees. One makes $50,000. The other makes $100,000. The company operates a SEP-IRA plan which means 25% contributions to employee’s IRA accounts. That means a $12,500 contribution for the first employee and a $25,000 contribution for the second employee. Both pension contributions count. And that’s the case even for the second employee who makes $100,000 before the SEP-IRA contribution.
Three Quick Comments to Close
Sorry, this is another long post. But three quick comments before I close.
First, the guidance from the Treasury and Small Business Administration changes almost daily. So you want to stay alert and also show patience here.
Second, I would not make “perfect” the enemy of “good” here. If you have an easy way to calculate and then document you’re entitled to $50,000 of paycheck protection loan money, don’t waste time trying to legitimately nudge that amount up a bit to, like, $52,000.
Third, understand that the loan forgiveness formula works differently than the loan amount formula. I’ll try to write about that when good details come out. (You may want to subscribe to our email newsletter to make sure you get that information. There’s a sign-up form just below the blog post.)
Jim Dreyer says
Hi Steve,
Thank you for the invaluable counsel you provide in this blog. You rock, sir!
I am the only employee/shareholder of an S Corp. To date, I have only been paying myself from the S Corp by taking draws. My questions follow.
Q – Am I eligible for a payroll protection loan if I have not yet started payroll (only been taking draws)?
Q – If I am eligible, what is the documentation I will need to supply to satisfy SBA loan requirements? Do I have to use the figure in box #1 on my Schedule K-1 as my “payroll?” That figure does not reflect my actual draws. A portion of those personal draws were used for deductible business expenses, such as home office expenses & personal auto mileage used for business, thereby reducing the figure in box #1.
Q – For the payroll protection loan to be forgiven, will I need to start payroll for the 8 weeks of required SBA documentation, or am I able to simply continue to take draws?
Steve, thank you in advance for your input!
Steve says
I don’t think you’re eligible if you don’t have salary in the 12 months the formula “looks back on” to determine your monthly payroll costs. Sorry.
William McMahon says
I too am very curious about question on mileage expense. I am an independent contractor that has a lot of mileage expense that I claim at the end of the year. Do I include that on the application? My lender has specifically instructed me not to include mileage, hotels, or meal and incidentals on the expense portion when calculating average monthly payroll as a self-employed contractor. That does not seem right because when I file my 2019 taxes I will be claiming all of those deductions. Can you confirm the correct way to approach this?
Steve says
I think you, William, are right. I think your bank is wrong. But given the timeclock here, I would do the loan application the way the bank wants…and then I’d be prepared to not have all of the loan forgiven once the bank figures out that you’ve been right all along.
YDR says
In calculating the avg monthly payroll, you would not include Federal payroll taxes, only State, correct?
Steve says
No, I think you include them. But I know what you’re referring to. Many people read the two relevant statutes, see that payroll costs from Feb 15, 2020 through June 30 2020 don’t include Social Security, Railroad Retirement and Federal Income tax withholding–so during the covered period that determines how much of the loan will be forgiven–and then then apply that same bookkeeping to the 2019 calendar year which is the year that you look at to determine the payroll costs.
Laura Pagett says
With the clarification that came through last night with the FAQ posted on the US Treasury, they provided an example of this and it is the employer portion of FICA that gets backup out to calculate the payroll costs.
Steve says
Thanks Laura!
Melissa Rawsky says
Your Partner’s example doesn’t seem to track. They should only report their guaranteed payments as SE income. Box 1 of a partner’s K-1 is pass-through, just like an S-corporation owner’s K-1 box 1 is pass-through, and not SE or “wages.”
Steve says
So I’m thinking that the partner is a general partner or manager-member in a managed LLC or a member in a member-managed LLC and so both the $50,000 of distributive share and then the $50,000 of guaranteed payment count as self-employment earnings and so appear in box 14 of the K-1 as self-employment income.
But you make at least a good point, which is that the box 1 distributive share would not necessarily be self-employment income.
This issue maybe also raises an interesting return preparation point: An error in classifying a partner or a member may show up someplace new with this PPP loan stuff.
Jennifer says
My husband and I have an Llc partnership with no employees. When I go to my bank’s application, it forces me to place a number in “number of employees” box… 0 is not accepted. Have you encountered this?
Steve says
Okay, I think and read the statute to say that self-employed people get these loans. So if the bank asks for the number of employees but won’t accept you entering a zero and then continue the application, I would enter a 1 if you’re a sole proprietor reporting the business on a Schedule C or enter a 2 if you guys work together in the business and file your taxes using a 1065 partnership return. In this case, for purposes of the bank’s application, you are counting working owners as employees.
HOWEVER, it’s clear that because the statute doesn’t explicitly say it covers partnerships, that some banks are not doing PPP loans to small partnerships.
I’m not sure what you do about this. Sorry.
Rosanne says
Thanks, Steve. A couple of quick questions.
1. I am the only employee in my business. I operate out of an S corp. I issue myself payroll once a year in December for the work I do for the whole year. I intend to use the Dec. 2019 payroll figure for the loan formula. As far as loan forgiveness goes, it appears a payroll figure from Feb, 2019 through June of 2019 is requested to compare to the 2020 “covered” period payroll. Unless I take the December 2019 payroll and average it monthly for all of 2019, I have no payroll for that 2019 June 30 period. How would this impact loan forgiveness for me?
