Last night, the Small Business Administration published its Paycheck Protection Program Loan Forgiveness Application.
The loan forgiveness application answers a number of questions, thankfully. It also provides useful shortcuts for borrowers.
I’m going to quickly summarize the highlights…
Alternate Payroll Covered Period
Responding to the pleas from accountants, the loan application allows borrowers to use their regular payroll schedule. That’s great news. It means that small businesses don’t need to match their payroll cycle to the eight week “testing period” or “covered period” which the forgiveness formula looks at.
Here’s the actual language from the instructions:
For administrative convenience, Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”).
The instructions then go on and provide an example of how this works:
For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.
But a note. Borrowers use the alternative payroll covered period only for payroll. Not for rent, interest or utilities.
Accrual-ish Accounting Allowed
Another useful accommodation from the SBA? The loan application tweaks the requirement that spending be “paid and incurred” during the eight week covered period or alternate payroll covered period.
Rather, the loan application provides forgiveness for payroll costs paid during the eight week covered period. And then the loan application also provides forgiveness for payroll costs incurred during the eight week covered period if the costs are paid on or before the next regular payroll date.
This accommodation helps. A lot. It means small businesses don’t need to reschedule one payroll period to end the last day of the covered period.
The loan application provides a similar accommodation for rent, interest and utilities costs, stating:
An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.
Note that eligibility stems either from a nonpayroll cost being paid. Or from a nonpayroll cost being incurred and then paid on or before the next regular billing date. That “either/or” option gives you some flexibility.
Usefully, the loan application also lists out what counts as utilities: “business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.”
Owner Compensation Capped at 2019 Compensation Levels
The loan application provides several other useful answers about how forgiveness works too.
For example, the application caps owner compensation payroll costs to what was paid in 2019. Here’s the slightly parsed language from the application instructions with a key bit boldfaced:
any amounts paid to owners (owner-employees, a self-employed individual, or general partners)… [are] capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.
That rule surprises no one, probably. But folks wondered if a bump in owner compensation might allow someone to nudge up their payroll costs. (You can’t blame people for thinking about this.)
Proprietor and Partner Draws Required
The accountants have argued a lot about whether the owner compensation replacement needs to be paid. Some said you just needed to “show” a copy of the borrowers 2019 tax return.
The paycheck protection program loan forgiveness application says different. Here’s the actual instruction for owner’s compensation with the key bit boldfaced:
Line 9: Enter any amounts paid to owners (owner-employees, a self-employed individual, or general partners).
A New Pay Rate Reduction Safe Harbor?
You maybe know this, but if an employer reduces people’s wages, that reduction may also reduce the loan forgiveness amount. (See this blog post for more information about how someone loses PPP loan forgiveness.)
The earlier SBA guidance said that if an employer reverses earlier salary and pay rate reductions by June 30, no reduction in the forgiveness occurs. (Which is good. This counts as a safe harbor.)
The loan forgiveness application creates a new, second safe harbor for salary or wage rate reductions.
Specifically, the loan application’s instructions say you should also compare the average wages paid on February 15, 2020 to “the average annual salary or hourly wage between February 15, 2020 and April 26, 2020.” If employee salary and wage rates have moved around a bit but people on average make as much as they did before? Good news. No reduction in the forgiveness occurs. (Another safe harbor. Apparently.)
For example, suppose you used to employ two workers making $40,000. That average wage equals $40,000. Obviously. If you replaced these two workers with new team members making $30,000 and $50,000, your average wage still equals $40,000. And you should be fine. Because you still average $40,000 per worker.
Simplified FTE Formula
Small businesses can also lose forgiveness if they reduce their employee headcount as measured by full-time equivalent, or “FTE,” employees. (More information here.) Usefully, then, the application describes a simplified full-time-equivalent formula that firms can use.
That method? You count employees who work 40 hours or more per week as 1 FTE. You count employees who work fewer hours as .5 of an FTE.
No 75% Threshold?
And then two quick other things obvious from the loan forgiveness application.
At least a handful of accountants—including me—worried that you needed to spend at least 75% of your loan amount on payroll to get forgiveness.
So, to use a worst case scenario to explain, suppose the bank bungled your PPP loan. Suppose they gave you $25,000 instead of $20,000. (Maybe they did this because they incorrectly treated your 1099 independent contractors as employees.)
Further suppose that your payroll costs for the covered period only ever could have equaled $15,000.
Had the bank funded the right amount–$20,000 in this example—you would hit the 75% threshold and be fine. Because $15,000 equals 75% of $20,000.
But $15,000 equals 60% of $25,000. And so if the 75% worked the way some of us worried, you were, well, a cooked goose.
Fortunately, the loan forgiveness application says your total forgiveness just needs to include at least 75% payroll costs.
The actual formula does this by limiting forgiveness to the amount calculated as your total payroll costs divided by .75.
For example, with $15,000 of payroll costs, that means up to $20,000 of forgiveness. Because $15,000/.75 equals $20,000.
In this case, it doesn’t destroy forgiveness if you incorrectly received $25,000. You will get forgiveness of $20,000 if you spend at least $15,000 on payroll and $5,000 on rent, interest and utilities. You will be allowed to keep the remaining $5,000 as a loan to be repaid at 1% interest over two years from the date received, prepayable without penalty at any time.
No Self-employed Sole Proprietor Haircut
One other bit of good news. As some worried and as I discussed in another earlier blog post, the earlier guidance from the SBA possibly suggested that self-employed people only received forgiveness for payroll costs. So, not for rent, utilities and interest.
The loan forgiveness application indicates these small businesses possibly can receive forgiveness for more than just payroll. Theoretically, these small businesses may be able to plug some rent, interest and utilities costs into the formula.
Two Final Thoughts
Let me leave you with two final thoughts about the loan forgiveness application.
First, many small business borrowers probably want to get their accountant’s help with the application. The reason? The application form requires accounting that probably exceeds the skills and comfort level of many small business owners. In other words, completing the PPP loan forgiveness application resembles a slightly complicated tax return. (Check out the form and instructions now to see if you’re in this boat. There’s a link to the form and instructions below.)
Second, accounting firms with lots of PPP loan borrowers need to plan on helping clients with these loan applications this summer. So train people. Devise workflow procedures. Schedule resources. In other words, basically another “mini-tax season” during the summer. When you thought you might be able to take a break. And then when you’re working on the tax returns due July 15.
Other Resources You May Find Useful
Here’s a link to the actual loan forgiveness application.
These earlier blog posts may be useful: Paycheck Protection Program Formula Illustrated and Explained and Payroll Protection Program Certification Safe Harbor.
Does this answer the questions owner / employee of s Corp who
Has w 2 salary does the w2 salary and And pension contributions count toward loan forgiveness
Does this apply to s Corp
Owner/ employee who has w2 of 100k 2019 salary have to enter this on line 9
Line 9: Enter any amounts paid to owners (owner-employees, a self-employed individual, or general partners).
I think the owner pension amount counts. Both the elective deferral and the employer match.
As defined, for the purposes of forgiveness the items such as a penson, solo 401Ks, etc would be considered “non-payroll” costs as defined in the SBA FAQ number 7, I believe. Wherein it specifically states these costs not directly paid to “employees” are not part of the $100K limit. So I agree with Steve that they would be included as part of the calculation for loan forgiveness.
If an employee does not want to return, can you hire someone for their hours to ensure that I get the full PPP, assuming I document them not wanting to return to work?
Yes.
Great, now that we got all these details worked out, I will be much better prepared for PPP Round 2 in the Fall
We use ADP for payroll services. We received the money on May 1, and had incurred and paid retention pay on May 4. Our two week pay period ends on May 10th. Is that ok? Will the retention pay count toward loan forgiveness?
I think your payroll costs start on May 1. Alternatively, you could start on May 11 (which is worth considering).
Either way, you can’t get forgiveness for payroll costs incurred before the start date.
E.g., if you start on May 1 and on May 4 pay people for two weeks that ends on May 4, only payment for May 1-4 count.
I am confused about the May 11 suggestion? If we start payroll on May 11, then we lose the payment on May 4th, right? Also, would a one time retention payment on May 4th count for incurred and paid during the covered period? The retention payment was not for work already done, but to retain employees. The May 4th payment should count in both the accrual and cash methods, right? Although we use the cash method as a standard practice.
I don’t know how a retention payment would work. Sorry. Seems like the issues would be (a) was expense incurred during the covered period, (b) does it exceed the $100K annual limit and (c) it is really an element of payroll cost as defined by statute and then the SBA guidance.
BTW I don’t see it listed in the statute. But maybe it is listed in SBA guidance. Or maybe, if I knew more about the practice of retention payments, I’d know “oh, yeah, that’s always just part of the XXXX category.”
Your statement “Either way, you can’t get forgiveness for payroll costs incurred before the start date” might not be true. If you read the application language very carefully, to me (and to many of other analysts I’ve read) the language allows anything paid in the period PLUS anything incurred in the period. The evidence for this is:
1) the repetition of the term “payroll costs” in the phrase “payroll costs paid and payroll costs incurred”, 2) the inclusion of the statement “Count payroll costs that were both paid and incurred only once” and 3) the use of the term “paid or incurred” at the bottom of page 1 and in the definition of Cash Compensation on page 7. It’s obvious we need further clarification on this.
You know what? I agree with you. For what it’s worth, I didn’t think this way the first times I read the application instructions. In part because it conflicts with my CPA mind and in part because it lets someone push more than eight weeks of payroll into the forgiveness calculations. But now I also read the instructions the way you’re reading them.
P.S. I tried to edit the blog post so this point is clearer.
Do elective deferrals for a 401k count toward forgiveness? For example, can we use the pro-rated (8 week) amount of $119,500?
Elective deferrals are part of the $100,000. The employer match would be in addition though…
see Interim Final Rule on Paycheck Protection Program posted on April 20, in Federal register:
“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), 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);“
What benefits are they referring to when they say “but not owners?”
