Okay, let’s get straight to the point: You want to explore a paycheck protection program loan if your small business has been or will be beat up by the COVID-19 crisis.
In this blog post, therefore, I’m going to give you a really quick overview. I hope you can read this in two to three minutes. That’ll give you the nudge to explore further this option.
Then, at the end of the post, I describe how you start the loan application process. Which you want to begin immediately. Like after you finish reading this…
How a Paycheck Protection Program Loan Works
The paycheck protection program (or PPP) loan provides you with money to pay employee payroll and related costs, your rent, your utilities and a handful of other business expenses over two months, or eight weeks.
The loan amount? Basically 2.5 times the average monthly payroll costs your small business incurs over the twelve months that precede you getting the loan.
Example: You pay $10,000 a month on average for wages, health insurance, and state payroll taxes. You therefore qualify potentially for a $25,000 loan.
Example: You pay $1,000,000 a month on average for wages, health insurance, and state payroll taxes. You therefore potentially qualify for a $2,500,000 loan.
Payroll costs include the business income earned by a sole proprietor, as shown on the business owner’s 2019 individual tax return on Schedule C.
Example: A sole proprietorship generates $48,000 for its owner, and that amount appears on the business owner’s tax return on Schedule C. The $48,000 counts as a payroll cost, and $4,000 counts as the average monthly payroll cost.
Two other points to mention here, too. First, though the statute doesn’t reference partnerships, the Treasury’s guidance on PPP loans explicitly indicates partnerships, too, get these loans. Partnerships treat self-employment earnings as a legitimate “payroll cost,” too (See here for the Treasury document that provides this guidance.)
Further, while the actual law does say you look at the preceding 12 months of payroll, the Treasury’s guidance says you’ll typically just look back at 2019’s payroll. (That’ll be convenient since tax forms and payroll reports you’ve already prepared will become the documentation you need for the loan application process.)
Loan Limitations and Restrictions
The law limits the loan amount to firms with fewer than 500 employees (for all practical purposes).
The maximum loan amount equals $10,000,000.
Further, you can only count payroll costs up to $100,000 per employee per year.
Example: A firm with ten employees each making $100,000 annually qualifies for same size loan as a firm with ten employees each making $200,000 a year.
Eligibility for a Paycheck Protection Program Loan
Your small business is eligible for a loan if you can self-certify that you need the loan.
The actual language from the statute says you must provide, “a good faith certification… that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient…”
You also need to indicate that you will use the funds, “to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.”
What this language means isn’t precisely clear… but I think you read it to say (a) you believe your firm needs this extra financial support to continue operating as usual and (b) you absolutely must use the money for payroll, the rent, loan payments, and utilities.
One other thing to mention about eligibility, too. The Small Business Administration disqualifies a handful of people from this opportunity: Folks who’ve defaulted on an SBA loan in the past, felons, folks the target of a criminal investigation, and so forth. (The application someone fills out asks about this stuff. In detail. So you don’t need more information from me. Just pay attention when you apply if any of these sorts of issues might possibly apply to one of the owners of a business.)
How the Paycheck Protection Program Loan Becomes “Free Money”
If you use the loan proceeds for an “approved” expense (payroll costs, rent, mortgage interest or utility expenses) and then you can also document that, the lender forgives the loan after two months.
Example: You borrow $100,000. Over the next eight weeks, you then use the $100,000 for employee payroll (an approved expense.) You don’t have to pay back the $100,000 loan. Really.
A handful of wrinkles related to this forgiveness formula, you want to really understand and pay attention to.
First, less than 25% of the money you spend can go for non-payroll costs if you want full forgiveness.
Second, if you reduce the average number of full-time employees in your firm after receiving the loan, that headcount reduction also reduces the loan forgiveness.
Example: You reduce firm employees from ten to eight workers, a 20 percent reduction. You only receive forgiveness for 80 percent of the loan because you only retained 80 percent of your workforce.
To determine whether you’ve reduced the number of full-time employees, the loan forgiveness formula compares the full-time employees during the eight weeks after you get the loan to the average number of full time employees you paid from February 15 to June 30 of 2019 or January 1 to February 29 of 2020. You choose, by the way, whether the comparison looks at 2019 or 2020.
Third, if you reduce the wages of workers earning less than $100,000 annually by more than 25%, the amount of the reduction in excess of 25% also reduces the amount of loan forgiveness.
Example: To economize, you reduce the salary of an employee who earns $10,000 every eight weeks, or $1250 a week. Specifically, you reduce his pay rate by $3,000, or 30 percent, after you receive your loan. If you had only reduced the employee’s pay by 25%, or $2,500, the pay cut doesn’t impact the loan forgiveness. However, you reduced the pay by $3,000, or 30%. That means you reduce the employee’s pay by $500 more than a 25% reduction in pay. In this case, you lose $500 of loan forgiveness.
One other thing to mention here–and something that only become clear on April 6th or 7th when the Treasury and the Small Business Administration published a PPP loan FAQ at the Treasury.gov website. An employee’s gross payroll amount is what counts as “payroll.” Not the net-of-taxes payroll.
Example: You have an employee who makes $1,000 a week for the eight weeks the forgiveness formula looks at. The employee’s weekly paycheck, however, equals $800. The $200 reduction occurs because of the Social Security, Medicare and federal income taxes imposed or withheld. But the entire $1,000 counts as payroll and results in forgiveness.
Further, the employer-paid state and local payroll taxes count as payroll costs, too. But not the federal payroll taxes the employer pays.
Example: That employee making $1,000 a week and described in the preceding example? The one who receives a $800 net payroll check due to payroll taxes and withholding? If the employer pays $100 in state and local payroll taxes, those count as payroll costs. But if the employer pays say $100 in federal payroll taxes, those don’t as payroll costs.
And Your Next Steps Are…
Four quick last points…
First, the statutes that create this package provide $349,000,000,000 in funding. That amount sounds like a lot of money. But it isn’t. Spread the amount over ten or twenty million small businesses, and you’re talking $20,000 to $30,000 (roughly) per firm.
Second, if you need this help, contact your bank immediately. Verify your bank will participate in the program. And, crucially, that your small business meets additional eligibility requirements the bank sets. Small businesses and sole proprietors can apply for loans starting April 3, 2020. Independent contractors and self-employed individuals can apply for loans starting April 10, 2020.