2. In 2019 I had an individual health insurance policy that my S corp reimbursed me for. I don’t believe this cost would be allowed as a payroll cost for loan purposes because it appears that only “group” health insurance costs are allowed in the loan formula. Am I correct?
Steve says
So for 2019, I think your annual payroll works fine. E.g., and I’m just using round numbers, say you take $104,000 of salary, insurance and retirement in 2019… and all at the end. That still gives you $104,000 of payroll for the year. So the monthly average still equals $104,000 divided by 12 months. So $8666 a month? And, oddly exactly $2,000 a week?
But I think you’re right about 2020 and the forgiveness calculations. To get forgiveness, I think you will need to pay Rosanne the employee $2K a week during the eight-week period following the loan closing. That’ll be only way to get forgiveness.
Regarding the SE health insurance. I think that if your SE health insurance appears in your W-2 that it gets included. I.e., the fact that the dollars appear in your W-2 makes fact that the policy probably isn’t a group policy irrelevant. (I see this as conceptually equivalent to not penalizing a sole proprietor by reducing his or her self-employment earnings because they’re taking an SE health insurance deduction.)
I may also be wrong and soon feel very foolish. The awkward part? We shall soon seen. 🙁
John says
I have a snack shop with part time student workers. They work varying number of hours and duration. 2019 w2 shows I’ve had 33 of them and I had on average 11.3 of them per payroll. If I put down 33 as my number of employees, I will never be able to fill within the 8 weeks forgive period. What do I put down for number of employees on PPP application and what documents do I use to support?
Steve says
I think you enter the number of employees as 33. And then probably you’ll provide lender at some point with 33 W-2s. Or 941s or a payroll report that summarize the wages paid these 33 employees over the annual period used in the payroll costs calculation.
The forgiveness formula doesn’t require you to employ the same number of employees. It requires you (basically) to pay as much payroll as your weekly average.
Also this note, if you get (say) a $50,000 loan but only receive partial forgiveness for say $40,000, that’ll still be way better than the alternative.
Terry says
Thanks for the great info. I am single member LLC with S Corp taxation. I pay myself a reasonable W2 salary and have K1 income reported on my taxes for shareholder distributions. Does my calculation only count the amount on my W3 or does it combine both payroll income and K1 income?
Steve says
Only your W-2. I would use Box 1 of your W-2 as your wages. And then, if you do an elective deferral, which would show in box 12 of your W-2, add that amount to whatever shows in box 1.
Paul says
Hi Steve:
I have an LLC taxed as an S Corp that employs 5 people including myself. I also have a Schedule C business with one employee. Do I make two applications?
Steve says
Yes, I think so.
Sim says
Hello Steve,
I have a question about the W-2s and 1099s. I own a company and get w-2 for myself. All the rest of my employees get 1099s. Am I eligible to apply for PPP loan with my employees income?
Steve says
Those other people you pay aren’t employees. They’re 1099 contractors. So they need to get their own PPP loans.
The business can get a PPP loan based on the wages it pays you.
BTW, confusion existed at the start of this program. Some banks suggested initially that 1099 contractors counted. Guidance provided in the last day or two explicitly says you don’t count those people.
Sim says
That clears up a lot. My company gets 1099 from another company as well. Am I eligible to apply as a 1099 contractor? Are those applications open yet? Thanks Steve!!
Liv says
Hello sir. I get 1099 from my employer. How do I apply for the PPP loan?
Steve says
The same way everyone else does. E.g., you go to your bank. (Or probably it’s website.) And tell them you want to apply for the PPP loan for your sole proprietorship. I think you’ll use the Schedule C and Schedule SE from your 2019 tax return to “determine” your “compensation” from the business.
Just an example: Your tax return’s Schedule SE shows $36,000 of “self-employment earnings.” So that’s $3K a month. You might be able to get a PPP loan equal to $7,500.
P.S. I think you want to apply ASAP.
Liv says
On some websites, it says the application for independent contractors will open up on April 10th. Is that accurate? Thanks
Liv says
On some websites it says application for independent contractors will open up on April 10th. Is that accurate? Please lmk.
Steve says
That’s what the SBA says. They didn’t really provide any additional info yesterday though on this specific topic. Unfortunately.
Arnaldo Colon says
Hello and thanks in advance. I am sole proprietor and only employee. I max out at $100,000, ($8,333/m) I pay $2,500 in monthly health benefits. I planned to add those and use 13% (450 sq ft office in 3500 sq ft home) for my home office space which is $29/m and 13% for my utilities $59/m. Those numbers are so small doesn’t seem worth it, what do you think? I would rather use my home mortgage interest rate for my home office, is that allowed? 13% of that would be $169/m.
Arnaldo Colon says
I apologize, I am an S Corp.
Steve says
I think you look at Box 1 of your W-2 for 2019… and add any elective deferral for a Simple-IRA or 401(k) from box 12.
That amount is your annual payroll. Divide it by 12. Multiply that amount by 2.5. Bingo. That’s your PPP loan amount. And what you apply for.