So here’s how I read that rule…
The whole block of discussion that the chunk of rule you quote falls under this heading:
1. Individuals With Self-Employment Income Who File a Form 1040, Schedule C…
In other words, what you quote above appears as part “e” of this discussion and answers the question, “What amounts shall be eligible for forgiveness?”
So I’m reading the question as basically, “What amounts shall be eligible for forgiveness… for individuals with self-employment income who file Form 1040, Schedule C?”
And when I read the rule that way, I conclude what they’re telling borrowers is don’t addback the self-employed health insurance or the pension deductions.
Further, that makes sense because the Schedule C profit hasn’t yet had the self-employed health insurance or pension deducted.
I used this example before to illustrate. A Schedule C shows $100K of profit. And that’s what the PPP loan amount formula plugged into the calculation. On the proprietor’s 1040, the business owner also deducts $10K for self-employed health insurance and $20K for a pension. If you let someone start with that $100K and then add another $10K and another $20K, you’d be double-counting the health insurance and pension.
Yes and it works if you are at the 100k limit. But suppose your sch c was over the 100k. You would be limited to the 100k and the owner would not get forgiveness for their share of the health insurance or pension. Are the owners, whether sch c or s Corp, allowed to include the their amounts paid for health insurance and pension benefits? A defined benefit plan, even only 8/52 of it, could be a huge amount skewed to an owner.
For Line 9, we are a C corp. We pay W2 compensation to the owners. How do we handle line 9? Just put in the W2 number? We don’t use a k-1 or dividend or anything like that. Can you clarify “proprietor and partner draws” listed above? In what circumstance does this refer to?
The proprietor draws are for Schedule C business owners.
The partner draws are for partners in partnerships operating active trades or businesses.
Neither of these “categories” applies to a shareholder-employee of a S corporation or C corporation.
We use ADP for our payroll services. If we did a retention pay (paid and incurred) on May 4th, and got our PPP on May 1, are we ok? Our two week pay period started on April 24th, and ends on May 7th.
You should be fine.
Can we use PPP to back pay employees? For example, we had to stop paying employees in March, but they continued to work… We had expected the funds to be deposited sooner, but it took so long that employees ended up working without pay for two weeks while we waited for funding. So, if we issue the checks from the PPP loan during the 8 weeks, but the pay is associated with work period prior to the 8 weeks, will it be forgiven?
For payroll costs, I don’t think so. Sorry.Yes, I think you can do this.
BTW,I also think what you propose works for nonpayroll costs. So you should be able to get forgiveness for late payments of rent, utilities, and interest.FYI, I’m basing this on the quoted bits of the application instructions that appear in the section above labeled “Accrual-ish Accounting Allowed.”
Edit note: A more careful reading of the form instructions leads to above edit.
Can I as as a sole proprietor also do the back pay work-around? I am commission only as a realtor (schedule c). My income went completely flat for a couple of months but applied and received loan on may 4 and just yesterday had a closing which will negate the forgiveness of the loan but still not make me whole over the course of the past few months.
Not sure I understand your question, but a sales commission in the eight weeks covered period doesn’t negate forgiveness.
So compensation is still just W-2. We still cant count monthly Shareholder distributions (K1)?
Yes. And compensation for S corporations always only looked at W-2 wages. Think about it this way. An S corporation has two shareholders. One works in the business and receives, say, $50,000 in W-2 wages. The other shareholder used to work in the business, but it now retired. Each shareholder also receives a $50,000 allocation of profit (shown on the K-1) and a $50,000 distribution.
The logic makes sense. The paycheck protection program provides money to pay the W-2 amount. But the K-1 amounts paid to the shareholders isn’t for work. It’s because they own the business. One guy (per our example) doesn’t even work in the business.
BTW, as I’ve answered the hundreds of questions from readers, it’s become clear to me that many small S corporations probably didn’t pay their shareholder-employees or pay them enough. These folks often understood their distributions to be part of the “wages.” But that’s not right. The distributions and “distributive shares” shown on the K-1 were part of the investor’s (shareholder’s) return on the business investment.
Hi Steve, Thank you for your helpful blog! With the newly released loan forgiveness application, line 7 seems to specifically exclude salary that employees selectively deferred for 401K contribution. Am I reading that correct? Should that deferral have been included in line 1 as cash compensation instead? Many thanks!
No, I don’t think you want to read it that way. The elective deferral counts. It’s part of the employee’s cash compensation. They’ve just told employee to reroute to their retirement account.
As always, you do a fantastic job of being on top. Here are two questions that arise (Single owner S-Corp that pays Salary Quarterly – 4 paychecks a year t the end of each Qtr) that I was put up against in reading the Treasury doc. I hope I am just misunderstanding it.
Q1: Completing the Schedule A Worksheet, if Table 1 is filled in with the pay-stub info from the payroll (cash compensation) for the owner who is on W-2. Then on the Schedule A itself, transfer that amount to line 1. Then on Line 9, again enter the same amount (owner/employee)? If so then Line 10 will have double the amount.
Going back to instructions, it does say “… do not include any … owner employees … ” (for Table 1) and. if so, then how do you get the FTE/Wage Reduction math correct since everything else for FTE/WR purposes is driven off Table 1 entries? Another example, is on Page 7 Step 1. How to do these calculations since in this case (there are no other employees) and answer from Step 1 needs to go into Box 3, Table1 to be transferred over to the Schedule A and then onto the main application) ?
Q2: Payroll schedule is Quarterly, but on Page 1 “Alternate Payroll Covered Period” the wording “… biweekly (or more frequent) payroll schedule may elect …” suggests that less frequent W-2 based/payroll-based owner only is left to hang high and dry, possibly risking zero forgiveness or be forced lie about it to get forgiveness? Or was this intentional perhaps to disallow single owner companies as much as possible?
5/22 Edit to add clarity and reflect more careful reading of form instructions..
OK, you could move to a weekly or biweekly payroll if you want to use the alternative covered period. And that would be the way to get payroll costs inside an alternative covered eight week period if you want to go that route.
But I think you can also just use your quarterly payroll. So if you’re still doing it, keep going.
The example below illustrates how this will work. And note that below info is based on the form instructions that say you can include payroll costs paid inside the eight week standard “covered period” and payroll costs incurred inside the eight week standard “covered period” if paid at the next regular payroll.
The Example: You pay yourself $16,000 a quarter, a few days after the quarter ends. So in 2020, you paid yourself $16,000 on April 3 for the first quarter… and then another $16,000 on July 3 for the second quarter. Further, say your eight week standard covered period runs from April 3 to May 29. This means that your first quarter $16,000 counts in its entirety. It was paid during the quarter. And then that 2/3rds of the second $16,000 count, so say $10,666. It was incurred during the eight weeks and paid at the next regular (quarterly) payroll. You therefore potentially have $26,666 of payroll cost for the owner.
BTW, if this employee was not an owner-employee, you could include the full $26,666 in the payroll costs. So, weirdly, roughly 21 weeks of payroll. Or something like that.
However, because this employee is an owner employee, you get limited by the 2019 compensation.
If in 2019, you had paid yourself $52,000, for example, you would be limited to 8/52nd of $52,000, or $8,000.
BTW, I think you basically don’t include the owner-employee in any of the FTE adjustment calculations. So if you’re doing the form correctly and you have only a single employee, the owner, the Line 7 FTE adjustment equals 0. And you check the box on the PPP Schedule A that’s part of this instruction:
Steve,
Much appreciate the clarifications. I used the 2 1/2 month formula from my Schedule C income as the only employee (and shareholder) of my S Corp. I have office rent. My health insurance is from a university where I teach part-time. It is not paid through the business and is new since January. Possible to pay for health insurance from the loan? If the loan amount equals 2 1/2 months income with no office rent or taxes paid included in the loan amount, do I only get forgiven for 8 weeks or 2 months of the loan? I am very confused. Please advise. I am an architect, not an accountant!!! Best,
As always, the information provided is spot on. Much appreciated!
Ok, Steve: An S Corp sole shareholder/employee had 2019 W-2 income of $120,000. The corp also recorded a SEP contribution of $30,000 on his behalf (shown on the 1120S as a payable; not paid to custodian yet but will be by 1120S extended filing date). He has no appreciable rent, utility, etc. costs.
The lender funded a loan for $26,700. I don’t know how that figure was arrived at,
With the restricted yearly payroll amount of $100,000 ($8.333/mo), he will qualify for $16,666 in direct payroll for forgiveness, leaving him ~$10k short and owing back to SBA. Big question: can the co’s ongoing SEP contribution of 25% (or $2,083/mo) be added to the $8,333 monthly allowable payroll figure to determine total monthly ‘payroll’ costs?
Edit 5/22 based on thinking more about the form instructions…
So I think he gets $1923 a week in payroll. That’s $100,000 divided by 52 weeks. So total payroll for eight weeks caps out at $15384.
And then I guess making a 25% SEP-IRA contribution
, or $3846,works. So if you make a $30,000 SEP-IRA contribution inside the eight weeks for 2019, I think that counts per the form instructions. But I’m a little surprised at that.P.S. You might also have health insurance, state unemployment taxes to add to the $15384… And then it’d be great if you could cobble together a bit of rent, interest and utilities (telephone, internet, etc.)
If its a S-Corp owner — Wouldn’t the $120,000 W-2 Income already include health insurance?
Yes, of course. You are right. It would be. Or should be.
i am in a similar situation where i’m an s corp (single owner-employee with no other employees) that had 2019 w2 wages of $102,000 with employer contributions towards a SEP IRA of 25% ($25,500)
My loan amount was approved for $26,145
i’m assuming my payroll wages of $15,385 should be forgiven as well as the employer contribution, 25% of $100,000/52 x 8 weeks ($3,846), should be also forgiven. So total of $19,231.