Third, you can grab the actual loan application for the paycheck protection loan here. Grab that. Fill it out. Do read its instructions. I would also strongly recommend you collect now the documentation you’ll need to accompany your loan application. Quarterly 941s. The W-2s and W-3. Your 1040 tax return including its Schedule C form if you’re a sole proprietor. Maybe the 1065 partnership return and its K-1s. Oh, and then the health insurance statements and state payroll tax returns for 2019.
A fourth and final point: Make sure you haven’t made some change to your payroll that sabotages the loan amount you might receive. Work through the numbers. Maybe with your accountant’s help. You can’t artificially fudge your payroll costs to inflate the loan amount. (Thank goodness.) But you probably can inadvertently reduce the loan amount you qualify for. (For example, by terminating employees. Or by reducing wages.)
Some Other Paycheck Protection Resources
Senator Marco Rubio, who spearheaded this bit of the CARES act, provides a good FAQ about how these paycheck protection loans work here.
You want to read all of the PDFs available at the Treasury’s COVID-19 loans web page here.
Note that if you can’t use the paycheck protection program, you may still qualify for an employee retention credit, something I describe here: The 50 percent Employee Retention Credit.
If you want to get up to speed on the other forms of tax-related assistance the Federal government provides, check out this blog post: COVID-19 Small Business Tax Relief.
As you work through your business plan for continuing operations over the next couple of months, you might find this useful (or at least encouraging): Small Business Survival Guide to the Corona Virus Crisis.
Also, if you have a question, do skim through the hundreds of questions and answers below. Almost surely your question has already been asked and answered several times in several different ways.
Hi Steve,
I really appreciate your articles regarding assistance to small businesses during this critical time. I am simply lost as to what to do with my business and any advice regarding which direction to go would (figuratively) be a lifesaver.
I have a two-person S Corporation in California in a healthcare profession of which I am the owner, 100% shareholder, and President. (The other employee is my spouse who plays a relatively nominal role in the S Corp.)
COVID-19 has directly led to the closing of the office I work at, hence zero revenue for my S Corp (and zero income for me). It is unknown when I will be able to return to work.
Would a PPP Loan and/or an EIDL (esp. given the $10,000 advance) be a good option for me? For reference, the amount I paid myself as compensation for 2019 was $100,000 and I anticipate that it will be ~$75,000 this year. I understand that this is not an official recommendation. Thank you so much for your help.
Your situation sounds exactly like what the paycheck protection program is designed for. To keep the math easy, say you pay John $6K a month and his spouse $1K. Further say the business pays $1K a month in health insurance. All totaled, then, $8K in average monthly payroll costs. In that case, you may be eligible for a paycheck protection loan of $8,000 times 2.5, or $20,000.
The loan forgiveness formula works like this. What you spend on payroll checks as well as business rent or mortgage interest and then also utilities, in the eight weeks after receiving the loan, doesn’t need to be repaid. So, assume you get a $20,000 loan on May 1. If you spend $8K in May and again in June on John’s payroll, John’s spouse’s payroll, and then their insurance, that money doesn’t need to be repaid. If you also spend another $2K a month on rent and utilities during May and June, that money also doesn’t need to be repaid.
The $20,000 in the end becomes “free” money.
Regarding whether or not the paycheck protection loan is better deal than other options, you just have to check. But I would think it’s hard to beat, as long as you truly qualify.
Do you know how to figure in employees that are in training and then would become commissioned employees? We are a parking enforcement company and commission is per boot per mile @$20 an hour after training(training is straight hourly rate). Our employee is under 90 days. how would we figure his pay?
I don’t the payroll costs accounting works any differently for you. You guys just have a more complicated formula you use to determine what goes on someone’s payroll check.
Steve, what about if John made $2K a month in wages and $5 a month in nonpassive income from Schedule K-1 from the S Corp. Is that $5 covered by PPP or anything, or just the W2 wages?
Just W-2 income.
what if your business is LLC Partnership, you take draws and file 1065 so have schedule k’s only
Use the self-employment earnings number shown in box 14 of the K-1? I think that would work…
Steve,
My husband is a sole proprietor LLC, but taxed as an S corp. He is the only person. His 1099 to his LLC totals $165,000 and he pays himself a w2 salary of $70,000. Can we use the $100,000 cap for his 1099 amount or can we only claim the w2 $70,000 payroll amount?
Thanks!
B
You use the $70K.
P.S. Once your LLC makes an S election, it’s an S corporation. Not a sole proprietorship (at least in terms of tax accounting).
Sorry for the post-comment, but I would like to add a third option to my previous question: file for unemployment for myself through the state of California. Thanks again.
I have the same question as John when it comes to filing for unemployment. I have clients that were in the travel industry. Right now I’m telling them to apply for both unemployment and the PPP loan. Thinking that if they accept unemployment, the PPP loan would not be forgiven, however >4% interest and up to 10 year term isn’t bad, so take the loan in case you need the money. Can always pay it off early. Thoughts on this?
Similar question as John and Carmen, does having employees (or yourself if you’re the owner of an S Corp) file for unemployment in the interim present issues for getting a PPP loan? Say you start filing for unemployment sometime in March, then apply for PPP when available, and then rehire employees or yourself after securing a PPP loan? Due to the uncertainty of when, or if, a company may get a PPP loan this seems to make sense, but maybe I’m missing something.
I think the unemployment impacts the average monthly payroll (because it pulls down your payroll) and so reduces the loan amount. And it’ll also factor into the calculation of whether or not you get 100% forgiveness.. or some lesser amount. But other than that, I don’t think that having had people taking unemployment benefits disqualifies a firm.
Sidebar: I read the loan forgiveness statute to say it’s okay to replace workers.
Ok, so my understanding is that as long as you rehire the workers before the closing of the loan, then you can get 8 weeks of forgiveness after that date. Is that correct? And in the article you state:
“To determine whether you’ve reduced the number of full-time employees, the loan forgiveness formula compares the full-time employees during the eight weeks after you get the loan to the average number of full time employees you paid from February 15 through June 30 of either 2019 or 2020. You choose, by the way, whether the comparison looks at 2019 or 2020.”
So if the payroll is the same after the loan closing as what payroll was in the 2019 period, then there should be full forgiveness. Meaning the employees can be on unemployment up until the loan closes, then rehired and the company gets full forgiveness. Does that sound like a correct interpretation?