BTW, this isn’t an issue for the PPP loan amount, but for forgiveness… I don’t know if a home office thing would count as rent or utilities. Something informal? Like many small S corporations use? I don’t think so… But what about a formal written accountable plan? Hmmm. That doesn’t really seem to qualify. No rental agreement signed prior to February 15, 2020 exists. But I can see how some practitioners might decide to treat such a plan as generating forgiveness. The accountable plan would probably be reimbursing the S corp shareholder for rent, mortgage interest, utilities that were contracted for before February 15, 2020.
P.S. More info about S corporations and home office deductions and accountable plans here: https://evergreensmallbusiness.com/s-corporation-home-office-deduction-revisited/
Arnaldo Colon says
Thank you
STEPHEN F. says
Steve, writing as a CPA here who has helped clients with applications since last Thursday, 4/2/20, and have clocked hours in my billing software but not billed anything out yet : the comment on first page of blog entry scares me-” can’t provide this service for a fee or for free ( per the rules ) ” Is this drawn from SBA’s Interim Final Rule Section III ( 4 ) ( c ), published 4/2/20 ? Still don’t know date Rule was entered to Federal Register. I have been on no less than five broadcasts on PPP. , all by CPAs or even the AICPA ,and nothing has been said about this fee prohibition for working on any facet of these PPP applications. That being said, one local bank did switch gears and told us to not put any amount in the Average Monthly Payroll box on the application. We have transmitted requested documents to lenders and occasionally a summary sheet of W-2 wages, health insurance paid, state payroll taxes paid, and employer contributions to sponsored retirement plans.
Thanks for the clarification on which borrowers to use the Schedule SE on. Looking for this high and low as ” self-employeds ” ( partners, partnerships ) ) filings open up on this Friday, 4/10/20.
Steve says
I am referring to the interim final rule. And maybe I’m reading it wrong and misreading the practitioner comments I have heard. HOWEVER…
I said what I said in the post because I know many CPAs worry whether they can bill for this work and have decided that to be safe they won’t. Also I’ve seen malpractice insurance company letters that say CPAs not billing for PPP work but then doing the work are taking a terrible risk. So I guess I was just trying to warn clients the CPAs may not be able to help you with this. Unless the bank agrees to pay.
DOUGLAS GILINSKY says
Hello Steve,
A partnership has already applied for the loan based on the payroll for the employees only. Can the partners apply themselves, using their K-1 income or should the original application be changed. How will they calculate the loan forgiveness for self-employed and partners without guaranteed payments.
Thank you in advance
Steve says
I think the partnership applied incorrectly. It should “fix” its error when the bank processes the application. Add the partners’ self-employment earnings. Note that you can only apply for one PPP loan. So you want to do it right.
DOUGLAS GILINSKY says
Thank you Steve. How would forgiveness be computed on the partners earnings?
STEPHEN F. says
Steve- Would this apply the same way, for example , a single-,member LLC law firm filing under default rule on Schedule C ( 1040 ), with W-2 emplopyess, would include member’s Schedule SE self-employment earnings up to the $ 100,000 limit ? My client usually nets $ 250-300,000 on Sch C , only add -on would be retirement plan contributions . It was maddening to determine whether should be filed as sole proprietorship on 4/3 or self-employed on 4/10, but the bank processed the application with the member’s estimate of his net. We had just finished tax-basis compiled FS on the law office for purposes of the member’s application for a HELOC just weeks before the CARES Act. Amazing that panicked clients do not know the content of info we provide them under fee engagements and are too busy to slow down to discuss it.
How does a self-employed expend the funds to get to forgiveness ?
Liv says
Hello Steve! Are applications for Independent Contractors already live or will they be made available later? Do you know? Thanks!
Steve says
I think this depends on banks not SBA. So watch your bank’s website?
CT says
Hi Steve,
Self employed individual with no employees and no 2019 tax return filed yet. 1099 income to the individual of $130,000, and only 1 1099 issued by the individual for $4,500. Is it your understanding that this person can apply and use his 1099 income as his loan amount (limited to $100,000 obviously) and thus receive a loan for ~$20,833? If so, how do you see the forgiveness side of that structure working? He just pays himself ~$2,604 per week for 8 weeks? Or do the 1099’s issued by the SE person come into play for forgiveness?
Steve says
I think you can apply for a PPP loan. You should file your 2019 tax return first though. That return’s Schedule C and Schedule SE provide the payroll costs that’ll feed into the PPP loan formula.
A note: You don’t count your revenue as payroll cost. You count your profit.
CT says
Thanks for that answer. Where are you getting the requirement for a 2019 return?
Also, what about the forgiveness question?
Steve says
You can’t look at your 1099s and determine your self-employment earnings. You need to tally all of the business expenses.
With regard to your question about forgiveness, I just posted another discussion here that explains how I think the owner payroll cost stuff works with regard to forgiveness. That’s my best explanation.
Here it is: PPP Loan Accounting.
Ajay says
Hi,
Thank you for taking the time to write this blog and answer questions. The information is super helpful.
I am a sole proprietor with 2 employees and we have both a 401k/profit sharing plan and group health insurance. My personal income is >$100k. I would like to know:
1. Can I include my health insurance costs (not just those of the employees)?
2. Can I include the employer portion of the profit sharing contribs for me and my employees or just the employees or neither?
Thanks!
Steve says
Answer to question #1 is no (see the discussion of health insurance in the blog post again?)
Answer to question #2 is no for you but yes for employees…
Ryan says
Steve, are you sure that employer 401k contributions on behalf of owners are excluded in determining total payroll costs?