I have health insurance through my spouse, so don’t have any costs for that.
And only other thing i need to include would be non-payroll costs such as cell phone, internet, vehicle, utility costs.
i wanted to know few things:
1) Is my above assumption correct? the amount forgiven would be $15,385 + $3,846?
2) Will i skip the 2 tables on the forgiveness application form, since there are no regular employees, just 1 s corp owner w2 employee?
3) In 2019, i paid out two 1099 contractors that i was not allowed to request for in the PPP loan amount, can I use the leftover money i have after my owner-employee payroll and non-payroll costs (~$5k/$6k) to convert/hire one of my 1099 contractors to a w2 employee and add them to my payroll? so essentially my employee count would increase, is that fine?
I think you’ve got it.
The owner compensation is using the 2019 number, but we see numerous times that employees compensation applies to the first quarter of 2020. If we gave small raises to our employees and the owner/employee in first quarter 2020 and have the form 941 to substantiate the salaries, we are still only to use the owner/employee 2019 compensation for that “employee” only and can not include the owner’s 2020 compensation level previous to the COVID shutdown? So the owners forgiveness is limited to their “old” salary even though we paid him their 1st Qtr/2020 salary in our 8 weeks?
Also doing the worksheet for FTE, we need to not include the owner in all calculations as they are excluded from the Worksheet calculations for safe harbor.
So the application says lesser of 2019 comp or $100K… I think you use that. I think that answers or responds to the question in your comment, right? Though obviously not the way a business owner would hope…
This should be changed! They allowed us to consider salaries paid during the time period of January 1-March 30, 2020. At that time, we were a profitable company, thus the owner received compensation. In 2019, we were still getting operations up and running after suffering and recovering from the damages of a Category 5 hurricane. In 2019, we recorded a loss for the year. So, in essence, $15K of our loan is now not going to be considered in the forgiveness because we have to use 2019 wages.
The EIDL loan has not yet materialized, but advance was received along with the PPP loan. What happens to that advance/how to handle it?
I don’t how you should handle that given the “lack of materialization” at this point. Sorry. I guess one would hope you can ask the bank… and maybe when you can ask you’ll have some additional clarity. (Sorry I’m not more help with that.)
We reimburse employees for mileage. Can that be included?
(And thank you for all that you do. I really look forward to reading your posts.)
So the mileage thing is funny. I would have said, “no that doesn’t count.” But in the guidance from SBA they more than once talk about covering a vehicle and then the gas. So while mileage doesn’t seem to count at least to me, maybe it does. (And I guess the application instruction you’d be relying on is the part that talks about how you can include utilities if you had the service before the PPP loan.)
Steve … you provide a GREAT service to the world of business owners … THANK YOU!
A sole proprietor who files a Form 1040, Schedule C to report their business income and expenses AND has an employee who receive Form W-2 for compensation paid. The business reimburses the employee for actual cost of health insurance. The business funds a SEPIRA contribution to the employee’s retirement account. What is your thought on whether both of these expenditures if made within the 8 week Paycheck Protection Program (PPP) period would qualify as expenditures that would turn the PPP Advance into a Grant versus Loan.
What about the expenditures paid for the sole proprietor? Does the business need to pay the sole proprietor for the health insurance and retirement contribution for them to create Grand versus Loan. [If so, would these amount be included on Line 9 of PPP Loan Forgiveness Application.] OR … can the business pay the health insurance to the insurance company and the retirement contribution to the retirement administrator? [If so, would these amounts be included on Lines 6 and 7 of PPP Loan Forgiveness Application.]
Thanks for your time and knowledge.
So I think the employee health insurance counts if you’re doing this the right way (for example, as described here, qualified small employer healthcare reimbursement arrangement.) And I think the employeer SEP works too. Also I think you need to pay the amounts you want forgiveness for by end of eight weeks.
The retirement benefit and health insurance doesn’t work for the sole proprietor. But this may not have the impact you’d worry about. For example, say you made $100,000 as per Schedule C. And then say you paid out $10K for health insurance and $20K for a SEP and so really in effect made $70K after deducting your benefits. In this case, you just use the $100K as your compensation amount. But that would be the same as using the $70K and then adding back $10K of health insurance and $20K of SEP. Hope that makes sense.
I’d be careful about including the QSEHRA payments. The term “group medical” has been in the PPP regulations since day 1. A QSEHRA is actually the opposite of group coverage, it is reimbursement for an individual policy.
I think borrowers should be prepared to not get forgiveness for everything they hope. But I’m reading the IFR’s language, shown below, to be pretty expansive, when it says payroll costs include,
BTW, based on rereading Section 106, I think the only way a QSEHRA doesn’t count as a employer provided accident and health plan is if plan doesn’t provide minimum essential coverage?
Steve,
Let’s say the bank gave you a loan of $17,700.You can only come up with $9,000 for payroll and are eligible for $12,000 for forgiveness. If you can only come up with $1,000(instead of the full 25% being $3,000) for non payroll costs, you would then just receive $10,000 in forgiveness and have to pay interest on the remaining $7,700 correct?
Yes, I think that’s the way it works. Or you could just repay the extra $7700 of course…
How long do I have to repay without paying interest if I decided to do so
Two years.
This question is for a 401k. We typically fund the 401k in real time for the profit share and safe harbor. That money of course counts in the $15,385 number. For example, the 3 percent safe harbor and 9 percent profit share (total 12 percent on $15,385). This is $1,846 that counts in retirement contributions (for line 7). We did give some retention pay over the $15,385. Does the 401k retirement money contribution on the amount over the $15,385 get reported on line 7 of PPP schedule A?
So the employer match(both the profit share and the safe harbor) are in addition to the $100K limit.
I.e., $100K divided by 52 weeks equals $1923. So you can pay someone $1923 a week basically… then in addition to that pay health insurance… and employer retirement benefits.
Say it came to $3,000 per week. I understand the $1923 limit. But the 3k allows us to put in more to the 401k than the $1923 does. Does money going into the 401k (as profit share for example) above the $1923 get forgiven? Or, are we capped at $1923 in terms of the profit share contribution to the 401k.
Same question. Do employer retirement contributions count inside the $15,385 max forgiveness cap?
Not for corporation owners. And I think folks reading that into the rules are mixing up the Schedule C sole proprietor rules with the S corporation and C corporation rules.
No.
Steve – Thanks again for your help on these somewhat frustrating and rapidly evolving topics.
Please delete this if this is too off topic, but something strange happened to me. I got the PPP approval email from Chase at 11:59 pm on April 30th. When I checked my account the next morning, the funds had been deposited. Like many folks, I had been checking my accounts frequently for approval status and to see if there had been an EIDL advance posted.
Now when I go back and look at my account, it says the funds were deposited on April 27th? My bankers don’t really have an explanation; obviously the logical one is that it posted and I just didn’t see it but I’m 99.9% sure I didn’t miss a deposit that large and was checking frequently.
This makes a pretty big difference as my pay period started on April 29th and if I’m reading the new guidance correctly that means I could’ve started my eight week payroll on the next pay period start of May 13th? Since we didn’t really get back going til last week, that makes a big difference as extending to another pay period would actually be a more meaningful period when actually open. Has anyone else had this issue with Chase or any other bank?
So, good story (and also a scary story) to share… No insight at my end. Your guesses or hunches better that I can come up with. Also, haven’t heard others talk about this. And unfortunately, for the record, I think you understand the ramifications. Sorry.
We are an LLC taxed as a S corp. Two 50/50 co-owners and 1 other employee. We only applied for average 2.5 monthly payroll paid using W2 wages, and do not have distributions/draws. We do have employer paid health insurance, but not retirement.
Question:
Should S corp owner-employees’ W2 wages be entered on line 1 (from Schedule A Worksheet Table 1, both <100K annual)? Or on Line 9 as 'any amounts paid to owners'? Obviously, they can't be entered on both…
It seems Line 9 (and the Rule it references) may have been intended for Schedule C filers? I am wondering if it would mean 'other' payments on top of "line 1" cash compensation for us?? And if the 8-week equivalent cap of applicable compensation in 2019 would apply to us?
(If so, would I take any 8-week pay stretch, or W2 8/52? If W2, would it be Box 1 or Box 3/5 – as our health insurance is added to Box 1, but not 3/5?)
I am hoping I may be jumping the gun and further guidance may come soon!?
So, I’m reading the instructions to say Line 9. Because you guys are “owner-employees.”
I think you use Box 5 for line 9.
And I think you put the s corp shareholder-employee self-employed health insurance amount (so the extra amount thrown into box 1) onto line 6.
Example: Two owners each make $40,000 and an employee makes $30,000. To keep math simple, all three employees get $5K (each) of health insurance.
The right payroll amount is $40K+$40K+$30K+$5K+$5K+$5K.
Then, as you hint, for the shareholder employees, the $5K gets added to W-2 box 1… and for the non-shareholder-employee,the $5K just appears on the 1120S tax return.
Tip to other folks reading this: You want to use box 5 of W-2 since box 3 is capped at the Social Security limit. Also, you don’t want to use box 1 for wages amount even though it would get you the right number in this case. You use box 5 since that’ll include the employee’s elective deferrals to a 401(k) or Simple-IRA.
How do single owner S corp shareholder/employees who were paid only once during 2019 (annual payroll in Dec, near year end) count towards the FTE count? And what documentation can we provide to show they were “employees” during the FTE periods??
The fact that you paid a shareholder-employee only once in 2019 won’t matter. The formula just looks at the total 2019 compensation.
For the covered period or alternative covered period, though, you’re going to want to move to something like a weekly or bi-weekly payroll.
I don’t see any trouble with a shareholder-employee FTE number… sorry. But again, I thinking you need to use weekly or bi-weekly payroll during the covered period.
What happens if I already issued one payroll to the shareholder for the maximum amount of $15,385. Should that have been paid over a two month period?