Carmen, I think the way you’re thinking makes financial sense. But maybe one thing to ponder are those certifications borrower makes about needing PPP loan to continue operations and using the funds for payroll etc. Seems like you’d want to think about whether tactic described meshes with that.
Thanks for the article – Had one question in the actual law it says payroll costs includes payments to independent contractors. I own a courier company where all the front office people (dispatchers, customer service and accounting people) are employees but all the drivers are independent contractors.
When requesting the loan amount it states the maximum loan would be 2.5 times your payroll costs so would that include both the employees and the independent contractors or just the actual employees.
So I’m not reading the statute to say that you include as payroll costs the amounts you pay independent contractors. Rather, I’m reading the statute to say that amounts you receive as an independent contractor will partially count, once you convert these amounts to self-employment income. However, what you want here could be something the relevant agency “reads into” the law. I would not be surprised at that. Er, I am not sure I’d want to bank on that though…In the interim final rule published on April 2, the SBA says you don’t count as payroll amounts you pay contractors. Contractors would get their own loans.
Thanks for the quick response Steve – I agree with you as it seemed like a double dip because the Independent contractor could also get a loan under this provision. It is just when they defined payroll costs in section 1102 (aa) it seemed to include the amounts paid to traditional employees followed by an AND (bb) the sum of payments payments of any compensation TO or income of an independent contractor…..
Allan Edwards posted a comment below that says he called SBA today and THEY SAID they will count payments to independent contractors as payroll costs. So maybe your reading is right… and I’m wrong.SBA rule later clarified these amounts don’t count.
This is one of the least understood pieces of the PPL. Then the question is, do you pick and choose which 1099’s are your independent contractors when not getting dinged for reductions, etc. I agree it seems like double dipping I/C gets a forgiveable loan for receiving payment and the payor…doesn’t make sense but sounds possible.
Hi Eric, so I think the interim final rule makes it clear that you don’t get PPP loan amounts for independent contractors. They need to get their own PPP loans.
Great article, thank you.
What about those of us who have a 2 person (husband and me) LLC partnership filing. I take Owner Draws for salary. Much of my salary is reduced through equipment depreciation and thusly not a lot of actually taxable income reported, but would this program be available to someone in my situation?
I think so. Details are a little less clear for folks in your situation. But if you’ve been paying self-employment taxes, you should have draws you took which qualify as payroll costs.
Hi. Thank you for your article! You are wonderful.
A two person LLC
Person A (1% ownership) takes a draw reporting that SCHEDULE SE of their personal return.
1. Would Person A file for PPP under their tax ID?
2. To maximize on forgivable amount would that person be best off to take their entire draw over the 8 week forgivable period?
Person B (99% ownership)
=> Didn’t take a draw in 2019 but did in 2018 & LLC income flows to their return (as it does with Person B)
=> the LLC pays Person B rental income and reports that on Schedule E of their 1040
3. Can Person B file anything?
4. Should the LLC file anything? The LLC only gives Person A a draw and every year but 2019 gave Person B a draw.
Thank you so much! the LLC is mostly closed due to stay at home
I think the LLC (so the partnership I presume) applies for the PPP loan. And then I think the payroll costs for the members can be their self-employment earnings for 2019.
BTW, I am all ears if someone has some other, easy-to-document way of coming up with partner or proprietor “compensation” that meshes with the statute and interim final rule from SBA. But I don’t spot some straightforward way.
Thank you.
Will apply as the LLC and consider the self-employment earnings for 2019 (what Person A) claims on their Sch. E
Kim (and Steve), I believe Steve is correct that the members’ self-employment earnings should count as payroll costs. Why are you only taking person A’s share of the earnings? Even if no draw is taken by person B, they still have taxable income from their 99% of profits, right? We have a married partnership LLC and I am trying to get this right too!
I agree with your accounting Joe. You don’t need draws to create SE earning. Only the earnings.
BTW I do think, as explained in my response to Lisa somewhere close to here, that for forgiveness later on you want draws that nicely connect to the SE earnings amount. (In many cases, you won’t actually HAVE SE earnings during the eight weeks. That’s kinda the problem.)
Having trouble getting the SBA lendermatch tool to work. Is anyone having success finding/applying for payroll protection loans yet?
I run a sole proprietor business that had revenue of $450,000 in 2019. My monthly revenue has dropped by 70% since COVID-19 hit. I have an EIN and LLC. I also receive W-2 income from another employer of about $60,000. Married filing jointly.
Am I reading this correctly that if my average monthly revenue was $37,500 in 2019, I can multiply by 2.5 and borrow $93,750?
I can then continue to make my regular payments to myself as a sole proprietor ($40k per month) and then after 8 weeks the loan will be forgiven if I paid myself the entirety of the loan?
What kind of documentation would I have to provide?
So your revenue isn’t your income. Therefore the first thing you’d need to do is convert the $37,500 of monthly revenue to monthly self-employment earnings.
Then, once you had that number, you’d pick the lesser of either $100,000/12 months (the max) or your monthly self-employment income.
But to continue this, if you can qualify, yes, I think you might be able to get a loan equal to $20,000 (or roughly 2.5 times $8K)… and then pay yourself $8K a month for two months… and then that amount would be forgiven. If you need to pay rent, utilities, state employment taxes, or health insurance for the proprietor (i.e., you), those payments from the loan funds will result in additional forgiveness.
What counts as “payroll documentation” for a sole proprietor. Withdrawals from a business checking account?
I’ve read the statute a dozen times now. And carefully perused the Treasury’s downloadable PDFs available here, https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses, and, sorry, I don’t know.
BTW, folks should read all of those PDFs including the lender guidelines.
But the admission that “I don’t know” made, here’s what I’d do. For a sole proprietor, until we get more info, I’d assume your Schedule SE “self-employment” earnings prove your “payroll costs” for the sole proprietor. And then, I think for now, you assume you’ll be able to count 1/12th of your annual SE earnings as a payroll cost.
BTW, I think you idea to actually “draw” this money from the “business” and put it into a “non-business” account is good.
Final comment: We all want to watch for more guidance on this subject.
Steve, it looks like your interpretation is that any payroll to employees making over $100k cannot be factored in, is that correct? My reading of it was that forgiveness of payroll for those employees caps at $100k (annualized) meaning, for example, an employee earning $120,000 would be paid $10k per month by the employer but loan forgiveness would be capped at $8,333.