Using the same logic that owner’s count as employees (with salaries equal to schedule C profits or schedule K1 box 14 income), wouldn’t the employer portion of 401k contributions on their behalf also count?
Or did I miss something whereby the SBA specifically excluded the employer portion of owner 401k contributions?
Thanks for your response!
Steve says
They count.
Ryan says
Steve, are you sure that employer contributions on behalf of owners do not count in determining payroll costs?
Since owners count as employees (with salaries determined from Schedule C or K1), wouldn’t employer portion of 401k contributions count just like they would for any other employee?
Thanks for your response!
Steve says
They do count. And not toward the $100K. So you could pay someone at the rate of $100K a year and provide a pension.. and get payroll cost of more than $8333 per month for that person.
Sorry if I didn’t write well, but that’s what I was trying to say in the discussion of retirement benefits.
Ryan Thomas says
Ok thanks! So just to be clear on Ajay’s original question, he should be able to count the employer contributions for both himself and his employees when figuring total payroll costs, correct?
Steve says
yes.
Steve says
yes
Scott Parris says
Steve
Thank you, great blog.
Any suggestions on how to amend an existing application when the guidance changes?
I submitted my application a couple days ago and my accountant just emailed me that the guidance has changed regarding pension plan costs and that his previous answer of “only 401k match can be included” is incorrect.
He now says i can include my defined benefit contribution which is much larger than ther 401K match?
I’m trying to amend my application but cannot figure out how to do it. If i use the application form it kicks out as soon as I say I have already appled. Trying to get through to my bank but long hold time.
Any suggestions on how to amend an existing application when the guidance changes?
will I be contacted before the funds are rel;eased?
Steve says
I think you need to hope the bank gives you a chance to update your calculations.
BTW, I’ve said this a few places. But it’s basically impossible to optimize this PPP stuff. Your accountant, for example, probably wasn’t paid for helping (per the rules). And if she or he was, they weren’t paid enough. The banks are totally overwhelmed. So is SBA. Most people’s accounting systems and payroll approaches aren’t really good enough to supply the needed info. Guidance has been changing nearly every day. Sometimes, today’s guidance simply corrects yesterday’s erroneous guidance.
My point is enumerating all this? I think we all need to set expectations low here. Focus on the fact that free money is, well, free. And we need to not get too worked up if we “only” get $30K instead of $40K.
Ajay says
Thanks
Anthony says
Hello Steve,
My Wife and I have an LLC 50% for each, my question is, for Payroll Wages, We do not pay ourselves any Payroll, Also Do we use line 1A on 1065 as Gross Receipts or Sales for qualifying income for PPP Loan, or a Net amount from somewhere else maybe K1, I assume because the Business is Trying to get this loan, Would the 75% Payroll mean we would in effect split the 75% earnings to each of us? and then that Portion would be forgiven?
Technically we are the 2 Employee’s only in this Business?
I have been looking all over and can’t really find these 2 questions being answered anywhere on Official SItes or otherwise?
Thanks Steve
Steve says
This sort of question comes up a lot. So I added another blog post that explains how in detail you can account for the owner “payroll”: https://evergreensmallbusiness.com/ppp-loan-accounting/
For an LLC treated as a partnership, though, I think you look at the K-1s’ numbers in box 1 and box 14. That’ll show the money you guys each earned after expenses. (This is also the money that flows through to your 1040 and on which you pay self-employment taxes.)
BTW, keep in mind the PPP loan isn’t to replace all your revenue. Which is kinda what you’re asking. It’s money to pay some of your expenses: payroll, rent, utilities, maybe interest on a mortgagee…
Anthony says
Thanks Steve, Yes I really don’t want to get to much Money to mess up the Forgiven aspect, Hopefully I can figure that out or if most would be forgiven accept for maybe a few thousand, more that would be fine.
Thanks for your Answer, It is much appreciated.
Have a Great night Sir.
Barry says
Hi Steve,
I have a single member LLC. My Sch C. shows no profit (or income), only a loss from deducting 15% (for a home office) of my annual mortgage interest, taxes and other home expenses. I collect Social Security.
Can I qualify for a PPP to pay for my home office expenses?
Steve says
I don’t think so. No SE earnings. Sorry.
Brian says
Any thoughts on whether a single member LLC owner can increase average monthly payroll by the amount of the SEP contribution?
In other words, $150,000 Sch C profit and a $10,000 SEP contribution on the 2019 return. Is the monthly payroll $8333 (100,000/12) or $9166 (110,000/12)
Steve says
I think payroll includes the SEP. There’s an example of that at end of blog post.
Gloria says
HI STEVE,
Your help is much appreciated and a godsend! I have have an S-corp and I am both the employer and employee. I pay myself a W-2 salary of 100,000 once a year. My Pension contribution is 45,000 and is reported on the income tax return form 1120s. So to calculate the PPP is it just 8,333 from my salary or can I add my pension, thus 12,083. My understanding is, because it’s a S-corp, I can only include the W-2 and cannot include payroll for the company correct?
I also applied for the EIDL per my accountant’s advice. Should i receive both, would i be eligible to receive grants for both?
He also advised me to apply for unemployment. I don’t think I am eligible for it if I am receiving the above loans. Is this correct?