If you paid the check after the start of the covered period you’re probably be fine. There’s basically a loophole I need to do a blog post about. And it’ll probably make your situation work.
Hi Steve – thank you for your continuous efforts to keep us well informed!!!
Appreciate this boil down of the application!!!
Steve,
Great blog and thank you for your efforts in guiding us through this process.
Your assistance with the following would be greatly appreciated.
S Corp has one employee, the 100% shareholder/owner, bi-weekly payroll. 2019 pay was as follows:
Regular pay – $80,000
Bonus – $10,000
2% shareholder medical $28,000 (included $24,000 of group health insurance and $4,000 of long-term care insurance)
My thoughts/options on how to handle for the eight-week period:
Gross pay of $13,846 which is $90,000 times 8/52. Or should it be $12,308 in regular wages and $1,538 in bonus? Gets to the same place but one uses the total annual pay for 2019 as regular pay for 2020 and the other breaks out the line items the same as 2019. Bonus is typically paid at end of year.
Health and long term care insurance payments of $4,667 (2/12 of 2019). You implied in one of your responses that these are not eligible for forgiveness for owner/shareholders. However, they are wages for an S Corp shareholder and it was my understanding that they are included in the forgiveness calculation because they are wages and would be allowed in excess of $100,000 annualized per year or otherwise.
Going on from there, if they are eligible as wages, should it be shown as 2% shareholder health insurance for the 8-week period as a pay stub line item? Typically we only do this once per year but would it make sense to show it as the wages that they are? Or just pay them and show them on the health care line of the forgiveness calculation?
So I think you’re doing the calculations the same way I would do them. (I didn’t mean to say or imply any place that retirement or health insurance for S corporation shareholder-employees don’t count. Sorry. I think that “don’t include” approach would only be the case for Schedule C or partner “business owners” where the owner compensation replacement number plugged into the PPP loan amount formula is “PRE” SE health insurance and “PRE” retirement.)
Regarding “getting” the health insurance into the 8 weeks, I think you want to disburse that money during the eight weeks.
Thank you Steve.
To clarify, you would:
Pay at the total 2019 rate of $90,000 with no bonus
Show a line item for 2% shareholder medical for the two months of payments during the period and count it as wages to owner on the forgiveness application rather than as health insurance premiums which is a separate line on the application.
And I apologize for my reference to you saying that health insurance to owner was not allowed for forgiveness. Reading so much that I mixed you up with someone else.
OK, first, I think this should be mostly an “apology free” zone! 🙂 We are all trying to make sense of a pretty complicated, darn fluid situation. Ugh. Definitely, no apology to me necessary!
Second, I think in case like you describe, I’d probably try putting the health insurance on a separate “health insurance” line. In you case, including the health insurance with the wages works if the monthly insurance is less than $833. But not if insurance is, say, $1K a month… because you’ll exceed the $100K limit.
BTW if this is for you, you’ll sort it out one way or another because you get the accounting. But if this is for a client, I would probably caution client to be alert to possibility the SBA may not accept the payroll accounting a CPA or tax accounting would do. I.e., they may look at box 1 and not box 5 of the W-2.
I am a little confused.. I just read that non-cash compensation for S-Corp owners has to be excluded from forgiveness (such as health insurance and retirement benefits, etc,).
My interpretation is that they did this to make these rules similar to those for partnerships and self-employed individuals who were not eligible to include such non-cash compensation for themselves. If this is true. S-Corp owners could only be forgiven for 8/52 of Box 3 or 5 compensation from their 2019 W-2’s and not Box 1 (or Box 3 or 5 plus items such as health insurance). Are you interpreting this the same way? Thanks.
I don’t think that’s right. I think people are misreading the interim final rule for sole proprietors, Look at the following three examples. All provide $100K of payroll cost for owner:
Schedule C sole proprietor who makes $100K, uses $10K of that for health insurance and uses $20K for a SEP. (This person lives off the other $70K, say.)
Partner who makes $100K, uses $10K of that for health insurance and uses $20K for a SEP. (This person lives off the other $70K, say.)
S corp shareholder who gets $100K in wages and benefits broken down like this: $10K health insurance. $20K pension, $70K wages.
Steve, thanks again as always.. On PPP Schedule A, I don’t understand the section just below line 10:
“If you have not reduced the number of employees or the average paid hours of your employees between January 1, 2020 and the end of the covered period, check here and enter 1.0 on line 13.”
It seems to be some other kind of safe harbor other than the one I know about of comparing FTE’s of 6/15/20 and 2/15/20 as per the Schedule A worksheet.
Can you explain how we can figure out if we can check the box and enter 1.0 on line 13? I am totally confused about this.
I read that as a shortcut to signal, hey, didn’t reduce the FTEs… so no FTE adjustment.
Steve, doesn’t it actually allow a different calculation that potentially could create an additional chance for safe harbor. As a business with a largely flexible PT staff the payroll period containing Jan 1 is relatively slow and would create a lower baseline for a comparison than Feb 15th. The end date of this comparison is also different as its related to the covered period so in some cases the result of this calc vs the regular safe harbor calc would differ and potentially be preferential.
Am I reading too much into this?
I am not sure I absolutely understand what you’re saying. Can you point me to the part of the blog post that you’re asking about or to the bit of the application? Sorry.
After digging through this a little bit more, this seems extremely more favorable to the business owner than I would have expected. The ability to opt for .5 or 1.0 FTE will seemingly make it much easier to either get to the safe harbor or at least get comparable to pre=crisis numbers. It would appear that if someone just worked 5 hours at some point during the covered period that that would count as .5 FTE. Picking exactly 40 hours seemed a little strange as most full timers not on salary tend to be less than that to avoid OT issues, but that is more than made up for by the .5 FTE rule.
Also, I thought the salary or hourly reduction was going to come from a comparison of gross wages between the two periods and any difference (lower) would be a dollar for dollar reduction of the forgiveness amount (which would then be subject to the FTE percentage reduction)? Keeping everyone’s rate the same or higher is much less complicated and in the businesses’ favor generally I would think.
I also don’t see anything that would prevent giving raises to staff, even if it’s hazardous duty pay or whatnot, but that might be covered elsewhere outside the forgiveness part. All in all, this seems like a nice and fair outcome and shouldn’t be that difficult to document. Thanks a ton for all your help on this!
I think the FTE shortcut’s attractiveness will depend on the business. Someone with a bunch of quarter time employees who become eighth time employees (like a franchisee employing students?) might end up really benefiting.
Someone who has full-time workers shift to .8 FTEs will get killed.
Hi Steve:
Thanks for your ongoing and always timely insights!
Great that SBA is letting us get 4 payrolls in for the 8-week period, one way or another. But I’m still not sure if I saw the answer to the following question: can those of us on semi-monthly payrolls calculate the $100,000 annual salary forgiveness cap as 4/24ths of $100,000, i.e. $16,666.67, or must we nonetheless calculate it as 8/52nds of $100,000, i.e. $15,384.61?
Hey Ron, first a shout-out for the behind-the-scenes help you’ve provided related to some of the technical details of the forgiveness application blog post. I know you didn’t want credit for that. But no good deed goes unpunished! 🙂
Second, I think you do get limited to (in the example you point to) $15,384 or $15,385. That’s the arithmetic glitch that occurs because except for February in non-leap-years, every month is a 2-3 days longer than four weeks.
Also, a semi-monthly payroll schedule is longer that a bi-weekly payroll. So that will prevent someone from using the alternate covered period which is something to be aware of. I thought for a minute that might be part of this. Then realized, my morning brain was not fully caffeinated yet. Payroll cycles longer than bi-weekly only prevent someone from using the alternate covered period.
Looking for a little clarification on the Alternative Payroll start date. I have furloughed all of my employees since March and have not brought them back because we are still closed by the state. I currently use a two week pay cycle using Paychex that always begins on Saturday and ends on Friday. I received my funds on Tuesday, May 4, which was technically in the middle of week one of my two-week pay cycle, assuming I had maintained the same pay cycles throughout. So my question is when using the alternative start date would May 9 become my payroll start date, or would it be May 16 since that is technically the start date of my next two-week pay cycle?
That’s an interesting question. And to generalize, what I understand is your old payroll cycle got “stopped” when you furloughed everybody… and then when you got the PPP money, you started a new payroll cycle.
If that’s the case, I’d probably not use an alternate covered period. I would think you did not really have a regular payroll cycle you can point to to justify a later start date. Here’s the language I’m thinking about with the kit bit boldfaced:
There’s not an “administrative convenience” angle in your situation. And there’s not really an in force “payroll schedule” you can point to.
I see what you are saying since my payroll has stopped, but my cycle has not stopped with my payroll provider. I am still prompted to submit my payroll information using the same two week schedule. Therefore, I would actually need to create a new one time payroll to actually have it process for a different week.
Sorry, maybe I misunderstood. If you’re on the same cycle (maybe you just had some payroll runs where the amount was “zero”) you should still be able to use that schedule… And if that’s case, you can use an alternate covered period that starts the first date of the payroll period that starts after you get your PPP funds. As long, that is, as the payroll period is two weeks or less.
Does it make a
Difference what payroll report looks like when you show to bank for forgiveness
If deduction from paycheck included taxes and 401k are on the payroll Report so net pay is shown as well .
As long as gross amount is on the
Payroll report and gets reimbursed either via check or direct transfer from account where ppp money is held is that acceptable?
I’m not Stephen, but I am an employer with a PPP. I tentatively expect to show (for each employee): 1) Gross Salary 2) list of non-tax deductions (401K, medical, etc.) 3) tax withholdings. Item (1) together with item (2) will give you the value on Line 2 of the Form 941 (which needs to be submitted with your Forgiveness Application). Then, when you include item 3 you will get to Net Pay, which you might want to match with your bank statement to prove the money was actually paid.