I think you get PPP loan money for paying salaries only up to $100K (but that you can of course pay more)… that you get forgiveness for paying salaries but only up to $100K…
By the way, something I got wrong in first drafts but have now fixed. I think you lose forgiveness if you reduce salaries EXCEPT that doesn’t apply if you reduce an employee salary but employee still makes $100K after reduction.
I don’t know if this helps. But I wonder if one thing that MAYBE explains the possible difference in our reading is I’m thinking the language at Sec 1106(a)(8)(A), specifically this phase, “the term ‘‘payroll costs’’ has the meaning given that term in paragraph (36) of section 7(a) of the Small Business Act (15 U.S.C. 636(a)), as added by section 1102 of this Act,” means they basically ignore payroll over $100K.
If we have an employee who’s annual salary is $120k, but they we’re hired in August of 2019 and thus have only been paid about $80k by us in the last 12 months can we count their full amount for the calculation of average monthly salary? Or do we have to reduce their monthly figure to $8,333.33?
I think you use $8333.33.
Thank you Steve.
Would the same logic apply to an employee that was going to be paid $120k but retired in July and was only paid $60k?
I am a home builder with 7 employees. I also have several 1099-Misc subcontractors. I am making application for the PPP loan and confirmed with the SBA today that the 1099 payments I made count toward the loan. However, in checking we only issue 1099’s to those subcontractors who were not incorporated. How do I substantiate the other 1099 payments we made?
I don’t know. I would think those “other” contractors, the non-1099 guys, need to do their own PPP loan.
BTW, that’s interesting the SBA said they’ll count amounts paid to 1099 guys as payroll costs. That makes sense. And you read oblique references to 1099-MISC income in the statute. But it wasn’t clear to me that those folks would for sure be covered.
April 2 update: You don’t count amounts paid to independent contractors as payroll, per the interim final rule.
what do you mean “You don’t count amounts paid to independent contractors as payroll, per the interim final rule”.
I cannot apply for the to pay for contractors (1099)? I am a single member LLC, working with different contractors to run the business.
for last year I kept most of my earnings in the business account to keep running the business – Can i declare only what i withdrawn from the account as salary or the entire amount?
I think you’re asking about whether you can get money to pay independent contractors… and the answer is “no, you can’t.”
Lots of confusion about this area of the law. But the way to make sense of this? These independent contractors need to apply for their own PPP loans. They aren’t employees if they’re independent contractors. They themselves are sole proprietors.
I am also a single member LLC. I believe Steve was also asking if he can claim the income that he received for himself? I am asking the same. I only paid myself from transferring funds from my business checking to my personal checking account. I file as a single member LLC.
Your LLC income ultimately shows up on your Schedule SE inside your 1040 return. That number is referenced in the statute. So I think that’s what you use…
The PPP specifies forgiveness for “Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).”
I am a home builder with construction loans on 3-4 large spec homes, would this cover my loans? I assume not……………
I don’t think so.
Hey Steve, this is a one-person s corp in Greensboro, NC. The owner is the only employee. The owner gets $2,200 per month in W2, and $3,300 per month in distributions. How would the PPP math work there?
If you only pay Daniel the owner $2,200 a month, you get a PPP loan equal to $5,500 (2.5 times $2,200.)
But if you pay Daniel $2,200 a month PLUS $50 a month of NC employer payroll taxes PLUS $250 a month of insurance, you get $6,250 (2.5 times $2,500.)
You’ll get forgiveness for any of the above costs plus rent plus utilities paid within first eight weeks after you get loan.
Daniel, Similar situation, North Carolina. One-person S-corp. Paying into unemployment insurance fund in NC. I just tried applying for unemployment insurance (finally got through on the website), and the process asks employee questions concerning “corporate ownership”, is your “take” that this would disqualify for unemployment benefits? Just asking as one business owner to another as we go through this.
Jack, Not sure if this helps, but in NY 2 person S-corp, unemployment benefits went through and received a check already, From my understanding you are not taking the loan out your S-corp is. As long as you are rehired/wages brought back to normal in the allotted time, forgiveness is still available.
In SC here. We will not get state unemployment as S corp officers because we were not paying into unemployment insurance. But if we had been paying into it, we would have gotten it.
Hi,
I am a single member llc. I own a personal training business. I draw money from my business each month, but don’t necessarily take the same amount each month. Am I eligible for this loan if I don’t take the same amount each month or don’t necessarily document it as I am paying myself? I am just trying to understand how to go about this.
Thanks for any advice you can lend!
Pat
So, we don’t really know. Sorry. But you get something according to the statute.
Here’s my current guess. Say your Schedule SE shows $36,000 a year of self-employment earnings. So $3,000 a month. I think you might get a PPP loan of $7,500 or 2.5 times $3,000.
And then if after you received the loan you paid yourself a $3,000 owner’s draw in both month 1 and month 2, that would result in $6,000 of forgiveness.
To get forgiveness on that other $1,500, you’d need to pay for rent, utilities, etc that adds up to least $1,500.
I see. Ok, I am going to dig deeper to understand this some more.
Thank you for your response, Steve.
Much appreciated.
Pat
Im also a single owner llc and wondering how things will shake out. As of now, my revenue is from a single contract. Ive not been impacted but fear as this drags on I might. I hate to be late to the party and find all the snacks are gone. I would like to apply based on future impact possibilities. Just so unsure if I would qualify.
I think you can apply if you think the “economic uncertainty” makes a loan request “necessary” to “support” your “on-going operations”. Note that the words in quotes come from the statute… It’s a bit gobble-y-goop-y. But I think if you think a loan is prudent to support your business operation given the economic uncertainty that you can apply in good faith.
BTW, the above isn’t the same thing as saying you’ll get forgiveness. Forgiveness will depend on you using the money for payroll, rent, etc.
A final note: I read the statute to say that if your LLC pays you biweekly draw equal to 1/26th of your self-employment earnings from 2019, that counts as a payroll cost.
Live Oak, another bank gathering leads for PPP loans: https://www.liveoakbank.com/paycheck-protection-program-sign-up/
Thanks Spencer. I added the link to the main body of the post.
Is this loan for small businesses in all 50 states and Puerto Rico or is it for the 50 states only?