Steve says
You get to include both your pension and your W-2 amount, I think. If you get a loan, though, you need to switch to weekly payroll so you get enough payroll within the eight weeks,
A longer answer here: PPP Loan Accounting.
Jamie says
Hi Steve,
Useful insights here. I own an S-corp and am the sole proprietor and shareowner. I pay myself a meager W-2 wage and the rest in K1 distributions. So am I correct to assume only W-2 wages can be used to calculate the PPP “forgivable” loan amount? Thank you!
Steve says
Only W-2 wages (and then pension and health insurance)… so not K-1 amounts.
Eldon says
Hi Steve,
My question relates to an EIDL 10,000 emergency advance obtained after April 3, 2020 and the effect of it on PPP loan forgiveness.
Assume a one-person sole propietorship with no employees. Schedule SE shows more than 100,000 of earnings and there are no rent, utilities or mortgage payments. However, there are other continuing expenses and no current revenue. PPP loan is 20,732 (8,333 x 2.5).
Q-Will the 10,000 EIDL advance reduce the PPP loan forgiveness by 10,000?
Adam says
I am an Scorp with 47 employees. I operate a dental lab. We work for dentists. They are prohibited from working except for emergency cases only. I received a PPP loan in the amount of $450k yesterday. Because we had no work and we are not allowed to have more than 10 people in our facility at once I was forced to furlough all but 10 employees. If the situation stays the same with dentists being prohibited from from working and us not being allowed to have more than 10 people in our building I won’t be able to bring employees back to work over the 8 weeks. If I spend only $160k on payroll over the 8 weeks what part will be forgiven? I’m stuck between a rock and a hard place. My employees can’t work from home.
Steve says
If you reduce your headcount by 80% roughly (so from 50 to 10), you will only receive 20% forgiveness.
I think what the law wants you to do? Pay your furloughed employees. I.e., you pay 37 people for sitting at home. (Maybe they can do something? Anything?)
BTW it’s in your interest to do that. If you spend $337,500 on payroll, so 75% of the PPP loan, you’ll also get to spend another $112.500 on mortgage, rent, etc., and get forgiveness for that too.
Adam says
Are you allowed to prepay rent and utilities to use up the 25% of non payroll expenses?
Glen says
I am a sole proprietor with no employees. Can I add to my schedule c line 31 net profit amount my health insurance payments from Schedule 1, my state income tax I paid in 2019, my cell phone bill, and my ira deduction amount on my schedule 1 for 2019. Can I add all of those amounts divided by 12 to come up with my average monthly payroll amount. I’m trying to figure what I can add to my schedule c net profit amount to calculate my average monthly payroll. Thanks
Steve says
No, sorry, you’re double counting items. I think you look at just your monthly self-employment earnings and multiple that by 2.5.
Glen says
Ok thank you, one last question is all of my monthly self employment earnings x 2.5 forgive able. I don’t have to pay it back Given I am a sole proprietor with no employees
Glen says
Thanks, Is all of the monthly self employment earnings x 2.5 forgiven, I wont have to pay it back even though I have no employees
Steve says
You will need to pay Glen the sole proprietor payroll costs equal to at least 75% of the loan…(but won’t get credit for more than $8333 per month)… and then you can use up to 25% for rent, mortgage interest and utilities for forgiveness too.
David says
Hi Steve – this is the most clear and concise discussion of so many of the variables that come up in these applications. I thank you very much!
I am a CPA. the comment on first page of blog entry scares me-” can’t provide this service for a fee or for free ( per the rules ) ” . How exactly do we get paid for this? In the Treasury Department’s Paycheck Protection Program (PPP) Information Sheet – Lenders, the third bold heading reads “Who can be an agent” and an accountant is specifically listed.
https://home.treasury.gov/system/files/136/PPP%20Lender%20Information%20Fact%20Sheet.pdf
The next bold heading is “How will agents be compensated” and reads Agent fees will be paid out of lender fees. The lender will pay the agent. Agents may not collect any fees from the applicant. The total amount that an agent may collect from the lender for assistance in preparing an application for a PPP loan (including referral to the lender) may not exceed: One (1) percent for loans of not more than $350,000; 0.50 percent for loans of more than $350,000 and less than $2 million; and 0.25 percent for loans of at least $2 million.
SBA Form 159 is the Fee Disclosure and Compensation Agreement – For use with 7(a) and 504 Loan Programs.
https://www.sba.gov/document/information-notice-5000-18012-updated-sba-form-159
Am I completely misguided here? I guess the bottom line comes down to how are we to get paid?
Steve says
Thanks for comment David. And I guess the question is, can you or I or should you or I try to bill client directly for work on this… and I read those documents you referenced and conclude, gosh but probably not?
I.e., I think we need to somehow get B of A or Chase or some other bank to pay us for helping their borrowers apply for the loan? I have no confidence that’s something we can be successful at.
BTW I’m assuming the accountants getting paid for this are the folks like KPMG, a story covered here.
David says
No, I think was asking is aren’t the accountants entitled to the agent’s fee for preparing the documents required for the loan application and the loan application itself? And isn’t the Treasury Department saying that the accountant fee (if they do indeed come under the definition of agent) comes out of the lender fee?