I don’t think you net out elective deferrals. Which is what I think you’re suggesting. I know SBA and PPP lenders want to look at 941s. But I don’t think they know how to read them or use them. But we will see… we will see…
Steve,
Do you think sole-prop no employees, with this clarification that they can include rent costs, will be able to use the appropriately prorated home office safe harbor? I use the home office safe harbor (that square footage calculation rather than a portion of actual bills) for a deduction of 1200 per year. In my mind that is the ‘rent’ portion of the ppp so that I would then have a line item of 200 for rent. Utilities then would be the dedicated phone, etc. What do you think?
I don’t know. Sorry. I thought based before the forgiveness application that you could NOT. But now I wonder… Keep your fingers crossed.
Steve,
For an S-corp, my understanding is the “business owner” is a “shareholder-employee” and not an “owner-employee”. The terms inside the parentheses define business owner relevant to line 9 on schedule A and does not refer to a shareholder-employee, only an “owner-employees/self-employed individual/general partners”. I can’t find a definition that includes an s-corp as an owner-employee. Additionally the interim final rule linked does not reference s-corps.
So wouldn’t that line be to cover the other business entities and s-corp w-2 wages go in Table 1 or 2 depending on comp level?
Thanks
I’m thinking that owner-employees are shareholder-employees. Or vice versa.
Owners are employees only in one situation, I think. When the business operates as an S corp or C corp.
But I will also say this: The SBA has not shown itself to be very knowledgeable about how tax accounting and payroll accounting work. So maybe they’ve created some new definition. Yet I don’t think so.
Couple questions – is a wife who works for her husband’s single owner LLC considered an “owner-employee?” The wife had ONE paycheck in March before all this hit.
Where are you getting this info – relating to the section – “No 75% Threshold?” You indicate if the “bank bungled your PPP loan. Suppose they gave you $25,000 instead of $20,000. (Maybe they did this because they incorrectly treated your 1099 independent contractors as employees.)”
There are a few issues with our loan.
1) Yes, amounts paid to independent contractors were included as part of payroll. We were actually moving from paying people as “independent contractors” to employees in February, but then COVID hit and we shut down operations for 1.5 months. So, we never actually paid them through payroll. It was cash/check payments and taxes were paid/taken out. Starting in May, we hired all those “independent contractors” in addition to 2 other employees and started paying them through w2 wages. So, in essence, its like we had 2 employees (owner and owner’s wife) during the January to March 2020 time frame, and now we have 5 OFFICIAL employees.
2) They allowed us to consider our net profit (for LLC) during the time period of January 1-March 30, 2020 when applying for the loan. In 2019, we recorded a loss for the year. So, in essence, $15K of our loan is now not going to be considered in the forgiveness because we have to use 2019 wages for the owner. UGH! Is this going to be taken into consideration based on your “No 75% threshold” section?
Thank you for listening to my ranting – ha!
If I understand your question, when I work through the application, the 75% rule that some of us worried doesn’t show up. That’s why I say this. You may want to peek at the earlier blog post that explained why I worried about the 75% rule: Losing PPP Loan Forgiveness.
You may be okay. Work the numbers. E.g., even if you should have only gotten $20K and you actually got $25K, if you have a bunch of guys on your crew now earning W-2 wages, that should work.
Part of Mel B’s question is similar to mine, but I didn’t see an answer.
” is a wife who works for her husband’s single owner LLC considered an “owner-employee?”
Ours is a C corporation with just two employees. One is owner, and the other is his wife. She has been on the payroll as a part-time employee. I am concerned with Line 9 and wondering about her compensation, and where to list it. She is not listed on corporation documents, She only is listed as employee with a W-2.
Also, can she be given a bonus to help meet the forgiveness percentage. or is that frowned upon she is a relative? Thanks again for all of your help!
Thank you for this amazing content. Even reading through your posts & Q&A comments, I am a bit fuzzy one 1 thing still around owner/employer retirement contributions.
As an S-Corp owner & employee, my W-2 box 5 wages were ~$90k last year & I made a ~$20k employer retirement contribution. Wondering how to treat these 2 amounts in payroll during my 8 weeks covered period to maximize forgiveness. Does option A or B sound like the more correct approach given your reading of the rules here?
Options:
A) Assume both are combined in the $100k limit = Pay myself the max 15,384 over the 8 weeks & make 0 employer contributions = 15,384 total forgiveness possible
B) Assume employer doesn’t count towards the $100k, but may be forgiven entirely? Pay myself (90/52)*8 = 13846 AND make a 25% employer retirement contribution 3461 = 17,307 total forgiven possible
So I think you can pay owner 8/52nd of $90K he or she made in 2019… and that’ll count as payroll.
And then it sounds like the employer made a (roughly) 22% employer contribution. And so I think you’d be okay making a similar employer contribution in covered period. E.., 22% of 8/52nds of $90K.
FYI I’m aware that some tax practitioners think that if you made the $20K 2019 contribution inside the 2020 covered period that you can get forgiveness for that, too, maybe… but I wouldn’t count on that. That seems wrong.
BTW, just to make this point, the $100K limit applies to wages but not to retirement or health insurance.
Wait a second, I’m still confused.
“Any amounts paid to owners”
Is this saying owner’s distributions are covered? I thought only payroll was covered?
I’m sole owner/employee of my LLC (S-Corp). I pay myself $65k in payroll a year and take the remaining $100k in distributions.
I don’t think it includes distributions pay to shareholders of an S corporation. Only wages.
So I guess S-corp owner-employees can only get 8/52 of their 2019 W-2 box 3? People all over this country are getting bonuses and hazard pay, and we can’t even repay what we haven’t paid ourselves during this, while we were making sure our employees still got paid. I can’t believe that is how they figured it for owners, with no adjustment or multiplier at all. Even people on unemployment got an extra $600 a week!
So the number for an S corp shareholder-employee is lesser of $1923 a week… or 8/52nds of (I think) box 5 on the W-2. And then you’d need to remember to add in the self-employed health insurance which would be extra…
Borrower is an S-corp which began in July of 2019. Owner did not pay themselves anything for the first 6 months but then began in January of 2020. Does this mean zero of their current salary would count towards forgiveness? This doesn’t make sense but I fear it may be true. Any thoughts?
Well, yes, sorry. I’m afraid so if you look just at the loan forgiveness application’s instructions…
Hey Steve – Thank you for everything you do! These articles are great.
I read all the comments above and still not 100% clear on this matter.
Do S-corp shareholders who received W2 income (not K1 dist) in 2019, list their PPP 2020 payroll under Line 1? Or does it still fall under line 9, with owner compensation?
The reason I ask is because the original loan value I received when applying was based on 2019 payroll which included owner W2 payroll as well. But now, Line 9 doesn’t get to count towards the FTE computed on Line 11, basically resulting in a situation in which if we pay ourselves (owners) we will end up not having a fully forgivable loan, and have to not only repay back the monies, but also still have to pay the payroll tax bill to IRS/EDD essentially now significantly coming out of pocket for having taken the loan.
The worst part is that I am already 2 weeks of my 8 out, and I have no idea how to properly distribute the money to ensure forgiveness, losing time and the ability to end up satisfying the FTE requirements.
Any input would be greatly appreciated!
It’s really hard to point to line numbers and ask questions. Sorry. But here’s the big picture answer. Your wages count as payroll costs (up to max of either $100K or 2019 compensation)… and you get credit for the owner compensation replacement you pay out during the covered period.
Further, having a shareholder-employee on the payroll doesn’t goof up your FTEs. Or scramble the FTE adjustments.
I think you want to work your way through the application… and then make sure your results make sense. (And mesh with above.)
Omer I think I understand your question regarding whether “owner/employee” is classified as an FTE on Line 11 (during chosen reference period). I had the same concerns- if we are classified as FTE on Line 11 but not on Line 12, then our forgiveness is compromised. HOWEVER, I read and reread the application 100 times trying to find clarification and I think I did. On page 5: Line 11 instructions, 2nd to last sentence states “For each employee, follow the same method that was used to calculate Average FTE on the PPP Schedule A Worksheet.” I took that to mean, since we are excluded from Table 1 and 2 for Line 12, by using the same method, we are also excluded for Line 11.
I hope I am correct in this! Anyone else have thoughts?
I agree with above. Another way to say something: I don’t think you get penalized if you fire yourself.
Steve,
Adding my thanks to what you do — your site has been immensely helpful!
I am set up as a single person S corp. My questions pertain to PPP Schedule A of the loan forgiveness application. What are your thoughts on the below?
Line 6 (health insurance): I cover my spouse & myself under an Obamacare plan. Are the monthly premiums (for the 8 weeks) permissible here?
Line 7 (employer contributions to retirement plans) – I make an employer 401k contribution every year. Does this amount need to be pro-rated for the 8 weeks (ie, the annual amount divided by 52 weeks x 8), or can it be a lump sum (a portion of the annual total, say 1/2 or 1/3)? What about bonuses?
I think you get to treat the health insurance as health insurance… so as another payroll cost.
I also think you can (based on what we see now) pay a retirement contribution based on the wages earned in the eight weeks. For example, just to make the math easy, say you have a safe harbor 401(k) plan that pays a 4% match. And a shareholder-employee that earns $1K a week. I think you can throw in another $40 a week as retirement contribution, calculated as 4% of the $1,000 per week.
You would not add the employee contribution. That will already be “in” the numbers. And I think you ought not count on doing something enormous. Though you hear of people planning to do that.
Many, many thanks for clarifying, Steve.
I also received a $1,000 EIDL grant advance. Would the advance be deducted from the PPP loan forgiveness amount? Even if the EIDL advance was used for payroll outside the 8 week period, or “other obligations that cannot be
met due to revenue losses”?
WOW! Thank you for all of your information on this topic. I was pulling my hair out filling out my forgiveness application today, and these posts have finally given me some answers.