I don’t know. Sorry. Anyone? (Nothing mentioned about Puerto Rico in statute or Treasury pdfs…)
Hi, I own a hair salon where it is two employees and myself. One of my employees is in her second year, but the other one just started in January.I have it set up as an LLC which is a sole-proprietorship for tax purposes. None of us make the same amount from month-to-month, and I don’t take a set amount from the business every month, just whatever I can. I filed for unemployment for myself (that I haven’t heard back about yet), but am hoping to get a forgivable PPP loan to pay my employees. Should I try to turn down the unemployment for myself? The application is with my SS number, not the EIN of the business, Will I be able to pay myself from the PPP loan and still have it forgiven? Thanks for your help!
I would go for the PPP money and hope business rebounds by the time the eight weeks run out. If economy hasn’t rebounded by then, you should at that point look at the employment benefit options.
Will do. Thanks!
Hi Steve – I have a correction and a question.
When looking at the number of employees for purposes of the forgiveness reduction, the two time periods for comparison purposes are (1) Feb 15 2019 to June 30 2019, OR (2) January 1, 2020 to Feb 29, 2020. I think you have one of your time periods stated incorrectly. See page 46 of the bill PDF
For purposes of applying the reductions to the forgiveness element, if you have both employee reductions and wage reductions, which do you apply first? It matters because the math result is different depending on which you apply first.
Thank you,
Mallory
You’re right about my dates error. Thank you. Now fixed.
BTW, I don’t understand your other comment. I think you get same result if you take 80% of 70% of $100,000 or instead take 70% of 80% of $100,000. So I must not understand.
Steve, Great article — thanks!! My question: The loan forgiveness would be cancellation of indebtedness income. Is that taxable?
The forgiveness of the loan statute says the COD income is excludible… so surprisingly, it’s not taxable.
Steve
Thank you so much for doing this. Your explanation is, by far, the best I have read so far.
I have a partnership LLC that pays two partners (myself & one person) on commission & a non-partner 1099 contractor who we also pay commission pmts to. On the application form that was just released the only business formation options beside non-profit, tribal, and vet org are self employed & independent contractor. Am I not able to file one app on behalf of the partnership and record total prev. 12 month commissions for the 3 of us?
OK, my thinking on this has changed. At first, and in some earlier comments in this thread (which I’ll try to fix), I said I thought maybe they’d “missed” probably by accident partners working partnerships.
But after thinking about this more and seeing the “all small businesses qualify” language used in the Treasury’s downloadable PDFs, partnerships surely qualify.
How to calculate the partner’s payroll costs? We don’t have any guidance on that right now. But I think you use the partner’s self-employment earnings as reported on their K-1.
Steve, should the partnership file for PPP loan showing W2 costs and each partner file separately showing the K1 draws? I do not see how the partnership would be able to show taxes paid by each partner as it is a pass through.
All together I think…
Does this mean to show W2 and K1 on the business loan application? Thank you for your postings
Hi Steve, I bought the small business I was previously managing and obtained a new EIN effective January 1, 2020. All the payroll history (2015 to now) is tied to the old EIN. I was advised by an IRS agent to submit a letter with my 1st quarter 2020 941 report requesting payroll deposits made this year be transferred to the EIN account.
I submitted an application for the Covid disaster relief fund today and referenced my new EIN. There were questions on the application regarding when the business opened and when I became the owner. Do you think there will be a qualification snag?
Thank you for your assistance.
You needed to be in business on February 15 which you were so you qualify. You may need to go to more work to document your payroll costs. But that’s doable.
Thank you so much for the write up Steve – very thankful for someone having small business’ back during this pandemic. If you don’t mind sharing some insight on a few questions:
1. Can single member LLC S-Corp apply as “Self-Employed” and use Adjusted Gross Income from form 1040 for average “payroll expenses”? That would be a much more helpful option since payroll numbers don’t include distributions.
2. Can/should 1099s (sent to randomly hired throughout the year subcontractors) be used in calculating average payroll?
3. For home office, can mortgage and utilities be counted as appropriate use of the loan?
Thanks so much again!
I don’t think you’ll use AGI for a sole proprietors payroll costs. Something like your self-employment earnings makes lots more sense.
You do not include 1099 contractors as payroll costs.
And to me, the statute says you don’t include these folks. But it appears Feds will let you do this. It’s almost as if Feds are saying (and sorry to be blunt), “Hey just because you miss-classified an employee as a 1099 contractor? Yeah, we’ll deal with you that later on that… for now, count them as employees.”I hope we get more guidance on this. (We need it.) Also iIf someone is truly an independent contractor, they should be able to get their own PPP loan.Thank you so much Steve!
To reiterate my first question, do you think as a sole employee of a passthrough corporation (LLC S-Corp) I could include distributions in addition to what I pay myself via payroll, when applying for PPP?
So for example, lets say that I’m a passthrough S-Corp and a sole employee. Business is netting $140k. I pay myself $60k via payroll and take $70k in distributions. Am I applying based on the $60k payroll (about $3700/mo after federal taxes) or do I apply using the $140k number which should theoretically allow me to borrow based on the maximum $100k number?
Thank you again Steve!
I am sure you can’t include distributions. Sorry. So your average monthly payroll is $5K and the loan amount is $12,500.
Thank you Steve! Last clarification: do I understand it correctly that I need to subtract federal, medicare and SS taxes from the $5k? The breakdown of the payroll is:
– $3,725 – what lands in personal account
– $1,657 – what gets collected for taxes
So would I apply based on $3725/mo or based on $5382/mo? Or based on the official salary number of $5k/mo.
Really appreciate you patiently taking the time to help everyone here!
Mark, you use basically what your W-2 shows in box 5 to calculate the loan amount.Using your example numbers above, you use the $5K/m to plug into the loan amount formula.
And then you use the $3725/mo to plug into the loan forgiveness formula.
BTW I didn’t understand this wrinkle until the SBA published its interim final rule on April 2. Sorry. Ugh.
Thank you Steve!
What about a single member LLC (sole proprietor/se;f-employed/no employees so flows through to a Schedule C for tax purposes). We provide 1099’s to our workers; thus, have no actual employees. I am understanding now that this will not qualify as payroll.
But what about my income? I pull owner draws, but this is my second year in business and I took a loss as a result on my 2019 taxes. Are you thinking that line 31 – Net profit or loss – is what they are going to go off of for people like me? In that case, no many actual self-employed individuals are going to benefit from this as most self-employed people take as many deductions as they can in order to actually stay in business! Would it be better for me to just file unemployment, and how could I even prove my income to file that?