David Linderer says
Here is additional information from the AICPA regarding the fee discussion Steve:
https://www.aicpa.org/interestareas/privatecompaniespracticesection/qualityservicesdelivery/sba-paycheck-protection-program-resources-for-cpas/aicpa-statement-on-cpas-as-agents-for-ppp-applications.html
Steve says
OK. You are right. Thank you for educating me on this. I will fix the blog post in about two seconds.
David P. Linderer says
No! I don’t know that I am right…Lol! I was just saying this is what I had found and was asking your opinion on it. This blog has brought about great insight but I do not want anyone to be lead to believe that I am correct about this. I am asking your opinion and your guidance on what we should do to be compensated. Not that we are trying to take advantage of the situation but I have a ton of tax returns that I would like to get out but can’t because my clients need me to do this.
Steve says
No, no, don’t worry. I read the AICPA letter. And I focus on this part of the statement:
The boldfacing is mine, BTW. But I think you’ve grabbed us a key bit of authoritative guidance. AICPA says (basically) we’ve always done this sort of work. And the client as is custom needs to pay.
What people like me (and others and maybe you) worried about was that statutory language you reference. If that was the rule, it was unworkable. What AICPA reminds us is (basically), “Hey SBA this is what we do and have always done.”
Not to be too mercenary, but I think you and I rely on this guidance. Our clients need our help with this! Probably nothing else you or I do this spring for clients will be as valuable.
David P. Linderer says
I guess back to my original thought though….how to get the banks to pay us. The Treasury guidance says we are entitled to a portion of the lenders fees for preparation and I see this SBA Form 159 but do you or anyone, know how to properly prepare this form and does it get submitted with the loan application and the banks just see it and say, oh, ok, there’s an agent….we have to pay him when the loan closes. I don’t know what others are doing with this.
Will says
I have a small business I ran on the side since 2018 (revenue less than $10,000 per year). I went full-time in October 2019 with revenue of $150,000 per year annualized and began paying myself a salary in 2020 ($68,000 per year). Is there a way to be categorized as a seasonal or new business under this formula?
Craig Walkenspaw says
Steve:
Thanks for sharing your PPP insight.
I have a quick question with a S-Corporation twist.
My father-in-law owns a small company and is its sole proprietor. The guys that work for him are treated as contractors and are given Misc 1099. So no employees, other than himself.
On his 2019’s…1040-SR, Scheduled C, Line 31, he shows a net profit of $166,952. Taxes were paid on this full amount.
It’s my understand that his annual payroll for figuring the PPP payroll and average monthly should be no more than $100,000 or $8333.33/month?
So the requested loan amount would be 2,5 x $8333.33 = $20,833.33.
He was planning on running this amount through a payroll service during the eight week PPP forgiveness period (taxes would be paid upfront). This will provide the need documentation for the loan’s forgiveness demonstration.
Here’s the twist,… Just prior to its March 15, 2020 deadline, he filed to become a S-Corporation beginning with his 2020’s tax filings.
For the purposes of the PPP loan, can still here treat himself as a sole proprietor and file as he has proposed here. …since the minimum salary required by the S-Corporation has not yet been established? At the end of 2020, he was planning on running the minimum amount through payroll. Now, the PPP payroll would account towards this amount.
Thanks for you insight,
Craig from Ohio
Steve says
I don’t a situation as complicated as your father-in-law’s is clear. The banks seem to be struggling to handle in a timely way anything that isn’t super simple. That said, FIL should be able to get a $20,833 as you calculate above.
Then, for 2020, I think you do use his W-2 wages.
And here’s my opinion: I would not be artificial or goofy in how you set salary in situation like this. E.g., this approach seems reasonable purely on economic grounds. No salary to shareholder-employee right now given uncertainty. Then, if PPP loan funds, start paying weekly salary that annualizes to a reasonable compensation amount.
Two tips? First, be sure to factor in both the health insurance and any pension contributions so those will play well with the S corporation in the long run. E.g., $3K a month W-2 wages maybe grows to $3600 a month if you add health insurance and then to $4500 a month if you add a SEP…Second, before 2020 ends, verify that the compensation paid to shareholder-employee is reasonable.
Marsha says
Can the employer only provide the employee with 80% of his or her salary with the Payroll Protection loan?
Steve says
Yes, sure. Are you thinking about the pay reduction effect on the forgiveness? That isn’t an issue with reductions of “only” 20%.
JEFFERY KAISER says
Forms missing line?
Steve. Thanks SO much for your insights and assistance. You’re great! As S corp owner, I have a w-2 of about $144K for 2019. In addition, contributed to a pension plan in amount of $50K. The BofA application form asks for average monthly payroll. Would I enter the actual $12K per month and have the bank take it down to the limit, or should the monthly amount be based on $100K ceiling, which means I should enter $8333 per month? And how do i factor in the pension contribution? There are no additional fields on the BofA app form to input additional amounts for pension. Thank you!
Steve says
I think you use $8333 plus the pension amount (so roughly another $4K) to get the monthly payroll. I.e., $12,833.
Sharon says
Steve,
Thanks so much for the great information. We received “clarification” from our local Chamber of Commerce that indicated that our 1099 folks should be included in the payroll costs and we used that number on our application (providing the bank with both the W-3 and the 1096’s from 2019 and were approved last week-although no funds yet!). I will be speaking to our accountant tomorrow about the feasibility of moving them to W-2 earners.