My first question is to see if I read your overview correctly regarding the 75% issue… We are a K1 LLC with 3 owners that used the $100k max per person for our loan application (no employees, we pay ourselves a monthly owner distribution that in 2019 was higher than the $100k max). Our loan was therefore approved for $62.500 ($300k divided by 12 x’s 2.5). I calculated that 75% of that amount would be $46,875, but it looks like the most we can actually pay in associated compensation to owners is less than that (taking that $100k per person and divide it by 52 and x’s 8, for a max for each of us of $15,385, which only equals a total of $41,655). Although only a $700 difference, I was reading that as not reaching the threshold needed and we would get denied on the forgiveness. Your explanation makes me think we might actually get forgiven in full *(with returning the remaining unspent)?
My second question is with compensation to owners – can we go over the $15,385 per person and max out our loan we were given between the three of us? I read it as no, but before I finish this forgiveness application I thought I would double check. We will have to give back a chunk of the unused portion as we only have the three of us and minimal rent and utility costs.
Thank you!
I think that’s right. I worried before the loan forgiveness application you might not get forgiveness based on earlier guidance. But the loan application doesn’t make you do this. So, good news.
I think what you’re really asking is whether you can simply keep the money you can’t get forgiveness for… and treat it as a loan. The answer there is yes.
We have an employee who makes $85,000 a year. So for the 8 week period we can receive forgiveness for $13,076 for her salary. Since she is now working from home and manages 7 staff, our executive director would like to give her a $3,500 bonus. Is this allowed since she is under the $100,000 threshold but over the $15,385 that is allowed for staff whose salary is over $100,000.
Also, can we apply amounts paid to staff for our Health Reimbursement Arrangement (HRA)?
Thank you
I am the president- owner of a C-Corp. I did not pay myself for most of 2019 as a new business, when I did start to pay myself as an employee it was at a pace of $100,000 plus but was around $52,000 for the total 2019. Am I still mandated to use this $52,000 total for my personal forgiveness as the employee/owner?
Yes. Sorry.
I don’t understand this about Chris’s post. He said: “we pay ourselves a monthly owner distribution that in 2019 was higher than the $100k max”, but multiple sources I’ve read show payroll salary, not distributions (at least w/an S-corp), is what counts toward the loan calculations.
Sam you are correct. Salaries, not distributions, matter.
I have two questions.
1. The tables in the Section A worksheet excludes owner employees, and Line 9 of Schedule A specifically includes owner employees. Am I correct in assuming that the owner employees in these instances are only for S Corp owner employees? I have a C Corp client whose corporation is owned by him and his spouse, both of whom are paid salaries. If they are excluded in the tables, then they will be excluded for FTE purposes in computing the FTE reduction. Doesn’t make sense.
2, The first page of the Application asks for “Employees at Time of Loan Application” and Employees at Time of Forgiveness Application”. No reference to full time or part time or FTE employees. I have a client who had 3 full time employees and 31 part time employees at time of loan application. He listed 34 employees on his application. At that time there was no definition of FTE employee. Should I follow this procedure on both places of the Forgiveness Application, i.e., just count heads with no regard to full time and part time employees? Or should I state FTE employees for these lines?
And many thanks for your blogs and answers to all the questions. I really appreciate your time and effort to give clarification to everything.
I read the application to mean that S corporation shareholder-employees are “owner-employees.” So that means their payroll goes onto line 9. I need to acknowledge though that some tax practitioners make a good argument that, referencing the Internal Revenue Code, they should NOT be included there. (My rebuttal: I don’t think we rely on IRC instead of a plain language reading of the SBA form instructions. Also, I think the first certification/representation borrower makes on page 4 hints at only two categories: owner-employee… or self-employed individual/partner.)
Regarding the FTE “inputs” here I think you use your real numbers and the fuller, updated guidance. I.e., if you put 31 on the PPP loan application but now you realize the right FTE number was maybe 18 or whatever, work with that number.
Steve,
I guess the confusion for C/S Corp is from owner-employee.
Who is to say that SBA didn’t directly lift that from the IRC since the specifically mentioned in instructions for Box 9 – (85 FR 21747, 21749) that Only pertains to Sch C filers.
I myself am a Single-owner, single-employee S-Corp that paid W-2 wages and put 25% of Salary in 401k as Company Contribution.
Yeah, so I don’t think we use the IRC as a filter for the SBA’s regulatory guidance. Rather, I think we use common language definitions unless SBA creates/supplies something else. So, owner-employees means, to me, owners who are employees. So, W-2 employees. So, only S corp and C corp owners.
Regarding the SEP, I think the employer match (but not the elective deferral) that your S corp pays for “N” the employee during the eight week counts. E.g., if you happen to pay “N”‘s 2019 profit share match of, say, 25% during the eight weeks in 2020? I think that counts. (Note: I would not have said this before seeing the interim final rule that can out late Friday May 22.)
Technically isn’t the “borrower” on the page 4 certification the Corporation?
Thank you for this blog!
Yes, I think you’re right.
A utility bill from a prior month but payment made during the 8 week period. Fair game for PPP forgiveness or no? It will show up as a normal expense out of the bank account within the 8 week period along with payroll etc
I think that works. It’s paid during the eight weeks.
I am s corp owner who requested 2.5/12 2019 earnings and received a PPP loan in that amount. I have mortgage interest and rent to pay in addition.
I am very confused!
From the loan forgiveness document:
The dollar amount for which forgiveness is requested:
• was used to pay costs that are eligible for forgiveness (payroll costs to retain employees; business mortgage interest payments; business rent or lease payments; or business utility payments);
• includes all applicable reductions due to decreases in the number of full-time equivalent employees and salary/hourly wage reductions;
• does not include nonpayroll costs in excess of 25% of the amount requested; AND
• does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.
So is my loan forgiveness up to only 2 months of 2019 wages only???? and Does the AND mean 2 months of 2019 wages + any qualified expenses?
Also, my health insurance comes from a part-time college teaching. I pay the whole amount myself without any school contribution. Can I include this amount as part of my compensation or expenses????
I am a single owner S Corp.
Sincerely,
Very Confused in Chicago
You want to work through the application.
It’s not that long to march through the form. BTW, you’re right that you get the lesser of either 8/52nds of your 2019 pay… or $15,385. But you’ll get rent and interest and utilities too…
I have ownership in two companies that received PPP funding; both are S corporations. The first business, I own 33 1/3%; the second 100%. Business #1 was incorporated in 2019, but we did not open our doors until February 14, 2020, at which time we had 4 part-time employees. We had NO payroll in 2019. The business is family owned and none of the owners were on payroll prior to the close of our business in March. We plan to bring back 3 employees (the 4th quit prior to Covid-19). We were told by our CPA that owners cannot be paid because we are related. Since none of us were on the payroll prior to the PPP funding, can owners be added to the payroll? We had planned on adding my husband and daughter (owners) to the payroll? What are the restrictions on this? Also, if we do not get forgiveness for the grant because we cannot use 75% of the loan for payroll, can the money that will then be turned into a loan be used for other expenses?
The next question is about a second business (S-Corp) that is wholly owned by me. I was on payroll prior to the shutdown on 3/16. I kept my two employees working, but the next three payrolls (4/1, 4/15, 5/1) I did not pay myself. I know that I cannot backpay myself using the PPP funds, but can I bump my pay up to adjust for the lost wages? Or can I file for unemployment for the amount of time I wasn’t paid or working.
I think a problem for business #1 is that owner payroll cost can’t exceed 2019 compensation. If that was zero, the owner payroll you get forgiveness for equals zero. (BTW I think you could still use the money for paying owners… but you don’t get forgivenness.)
Regarding business #2 I think you need to pay yourself during the eight week covered period at least 8/52nds of what the business paid you in 2019. You can’t exceed eight weeks of your 2019 compensation.
Thanks again for all of the help and guidance you’ve provided during this difficult time.
We’re a Schedule C sole proprietorship, small retail store. We’ve been shuttered since mid-March, with no employees working, including owner. All are collecting unemployment, and will continue to do so until we are allowed to re-open, hopefully around June 1st, though even this date remains quite uncertain at this point.
When allowed, we will open with owner, and perhaps one employee working, doing curbside delivery from inventory without actually opening the store to customers. There is no way we could possibly put all of our employees back to work until the store is completely re-opened and we resume our normal business schedule.
Our eight week time frame concludes on June 19th, which would give us only one pay period for which forgiveness might be possible. Reading the very complicated forgiveness application, and taking into account the EIDL advance received, it makes no sense for us to even bother asking for forgiveness of any part of the loan.
Is there any reason we can’t just ignore forgiveness and use the funds to assist with coming payroll and other expenses as we work to get back on our feet, making repayment according to the terms originally agreed to for the unforgiven portion of the loan?
Sure, you can ignore the forgiveness thing… But what you might do is work through the form and see if you can get some forgiveness.
Also, keep thing in mind. It seems possible that Congress could change the 8 weeks to 24 weeks. And would open up your “spending window.”
Good luck! We need small businesses to make it through the storm!
I’m an S-Corp owner, but I thought there was some specific guidance that Schedule C folks receiving PPP should not also go for unemployment? I can’t find where I read it quickly but thought it was in the kind of definition type document that a lot of other guidance ties back to. Just want to make sure this poster considers that (maybe I’m misreading it) but they should get forgiveness on 8/52 unless I’m way off.
I think that’d be an unemployment office question. BTW, the only PPP statute issue that comes into play here is the requirement that says you can’t do employee retention credits together with a PPP loan. More info here: The 50 Percent Section 2301 Employee Retention Credit blog post.
Steve – thanks for the insights. A couple of things.
If Congress does end up extending the time period to use the loan from 8 weeks to a number that is over 90 days (e.g. 13 weeks), would you suggest just keeping payroll process/cadence as was in place in Q1?
As shareholder-employee of S-corp (one owner), I pay myself at the end of each quarter. So if I received loan on 4/17 but next scheduled payroll is 6/30 (over 8 weeks) then should I just do nothing and apply for loan forgiveness after 6/30 payroll is processed?