I read somewhere that they may be going off of your gross sales or gross income. This would be somewhat better I suppose. Thoughts?
As mentioned a time or two in the thread above, I think you use your Schedule SE income as your payroll cost. (Your independent contractors would do the same.)
I have a similar situation as Ashley.
My 2019 1040 (as a sole proprietor) was filed as a business loss.
My bank is telling me they will not fund the PPP loan for me.
Does a 2019 business loss exclude me from the PPP program?
Well that makes sense. You can to replace compensation or earnings from the business. But if you don’t have earnings from the business, there’s nothing to replace. Sorry.
I think your situation may be one that isn’t addressed by the PPP.
Say the timeframe for calculating “avg monthly payroll” is the last 12 months from date of application, and also say you owned your own company and were the only employee, couldn’t you technically go to your line of credit or use your companies current cash to pay yourself like a years worth of salary a couple days before you take the loan out in order to max out the amount the government would match?
The max PPP loan you could get on the owner would be $8333 times 2.5 or $20,832.50. So you’re not going to get that much “boost”. E.g., if you pay yourself $100,000 this month and so get to the average, you’ll be paying $15,300 in payroll taxes to get a $20,832.50 PPP loan…
Hi, I have a question. An LLC with 2 owners, no other employees but a few outside contractors. Does this company qualify under the PPP? Both owners have 50% ownership. Don’t pay themselves like a monthly draw. It does have rent and utilities and so forth. Profit is shared and taxed per owner.
See my answer to Tyler’s same question.
This is amazing, thank you!
Can you help clarify this for me – we have 3 restaurants, all as separate LLCs, my wife is 100% owner of each. Can we apply for a loan for each one? The application has language about Applicant not getting multiple loans. Is the biz or the individual the applicant?
Your three restaurants, each operated by an LLC owned by a single member, your spouse, count as a single business.
Hello Steve. I feel like I’m asking a question that’s already been asked – but I’m still having trouble understanding.
I am part owner of an LLC passthrough partnership with 2 partners. We have 4 Employees. The Partners take a percent of each months earnings that are reported annually on a K-1 and the employees are regular W2 wage workers. Lets say we make an average of total 10k in K-1 distributions collectively and our employees make an average of 10k collectively for simplicity.
Does that payroll number include our K-1 distributions or is it only the W2 workers?
Would we qualify for a 25k loan of just the W2 workers or a 50k loan to include the partner distributions?
Thank you!
See my answer to Tyler’s same question above…
Great article! Thank you for taking the time to spell this out. It has been very helpful!
Hello, thank you for this post, it is very helpful. I had a few questions if you would not mind helping! Thank you!
1. Does this count as taxable income?
2. I have a 1 person S-Corp and I pay myself as an employee. I pay myself 5k a month with the rest of my income as distributions. I also have a home office so I can deduct a portion of my rent/utilities. So I can add that all up and multiply by 2.5 to determine the loan, and as long as I use the loan to pay for those things it will be forgiven?
3. If I also applied for the EIDL $10,000 stimulus does it affect the PPP in terms of forgiveness?
Oddly, the money probably won’t count if you get the forgiveness thing right.
Your loan equals 2.5 times your payroll costs… the “2” is for payroll… the “.5” is for the overhead. So overhead doesn’t factor into the loan amount, it factors into the forgiveness amount.
Finally, I don’t think you lose eligibility for PPP or forego forgiveness if you applied for EIDL. I do think you can only apply for one PPP loan.
Hello,
I am an S Corp and the only employee on the payroll.
S. Corp pays me 6K a month
My employer tax and contribution is 250 a month.
My health insurance is very confusing in terms of calculation for the loan amount. It’s Deducted from my business account every month but it’s not tied to my S Corp. Do I include this since I am the only owner?
Here’s the way you’re supposed to do your shareholder-employee payroll:
https://evergreensmallbusiness.com/payroll-accounting-rules-for-s-corporation-shareholder-health-insurance/
If you do your bookkeeping correctly, the health insurance appears in box 1 of your W-2.
General comment that applies to this PPP loan stuff in a bunch of areas: If a firm’s bookkeeping hasn’t been decent, that’s going to deflate your loan amount or make the loan application more work.
Hey Steve
I got a question. I just applied for EIDL today with advance 10,000. But later today, I just realized that we can only apply for either EIDL or PPP. But, I think PPP will be better off for my business with the forgiveness instead of the 10,000 EIDL provided. Is there anyways I can change EIDL to PPP if i’m approve?
I think you can do both… but I think your EIDL loan will slightly impact the forgiveness on your PPP loan.
(If someone can point to some good source that confirms or debunks this, gosh, please post!)To see examples of how this adjustmnent works, see the interim final rule here.My business is an LLC filing as S-Corp and I am the only employee. This may be an obvious question, but if I file for a PPP, is anything stopping you from applying for unemployment after 6/30 when PPP is over?
I think you’ll be able to file for unemployment even if you take a PPP loan.
For example, you apply on Friday April 3 and get the PPP money on April 10. Over the next eight weeks, you use your PPP money to pay yourself payroll and a bit of “overhead.” When the PPP money runs out, if business hasn’t yet restarted, I think you can probably look at any other forms of assistance. Like unemployment.
I don’t want to sound like a Pollyanna… but this COVID-19 thing isn’t going to last forever. So I’d factor that into your analysis here. I would be planning how to do stuff over the eight weeks of “PPP support” that lets you hit the decks running once the economy lurches to life again.
Hi Steve, I am a licensed cosmetologist. I’d like to know if i would qualify for the paycheck protection program. I am a self employed and since I have not been able to work I am getting paid. Would I be able to apply for this loan.?
You will qualify.
Hi Steve,
Thank you for your article!
It seems as though S-Corp owners who are employees are getting the short hand here.
I am a S-Corp and I am the only employee. My concern is it doesn’t seem as though I will be paid for my total income, only salary and not distributions? Correct?
My main concern is that 75% of funds must be used for payroll. Funds to pay other expenses such as rent, utilities, and health insurance can not exceed 25%. Because of payroll amount I will not have enough funds to cover my expenses since the total is greater than 25%. . Is this correct? My health insurance is not included on actual payroll but would health insurance cost count as payroll cost and be included in the 75%?