However, my question is more asking your opinion. I live in a state where we cannot operate by order of our Gov until “at least” 6/10/20. There is no way that our business will be up and running and generating enough business that we can equal the same wages paid in 2019. It is going to take some time for all businesses to recover and get their companies back to pre-corona numbers – if ever for some. Do you think the SBA or the federal government will adjust the 8 week period beginning July 1? In reality, it really should be a minimum of 120 days to bring those payroll numbers back.
I appreciate your insight.
Sharon
Steve says
So it was incorrect to include the 1099 contractors, thought that probably wasn’t clear when you received advice to include. Also, I think you would add people back to the payroll even if they weren’t working. Finally, SBA has clearly said the 8 week period begins with loan funding.
Paul Becker says
Hi Steve- We are a small partnership with 2 attorneys as partners and a handful of employees. As partners we take draws from time to time not regular w-2 paychecks. The statute is clear that the program is set up for a “business” and there can only be one loan per business.. In that regard, doesn’t the partners’ draws/compensation have to be put in the same application as the loan to cover the employee payroll costs, since only one loan is allowed. Other sites have suggested that partners should fill out a separate loan application as self employed individuals under the sole proprietor provision., However that would be more than one application and the individual partners are not a “business” as individuals. .
Steve says
Agree with you that partnerships are businesses. Also I think “payroll costs” for partners do get plugged into the PPP loan formula. And that you apply for one loan.
That said, if your bank isn’t willing to lend to an entity that isn’t explicitly covered/called out/named/etc in the statute, I don’t know what you do.
FWIW, I do know some law firm partnerships seem to have gotten loans that include payroll costs for partners. But I also think we have a bunch of comments here where partnerships are saying banks won’t lend to them because partnerships aren’t businesses… and then even if they were businesses, the partners don’t create payroll costs.
My cowardly approach here would probably be to go for the loan you can get. This notion stems from a fear that the money will run out before the bank figures this out. Sorry.
Mark J says
The new guidance issued yesterday clears this up – partnerships can apply and use the partners’ last year’s K-1 income as the partner’s payroll.
Steve says
Agree. I updated the blog post. Now I need to look through comments.
Christina says
Hi Steve,
Thank you so much for this! I’ve got an unusual situation – I switched from being a sole proprietor last year to an s-corp in Jan of this year. It’s still just one owner and I am the only employee, but the business has a new legal name and EIN as of Jan 2020. Do I use the self employment earrings from last year, and apply for the loan under the new business legal name/EIN number? Going forward I will continue to operate as an S-Corp. Not sure how to approach this – any insight you can provide would be appreciate! Thank you, Christina
Steve says
Sorry, but I think your situation probably creates a problem. Your sole proprietorship can probably get a PPP loan based on the “payroll costs” of 2019. But the problem is, it isn’t operating this year and so won’t have any payroll costs in 2020 that produce forgiveness.
Your S corporation didn’t exist in 2019, so it can’t look there to determine an average monthly payroll it can plug into the PPP loan formula. Ironically, it sounds like S corp HAS wages so if it could get a loan, it could receive forgiveness.
Possibly if the time clock wasn’t running, you can look at some creative option. Maybe restarting the sole proprietorship? (Though it was supposed to be running February 15, 2020 and obviously wasn’t.) Maybe seeing if you could get S corp payroll into the first part of 2020 and so come up with some sort of average monthly payroll amount. Maybe a bank expert in SBA affiliation (so not a tax accountant like me) could spot a way to link these two entities.
But with of guidance–I don’t think the sole proprietorship rules are even out (though we thought they’d be out last Friday), I think you situation is problematic.
Again, sorry.
JEFFERY says
Forms missing line?
Steve. Thanks SO much for your insights and assistance. You’re great! As S corp owner, I have a w-2 of about $144K for 2019. In addition, contributed to a pension plan in amount of $50K. The BofA application form asks for average monthly payroll. Would I enter the actual $12K per month and have the bank take it down to the limit, or should the monthly amount be based on $100K ceiling, which means I should enter $8333 per month? And how do i factor in the pension contribution? There are no additional fields on the BofA app form to input additional amounts for pension. Thank you!
Steve says
I remember answering this question before. Maybe answer didn’t get posted?
In any case, your payroll costs equal the $8333 plus the payroll associated with those dollars. I can’t see how you get to $50K of pension on $144K of W-2 wages. But to use example of a SEP (which at this point I think will work), a SEP-IRA goes to 25% of your wages up to a limit that doesn’t matter here. So in situation where one was doing a SEP, I think one would add 25% of the $8333.
Jeffery says
thank you Steve. Most appreciated. I was showing numbers that were examples, not actual for online, in order to clarify the question about whether the $8333 limit on salary can be added to with a pension element, as well. Sorry.
Also, the application only has one line for monthly payroll and then instructs to attach payroll info. So in cases like mine, we simply include the pension in the monthly salary number and also attach pension information, right? This will assume the bank recognizes the monthly payroll on the application is higher than the allowed salary limit due to the pension documentation forms attached, right? Thanks again.
Elaine says
I have an concrete LLC company with 100% ownership. My payroll was 146,00 and my 1099’s were 112,00.oo. The worksheet that I was sent by the bank has me deducting the 1099 out of my payroll which leaves me with 2833.00 eligible payroll. Is this correct? I don’t understand why it would deduct the 1099’s from my payroll number.