Also, even if the 8 weeks is not extended, doesn’t the language “Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.” suggest I don’t have to change my payroll cadence in the first place?
Finally, I’m assisting a friend’s small business that has 2 partners filing a 1065 with no salaries and wage expense on line 9 in 2019. Only distributions in Sch K box 19 (A). They have a small amount in Box 14 A on the K-1, which guidance says would be eligible payroll costs. However, they have a huge amount in Box 14 C (non-farm) which guidance suggests would not be eligible. Presumably they paid self-employment tax on that 14 C amount on their 1040. Should they consider amending 2019 to move 14 C to 14 A?
You’re right. You can do this. I tried to polish up the language so this is clearer.
Yes.
P.S. I’m a little unclear about your friend’s business. But I think they just don’t have much self-employment earnings to “count” as payroll costs. So that’d be just what shows in box 14A
S corp here with 4 owner/employees (and a handful of other FTEs). We are instructed to enter our pay on line 9 but there is no place to include us in the FTE count. Should we then also exclude ourselves from the FTE count for our election period? If not, we’ll show a reduction of 4 FTEs which will drastically reduce our forgiveness.
I’m reading the form instructions to say you exclude owners from the FTE reduction calculation.
So your FTE calculations are based on those “handful of other FTEs”
Great resource – Thank you
I believe there is a formula error in Salary/Hourly Wage Reduction: Step 3.d. – which reads:
Multiply the amount entered in 3.b. by the amount entered in 3.c. ______________. Multiply this amount by 8: ______________. Enter this value in the column above box 3 for that employee.
If I follow the instructions I get a figure of 4.7 million… if I calculate the number assuming what I think was intended… I get a number closer to 3 thousand…
I wondered about that also. What formula did you use?
Now I know why the method to determine FTE from PTE, is called SIMPLIFIED: It’s insane!
If FTE are “40 or more hours a week” and anyone having “fewer” hours are PTE, then that means someone with 39.75 hours is considered part time? Even the federal government has better guidelines, 30 hrs. being the cut, and each individual state has their own rules, (OK is 32) The BOL Statistics says 35 and less are PTE. From what I’ve read, it seems the decision is ultimately left up to individual businesses. Our business employs roughly 150 people, and we have not shut down, have not laid off any workers, albeit some have quit so the Government can pay them ($600 a week unemployment)! And yet we’re penalized for some cut backs which include NO overtime, and max of 32 hours for some employees. If the simplified formula has to be followed, this would take our workforce number down approximately 35%, and we get dinged on the PPP Forgiveness Application. Sorry for ranting…..
You don’t need to use the simplified formula. You can do a full-blown, real FTE calculation. You’ll probably want to. And then pick the method that gives you the better outcome. Also, you may be able to wiggle out of the FTE adjustment if you’ve got folks who refuse to come back to work.
I also wonder about the “fired for cause” language in the application instructions… Does that suggest if you terminate someone for, say, showing up intoxicated before their shift to drive a delivery truck, that you maybe get a mulligan?
Thanks Steve! I appreciate the clarification.
On the fired for cause, our HR Department is documenting ever case where an employee just walked off, or failed a drug test, or just never came back, so I feel somewhat comfortable those reductions won’t count against me. Stay Tuned!!
Thank you so much for the info. I have been reading a lot of info, and yours is clear. I have read through all of the comments and haven’t seen this question yet.
We only have one full time employee and one part time employee. We are trying to receive full forgiveness for the loan. We plan to pay the full time employee over the covered period, and then add the part time employee by June 30. I believe that would grant us FTE safe harbor.
But what about salary wage reduction exemption? If the PT employee is only paid once, it will be reduced. Does it still qualify for safe harbor? For example, on the PPP Schedule A Worksheet, Step 2, Line C, how is the average annual salary calculated for June 30, 2020? It is a calculation for one day and not a period. Thanks!
You won’t get hit with the FTE adjustment if you rehire the part-timer by June. And if you pay the part-timer the same salary (so you used to pay them $400 a week and then starting on, say, June 28, you rehire and pay then $400 a week), you should be okay.
The problem will be the lack of payroll costs to “fill up” the eight weeks.
Example: Say your full-time person makes $1600 a week working full time. Your pre-Covid-19 weekly payroll therefore ran $2,000 week. In this scenario, you could have gotten a loan equal to something like $21,666 just on their wages. And more if you provide health insurance or retirement benefits or pay state payroll taxes.
Now say you run through the eight weeks and pay the $1600 a week for the full eight weeks. And then $80 a day to the part=timer for June 28, June 29 and June 30. In this case, your total payroll might equal 8 weeks times $1600/week plus 3 days times $80/day, or $13,040. So that becomes the payroll cost you get forgiveness for.
And then the payroll costs needs to equal at least 75% of the forgiveness, which means with $13,040, your maximum forgiveness equals $17,387. You calculate this number by dividing $13,040 by .75. This means you can get forgiveness for up to another $4347 of rent, interest and utilities.
And so there’s the situation… you got a PPP loan equal to $21,666. But your max forgiveness equals $17,387.
You will pay back the unforgiven amount over two years at a 1% interest rate.
Thank you for all of the details; I appreciate your time and effort. That is very helpful. And yes, I do realize that we need to be at the 75% mark.
I was getting conflicting info regarding rehiring the part- time employee by the June 30 deadline. One person ( a CPA) stated that the amount paid to the rehired employee the last week of June had to be divided by 8 weeks (covered period) to get the annual salary. It is in their worksheet that way. That is why I gave you
the specific line. That would not have worked well for us at all, and it would definitely put us in a Salary Wage reduction. Your interpretation is the way I read it. I just don’t know how our lender will interpret it! It is not that much money, but I want to get it all forgiven if at all possible. Since we are not open, the part-time employee is collecting unemployment, and I do not want him to lose that just to help us. It is hard to justify paying someone when no work and we have little cash. Thanks again for your help and quick response.
If you are an S-Corp be careful when claiming the Forgiveness Portion as you will be creating phantom tax income and will owe estimates personally by July 15th. If you are in a high tax bracket maybe even becuase your income combined with your spouse puts you there you could potentially owe 37% of the forgiven portion less any real losses for the year. I even missed this when I applied for the loan as we were getting client after client stall on projects and new business came to a stand still. Not knowing what the second half of the year will bring is scary knowing I could owe 30k in estimates by July 15th! Do you think they might waive the penalties for this phantom income or should I just let the cash go on July 15th???
The reason for this is the payroll costs etc that is forgiven is not deductable by the S-Corp and in our case we have all highly compensated consultants so it is the bulk of our expense monthlly.
I’m not really seeing this as phantom income. It is income. (They’ve created a very confusing bookkeeping approach, unfortunately… gosh it would have been easier to just treat the forgiveness as cancellation of debt income…)
Also, if you use the money entirely for non-owner-employees, it should wash… I.e., you have $100K in PPP funding and then spend that $100K on payroll, no impact.
The case where this has an impact? When the payroll goes to owners. In that case, the payroll counts as taxable income. But it is income. You have actually “gotten” the money.
One other comment: Congress may change this… We should all keep our eyes open.
Stephen,
The whole amount that is forgiven, becomes phantom taxable income not just employee owners the way I see it. You can’t deduct any of the forgiven amount for tax purposes on the S-Corp. So if you have a small loss and $150k is forgiven, you have to remove those payroll expenses for tax purposes and that creates a profit which flows to s-corp owners.
We have an LLC law firm taxed as a partnership with four partners and five employees. Our firm pays one premium per month for group health coverage for all employees and partners. Is the portion of the premium for the partners eligible for forgiveness? Thank you for taking the time to answer all these questions.
No it’s not. But you didn’t get hosed. E.g., both of scenarios below give same payroll cost…
A partner makes $1500 a week and uses $150 of that for health insurance. She “creates” $1500 a week in payroll costs.
An employee makes $1350 a week and gets in effect another $150 a week in health insurance. He “creates” $1500 a week in payroll costs.
The point above–and something that the interim final rule released at the start of the holiday weekend points to: The health insurance for a partner is already “in” the net earnings from self-employment number the partnership plugs into the PPP loan amount formula.
I am a self proprietor Personal Trainer. I work with older adults and train them at their homes. I earned about 36000 last year but after business deductions for conferences, travel to conferences, memberships, certifications, mileage, etc. My net income was much less. That is what the ppp went on from my schedule c.
I’ve been receiving unemployment for the last 3 weeks, which is more than my supposed ppp payroll for the same amount of time.
I know I can’t claim both but can I return the ppp and keep filing for unemployment?
If I can’t return the ppp will I be able to get unemployment again in 8 weeks if I’m still unable to work with my at risk clients?
I live in Tn.
Thank you
Michael
I don’t know the answer to your question. But a couple-three thoughts:
1. You may want to try restarting your business (using the PPP loan money) just so you can get a permanent income thing in place again.
2. You really need to ask your state unemployment office about how your unemployment benefits connect and affect your PPP payroll.
3. Keep your eyes open for changes in the PPP rules. If they change the 8 weeks to 24 weeks, you may be able to spend a day a week on your business for next few months, keep your name in front of your customers etc., and then take unemployment for the other four days a week. Something like that may be optimal.
A theme through all of above? Unemployment is a short-term remedy…
I would like clarification for seasonal businesses and loan forgiveness for my scorp.
For the loan amount calculation, I used W2 income from March 1st-June 3oth 2019 as per the instructions. $30k total payroll for the year, but all in a 3 month span from April 1st through June 3oth, There was no other income or payroll for the rest of the year. Average payroll was $10k/mth for a loan amount of $25k.
I thought for forgiveness, I would not be limited to 8/52 of 2019 income or $4,615($30k/12×8) That would not make sense as that would differ from calculations used for the loan amount for seasonal businesses.