Any idea if we can increase payroll amount and decrease distribution amount for quarter 2 to help this situation?
I don’t think S corporations are getting short-changed really. But you’re right, this PPP money goes for payroll and overhead… It’s not “business profit” insurance.
As far as increasing payroll for shareholder-employees, that seems pretty low impact. For example, assume you’ve been paying the “average” S corporation salary which is maybe $4K a month. You bump this up to $8K a month to inflate the PPP loan. You’ve only bumped the loan amount up by $4,000 times 2.5, or $10,000.
P.S. Health insurance is included in your payroll costs. Also it’s
explicitlypossibly included if you do your bookkeeping right. More info here: Payroll Accounting Rules for S Corporation Shareholder-employees.Hi Steve,
How long do we need to maintain the same number of employees? Is it only for the 2 months? If we need to lay them off after the 2 month period is over, do we still qualify for loan forgiveness?
Thanks,
Robyn
I think so, yes.
BTW I hope your business restarts during the eight weeks and that in week nine, you guys are beginning to “rev” things up again.
The storm doesn’t last forever…
I appreciate the information you have provided. I have been reading other sources about how to compute the payroll cost and the way the other source describes it is that you take the gross wages paid for the prior 12 months less the Federal income tax withholding and FICA withholding to arrive at a payroll cost (you don’t have to deduct any state income tax withholding). Is that your understanding of how to compute the payroll cost? I tried to read the actual law and I did not see the how to compute spelled out in the law. In some PPP loan applications, I don’t see it spelled out in the instructions on how to compute.
Also, in regards to the proceeds being forgiven. If I debit cash when I receive the loan proceeds I will credit a loan payable account. If the loan is forgiven, I’ll debit the loan payable account and credit what? Does it make sense that the expenses paid with the loan that is forgiven are not tax deductible?
Thanks in advance for your insight.
Regarding the payroll cost amount that plugs into the loan amount formula, I think we use basically what shows in box 5 of the W-2s (as long as that value isn’t more than $100,000.) Regarding the payroll costs that plug into the loan forgiveness formula, you basically use payroll net of the federal taxes. So payroll after deducting Social Security, Medicare, and federal income taxes withheld.
I think you credit some income account. It’ll be excluded income, so an M-1 adjustment.
Are the expenses paid with the forgiven loan still deductible?
Also, for S-corporations and partnerships, will the excluded income increase the shareholders/partners basis?
I kinda thing the answer to both questions is “yes.”
It wouldn’t have made any sense to say the COD is excludible if it means you then don’t get to deduct the expenses you pay with the loan proceeds.
For the record, I bet we agree on something here… that this seems like awfully strange tax accounting…
“So payroll after deducting Social Security, Medicare, and federal income taxes withheld.” Would the employer contribution to Social Security and Medicare plug into the loan forgiveness formula?
It appears the PPPL would be the better option for my small S-Corp, but I already submitted an application online with the SBA for the Emergency Disaster immediate $10K Loan.
Are the two programs mutually exclusive? i.e. Will my EDLI application likely cause my future application for the PPPL to be rejected or delayed?
I don’t think they’re mutually exclusive. I think you’ll get a little adjustment on the forgiveness on the PPP loan though…
If I own an S Corp and get dividends do I include this amount in the average monthly payroll?
Thanks in advance.
No, sorry. Distributions aren’t a payroll cost.
Stephen, thanks so much for such an enlightening article.
I have a bit of a corner case. I incorporated my S- corp in January this year and I’m the sole employee. I have not been paying myself a salary or received any other compensation from the company yet – as I’m still in the process of establishing myself.
Is there any way to still be eligible for the protection program as a small business?
Thank you!
I think you’re out of luck. Sorry. If you’re a new business, you can make the calculations work without a full year to look back at. Here’s the language, “payroll costs incurred during the period beginning on January 1, 2020 and ending on February 29, 2020…” But you didn’t pay any payroll then either.
Steve – Thank you for this. I have read through all the literature and the comments and don’t think this has been asked.
I am an LLC w/ S-Corp filing and my last contract ended on 12/31/19 with my last salary pay date on 1/15/2020. I have sense been collecting unemployment. Since I cannot secure a new contract under the current conditions but I did not have a paycheck issued in February (or March), do you see any impacts on the PPP process?
Secondly, since the money that does not go to payroll expenses or one of the eligible expenses will need to be paid back, could I increase my salary to increase that foregiveness? As an example, my monthly salary is $7,250 so assuming I would need to pay back $3,625 as payroll is my only eligible expense.
Thank you,
Bo
The PPP loan application suggests you use 2019 to determine your average monthly payroll. So if you paid yourself $7250 month in 2019, I think you get a loan equal to $18,125.
You would than want to pay Bo the employee $7250 a month during the two months in 2020 after the loan closes… and then any other qualified expenses (rent, health insurance, utilities) … these items will result in forgiveness.
Thanks so much for responding to my earlier queries!
One additional question. As an employee of my spouse’s S Corp, I had $5,250 of tuition benefits reimbursed for graduate education in 2019 through the corporation. I have about $2,500 of graduate education expenses from Feb. 2020 which we were planning on having the corporation reimburse as well. Does that factor into (a) payroll expenses to determine loan amount or (b) what the PPP money can be used for? Or is tuition reimbursement out of the picture for PPP? Thank you again!
I don’t think that works. Sorry. Pretty limited list of expenditures that trigger forgiveness and only payroll costs plug into the loan amount formula.
Great stuff, thank you. If I can throw you a question from the “professional services firm” world: We have a law firm which is an LLC taxed as a partnership (“Operating LLC”). There are 4 members (25% each) of Operating LLC, each of which is a single-member LLC with an S-corp election (each a “Member LLC”). Operating LLC employees 3 employees on payroll (a part-time attorney, a part-time bookkeeper, and a part-time administrative assistant). Operating LLC makes distributions to each Member LLC on a “eat-what-you-kill” basis, after sharing in overhead costs (Including payroll for the 3 employees, rent, etc.). Each individual Member LLC has its own payroll for its own sole member. We would like to apply for 1 loan at the Operating LLC level. Payroll for the 3 employees of Operating LLC is straightforward enough. However, the distributions to the 4 LLC members is where we are getting stuck. At the Member LLC levels, we have each run a payroll (as we are S corps) in the past 12 months (side note, payrolls are not monthly – would that matter?), but your answer to Tyler seems to indicate that the entire amount on each Member LLC K-1 should be the basis for our application request (an, presumably, that would be the correct documentation to provide a lender.). Thoughts? Very much appreciated!!! Thank you!!