Steve says
Payroll includes W-2 wages paid to employees, the owner’s Schedule C profit, health insurance and retirement benefits paid for employees.
Payroll doesn’t include 1099 contractors. They’re supposed to get their own PPP loans.
Krista says
Steve- help! My husband is an independent contractor. Our Schedule C shows a loss because of extra expenses. Can he qualify for the PPP loan?
Steve says
No, sorry. With no Schedule C profit, the PPP loan amount equals zero.
Leonard says
Hi Steve,
I have W2 income as an employee of a large company, and then a small consulting business (sole proprietor) with a smaller amount of 1099/Schedule C income. Can I apply for a PPP loan using the profit on my schedule C as my payroll?
Thanks,
Len
Steve says
I guess so if you can meet the certification requirements. The money is probably already gone though…
Aaron says
Hi Steve,
Great post and blog thank you for your work!
I wanted to get your thoughts on the forgiveness portion of “payroll costs” . It seems like the payroll costs include employee federal income taxes when applying for the loan, but once you start to use the loan for payroll, the portion of employer AND employee taxes will not be included in the forgivable amount. Do you think it would be safer to only use the PPL to pay for the net paycheck amounts and have your company fork over the payments for all taxes aside from state/local?
Thank you,
Steve says
No, only the employee paid payroll taxes count toward the loan amount or the forgiveness amount. Sorry if that’s not clear from the above discussion.
DOUGLAS GILINSKY says
Thanks again Steve for all of your help. I have a business that received an email that the loan was not approved. The only reason was “Federal law prohibits us from providing the loan requested”. The bank (Chase) says please do not call as they will be unable to answer questions. I am sure they are eligible for this loan. Who could you contact if not the bank. Could you apply with another bank, assuming there are still funds available.
frank broder says
We applied on April 3 and was given a PPP loan by our regular bank based upon the salary of our one employee. At the time, the SBA was saying that partnership draws did not apply for determining the loan amount so we went with Nataly’s salary only. The loan was funded on April 15 for about $11,000 based on the April 3 application.
Unbeknownst to me, on April 14, the SBA released reversed course and said that partnership draws were also eligible to be included in the loss amount. Given that we were already funded for our one employee, how do we go back and get the extra loan amount for partner draws? We would qualify for another $42,000.
When we got the initial loan we represented we would not apply for additional PPP loans in the future and even if we were to apply again we would have to certify that we had not previously received a PPP loan.
Are we just out of luck on this?
Steve says
I think you’re out of luck. Sorry. You get one bite at the apple.
If it makes you feel any better, know that most of your small business friends (like 97% of them) got zero.
Steve says
I have a small behavioral health business with 6 staff that provides comprehensive services to youth. All of our staff are 1099 MISC employess working part time. I submitted the PPP application for the 6 employees and have the 1099 MISC docs sent to them from 2019, but your post raised a number of questions for me (and the bank is unavailable for questions). First, do I submit all the 1099 MISC forms with the payroll totals as validation of the amount requested? Second, if I convert them all to w2 employees will I meet the criteria to not have to repay the loan? Hope the question makes sense, because very little is making sense at this point. Thanks so much!
Steve says
The folks you call employees but to whom you issue a 1099 aren’t employees. They are independent contractors. Accordingly, the amounts you paid them in 2019 don’t “justify” PPP loan funding. You may however be able to get PPP loan funding for your W-2 earnings or self-employment income.
Example: You make $60K in wages or self-employment earnings. You also pay $180,000 to 1099 contractors.
In this case, only the $60k you receive counts as payroll costs. That’s $5K a month. Your PPP loan can be $12,500.
BTW, the 1099 contractors? They can get their own PPP loans based on the self-employment earnings their Schedule C forms show.
STEPHEN F. says
Steve,
Say a partnership has employees ( their payroll costs are in the application ), and three active general partners: one with 79%, another with 16% and the last with 5 %. The pship nets $ 240,000 for 2019, and that self-employment income is divvied up by the percentages. Does the $ 100,000 cap apply at each partner’s level, or does it apply to the pship’s total $ 240,000 ? Look at III ( 1 ) ( a ) in the 4/14/20 Additional Eligibility Criteria release Interim Final Rule . It’s not clearly stated there which way it goes, but all other $ 100,000 caps where an employee, sole proprietor or self-employed are involved state it on a per person basis. . The bank is insisting it is on the partnership basis, not by individual partner, as we presented it in the app. I can understand the potential complexities created by ” how many bites at the $ 100,000 apple does the individual get through how many entities “, and the burden imposed in disclosing it ( and SBA digesting it ) on multiple entity apps where that partner may have income. May have to take the ” cowardly ” approach as you mentioned in a prior posted response, which was echoed in a recent webcast I listened in on last Wednesday. However, we are trying to get the bank to show its card on this tomorrow. I have this same issue on another general pship , husband and wife 50/50, with SE income where the wife has W-2 income from two corps totaling over the $ 100,000 cap, but husband has no W-2 income. SBA funded both of those corp apps, submitted at same time, and the ownership affiliation schedules were enclosed. We don’t know what the future holds, if anything, for SBA review after the forgiveness stage is past and loan has been adjusted.