From FAQ #14
“In general, borrowers can calculate their aggregate payroll costs using data
either from the previous 12 months or from calendar year 2019. For seasonal businesses,
the applicant may use average monthly payroll for the period between February 15, 2019,
or March 1, 2019, and June 30, 2019.”
thoughts?
edit…8/52 on $30k would be $30k/52×8=$4,615.
I don’t think many have a handle on seasonal business and forgiveness as I have asked on many forums without a clear answer. If the amount of the loan is based on 12 weeks of income in 2019, how can they limit the forgiveness to 8/52? Doesn’t makes sense. I received a loan of $25k from my bank based on $30k of W2 income(scorp) from April 1st-June 30th. My forgiveness can’t possibly be just 8/52 from 2019, or $4,615.
Thank you for helping us small business owners during this very difficult time.
I own an S corp and pay myself $65,000 as an employee through payroll with my other employees. I take distributions which with my W2 income is above $100,000 annually.
I’ve been working additional hours during the pandemic to keep my business afloat and therefore my W2 compensation has increased. Am I able to have that additional compensation forgiven up to $100,000 annualized? Thank you again.
No, sorry. Your owner-employee payroll forgiveness can’t exceed 8/52nds of what you show on your 2019 W-2.
Are you saying that line 9 owner-employee includes C corporations? When I have read that previously, I always assumed that it was referring to those with Schedule C’s. Since I am a bookkeeper for a C corporation, I assumed that all are treated as employees since the corporation is taxed on it’s own. Thanks for taking the time to help all of us!
This is a great resource! We are an S Corporation with two owners and nine employees. Based on our wages so far into our 8 week period, we would only be eligible to have about 50% of our PPP loan forgiven. Other business owner friends have said their accountants have recommended paying themselves more to have the loan forgiven. To me, it seems odd to do this because you are paying incomes taxes on both the employer and employee side, rather than just paying the 1% loan interest. But I don’t see anyone discussing this, only ways to make sure all of the loan is forgiven. What are your thoughts?
The advice from the other accountants probably was given before the SBA limited the forgiveness to 8/52nds of the 2019 compensation. Now, after we have the loan forgiveness application and interim final rule on forgiveness, we all know about the limit.
BTW, there are ways to nudge up the payroll costs: This new blog post explains: Maximize PPP Forgiveness.
I am still trying to figure out if employer benefits contributions max is 100k in salary For ppp . If you paid employer 120k in 2019 and did 25 % percent pension. Contributions shouldn’t you use the same salary for pension for ppp loan forgiveness
OK, so that’s an interesting question. I don’t think any rule (or at least that I’ve read) makes the connection you point out. Probably it’s a crack in the rules…
Is there any clarity on the following 2 issues (sole proprietor with employees, schedule C):
1. We will be paying total SEP IRA payments to our employees within the covered period (approximately $10K each, total salary with medical plus SEP under 100K). Do we have to calculate forgivable amount at 8/52 or will it be possible to use the whole amount?
2. We contribute to employee’s HSA plans. Is HSA contribution considered part of Medical plan expense?
Thank you again for your guidance, Steve.
Thanks Steve for your very helpful articles and blogs. S-corp – bottom line, I guess if the owner only takes draws, he is not able to have anything forgiven? He did start payroll with a payroll processing company in late April 2020 – he didn’t know how to do this before and his CPA didn’t provide the service. I guess he still can’t apply his payroll that he is now incurring against the PPP loan he received?
Yeah, so I think in that situation, he’s out of luck. No payroll, no forgiveness.
Looking at the “PPP Loan Forgiveness Application” form’s last line (line 11) it states the “forgiveness Amount (enter the smallest of lines 8, 9 and 10).”
So the list should be the modified total (line 8), PPP Loan amount (line 9) and the 75% payroll calculation (line 10).
The wording on Line 11 for forgiveness seems to be in error as would not the amount forgiven be the smaller of line 8 or 9 as long as line 10 has a value that is equal or greater than 75% of line 1? I can’t clearly see how this math works in my mind or how the form instructs on that it would not include the “lines 2,3,4” in the calculation for forgiveness if it’s limited to the 75% amount calculated and shown on line 10; which would then show forgiveness of only 75% of line 1.
I’m re-reading this and I’m not sure if my question is clearly worded but the line 11 instructions goes against what we all expected.
Steve:
Thank you for your great work!
I am owner of an S Corp with wife as an employee. I have learned that an owner-employee cannot raise his own wage levels beyond 2019 figures to reach 75% payroll. However, is it permissible to increase my wife’s salary as an employee to do so?
Health Insurance Premiums/Retirement Funds:
Again as of today I believe health insurance premiums and retirement/pension account contributions are not permitted to be forgiven under payroll protection if self employed. As I am an owner-employee of an S-Corp with health insurance premiums paid for my family by the S Corp am I able to have these costs forgiven if paid for with Payroll Protection funds?
As for an IRA or Sepp Contribution do not know whether as an S Corp Owner-Employee these costs can be forgiven. If not permissible, can my S Corp make an IRA contribution for my wife-employee as a forgivable use of Payroll Protection funding. Basically if needed, didn’t know if a spouse of an owner-employee can be considered a pure employee so as to allow for such contributions to be forgiven.
Thank you!
I don’t think you should be able to raise your spouse’s salary to get around the 2019 limit. I can’t point you to a sentence or paragraph in some guidance. But that would make sense (because otherwise paying a spouse would be SUCH an easy way to circumvent the rules.)
As far as the pension thing, in the blog post about the Maximizing PPP Forgiveness Interim Final Rule, another reader posted a comment about Ed Zollars reading of the IFR that says retirement and health insurance for owner-employees gets treated the same way as payroll compensation. I’m not reading the IFR that way. But I acknowledge that reading is very reasonable.
As an S-Corp owner-employee my wife as an employee reported a salary of 15k last year. If I were to pay my wife an IRA contribution during the 8 week period of say 5k in addition to the pro rated 15k weekly salary could I (a) count that IRA contribution toward payroll expenditures to get to the 75% requirement not limited by the 15k reported wages? or if not considered a payroll expense (b) still have that contribution forgivable under the 25 % non payroll expenses? Thanks again!
Stephen:
Piggybacking off of a previous post, I am an S Corp Owner-employee. My husband is an employee. My W-2 shows total health insurance premiums paid under Box 14 of the W-2 for both of us under our family plan. His W-2 shows nothing in Box 14 of the W-2. We have our family health insurance premiums paid out of company account and I made sepp contribution last year, he did not make an ira contribution.
Under this scenario can 2 months of these S Corp health premiums be paid with Payroll Protection funds and be forgivable? Would this be considered payroll? Can the company make an ira contribution to my husband that will be forgiven despite no 2019 contribution? If so would this contribution be considered payroll? Thank you!
So I think you can include the health insurance over the two months. But I will note that some people read the IFR this blog post discusses to say you can’t. (I think it’s fair to say that folks who dig into the details of this issue don’t think guidance is that clear… It’s poorly written and maybe poorly reasoned out by the SBA.)
Regarding an IRA deduction for your spouse, I don’t think that works. It would need to be an employer retirement contribution. A SEP-IRA probably works. But not an IRA.
Thank you Stephen:
If my eight week salary compensation shows approx. 12k, and I make a Sepp contribution as an owner-employee of 5k would that contribution be forgivable only up to cap of $15, 384 ($ 3,384) or in addition to the $15,384 cap and considered a non payroll 25% forgivable expense?
I’m interested in applying for a PPP loan, but was denied because I am the single-owner of a S-Corp with no employees (only 1099 contractors). I didn’t realize that I should have been paying myself a salary and have only been taking distributions to pay myself.
I read your post about last minute S-corp payroll hacks and am wondering would it be possible to re-categorize my distributions as income? Aside from making me eligible for the PPP loan, I’m thinking this could help avoid auditing issues down the line. Naturally, I’m looking for a new accountant now and will seek their advice but I’m just wondering if this is a potential option for me (if so, I’d need to act ASAP).
You might be able to do that. The approach you’d want to take? First, do some payroll for the last quarter of 2019. That’ll give you 2019 payroll to plug into the formula. (Probably the more payroll the better?)
Then use that payroll–which you should have done all along–to apply for a PPP loan. (There’s still time and money!). And see if you can get the loan.
Example: You pay Lauren the employee $24,000 for the last quarter of 2019. Maybe you even try to add some health insurance? To get the $24K to $30K? Then you calculate monthly payroll, multiply by 2.5, and voila, that’s your payroll. (With $30K for 2019, you’d get a $6250 PPP loan.
Maybe this isn’t worth it… but it’s something to think about… Good luck
I’ve heard some rumors about the PPP program being extended to include more than 8 weeks? Is there any truth in this?
Hi Steve:
We are a union shop. We applied for PPP based on W-2’s and 941’s and did not consider all the payments we make to the union for all their different funds. ie legal, vacation,. health, lecit etc. there is like 10 different funds all calculated based on hours worked. For the loan forgiveness, can the amounts paid to the union be considered as other payroll costs? Or only the vacation and health funds?
Steve, thank you for your continuing efforts. I am confused on one key point for my business. 2 of 3 of our partners earned well over $100k in 2019. Thus, these 2 partners are capped at $15385 or are they capped at $15885 multiplied by .9235 which would result in a cap of $14208?
I think they’re capped at $15385. Here’s relevant blurb we should all be looking at:
So what I’m thinking (but see if you agree)… I’m thinking that $15.385 is the amount leftover after all the adjustments. E.g. if Sec 179, unreimbursed partnership expenses, etc. all equal zero. I think you need $15.385/.9235 or $16,659 showing in box… so .9235 of that equals $15,385. I.e., I’m thinking they’re backing out a chunk for “half” of the SE taxes. In the usual crude fashion used on tax returns.
Very interested if others want to argue for a different treatment though…