So I think a partnership of S corporations creates some trickiness. What would be simplest (and I think okay but maybe a little risky) would be if the partnership operates a common paymaster arrangement and so pays the salaries of the “rank and file” employees… and then also for administrative convenience the salaries of the S corporation partners. In this case, I would think the partnership does the PPP loan and tallies box 5 on the W-2s (adjusting as necessary for situations where someone makes more than $100K.)
If you haven’t used a common paymaster arrangement and so each S corporation really does its own payroll (so separate 941s, W-2s, etc., etc), then I think you need to do separate PPP loans if only for paperwork sake.
Note: The treasury’s instructions suggest that easiest or commonest approach is to look at 2019 payroll. That doesn’t kind mesh with the statute. But it’ll make documentation easy… one will just need to look at the W-2s and 941s from 2019.
Thanks. Going with separate loans seems like an issue given Question #3 on the applications/affiliate rules. We are attempting to get guidance from our lender and will update you when we learn more.
Steve,
Thanks for this. I’ve a wholly-owned LLC on Schedule E operating as a landlord, zero employees. Positive EBITDA, negative AGI, and pays out some of EBITDA to me personally. Do those payments qualify as payroll costs under the CARES Payroll Protection Plan?
If you’re not sure, is there a way to ask SBA for guidance, or for my bank to get guidance on that?
If no, is there a way to file an application disclosing the circumstances in a way that won’t get me in trouble if they decide against it?
No, sorry, I don’t think you qualify. You need to have a trade or business that’s paying payroll taxes or putting self-employment income and taxes on your return.
Schedule E income doesn’t “do” that…
The PPP says Small business and sole proprietorships can apply on 4/3, while independent contractors and self-employed individuals can file 4/10. My question is, what is a single member LLC? Is it a small business, sole proprietorship or self-employed? Thanks for any advise!
Unless it makes an election to be treated as a corporation, a single member is disregarded for income tax purposes. That means, basically, you’re a sole proprietorship if you’re operating an active trade or business.
Thanks Steve, I should have added that for tax purposes I am a C – CORP, I file C-corp federal tax documents each year and any income from the business is put on a schedule K and passed to my personal taxes along with payroll from the business (Which is roughly 50% of total business profit). So I assume then due to my tax election I am a small business?
I think I messed that last reply up. For taxes I am an S Corp, where I get a Schedule K and the income is passed to my personal taxes. Sorry, I think I put C Corp.
So you’re an S corporation. You’ll count your shareholder-employee wages as part of the payroll cost. And you are in the group that’ll be able to apply on April 3.
I am a single member LLC. I file Schedule C taxes and have pass-through income. I work as a business consultant and have several clients who pay me and send me 1099’s each year. On occasions, I employ independent contractors to work on some projects, so I 1099 them.
I take a monthly draw from my business account on the 1st of every month, plus pay myself a ‘bonus’ whenever I need one! My net income (after expenses/IC costs) is more than $100,000. I am assuming I can simply claim the maximum of $8333 as a forgivable loan.
How do I classify myself for the purpose of applying for a PPP loan? Am I a small business? Am I a sole proprietor? Am I am independent contractor? I am finding it very confusing.
That’s probably roughly right. Maybe the Treasury or SBA will provide additional instructions a bit later… but I would think you look at your Schedule SE to get “Self-employment Earnings” and treat that.
BTW, the application form suggests looking at 2019, so just grabbing the Schedule SE from your 2019 return (as the proof) will be easiest.
As you know, you’ll be limited to $100,000 or an average of $8333 per month.
P.S. I don’t know how you treat the independent contractors, as noted in replies to other comments…P.S. Per the interim final rule that appeared on April 2, you ignore your independent contractors. They can get their own PPP loans.
Thanks, Steve, for your quick response and for all the help you are giving us!
Just as clarification – I file with a Schedule C, Profit or Loss From Business, not Schedule SE. This is where my confusion comes in, in terms of what my ‘classification’ is! Do I count myself as a small business or as a 1099/IC. My clients issue me with 1099s.
I pay my ICs, and then send them a 1099. I do not withhold any taxes from them.
You file a Schedule SE. It takes the bottom-line number from your Schedule C and calculates your self-employment earnings from the sole proprietorship.
I am following along here because I have the exact same quesiton. I just flipped my entire tax return, and I only have Schedule C’s from each of my single-member LLC’s and no Schedule SE. I am assuming that I can file as a sole proprietorship since that is how I am treated for tax purposes?
You should have a Schedule SE.
The Schedule SE takes your Schedule C bottom-line and calculates your self-employment income and your self-employment taxes.
Also, you are a sole proprietor.
I’m a bit confused by this post. Everything here is relative to my situation and what I do except I also pay employees on W2 about 60k.
The PPP application requires that we state how much our payroll is and this is where my confusion is.
My filed payroll shows I paid only W2s of 60K and does not include anything about my Schedule SE.
So are we supposed to calculate the PPP using (W2 + 8333) ?
How would that be substantiated since they are asking for Payroll records which for me is only my W2?
Am I supposed to pay myself 8333 for the 2 months and claim that as forgiveable?
I am really confused as to how this would work
So if you run a sole proprietorship, make $60K in SE earnings AND you also pay your employees in total $60K , I think your payroll cost is $120K for the year… so your average monthly payroll is $120K / twelve months… or $10K a month… And that’s the figure you plug into the calculations.
You want to work out your own numbers of course.
Hi Steve,
This is great info, thanks! Reading other posts, I’m a little unclear re: payroll and distribution, etc.
2019 my LLC was not “S” and total on SE was about $80,000. It seems from previous posts, that you think can just divide that by 12, if I’m understanding correctly? My case is further complicated, since I found you end of 2019, and starting 1/1/20 I converted to “S” corp status, and having been paying myself about $4,000 a month in salary (and obviously the balance would come over a distributions later). So I’m a bit confused, would I apply based on the $4,000 recent payroll, or 1/12 of my 2019 SE income? Thanks!
That’s a good case to talk about. I think the PPP loan formula will look at your 2019 self-employment earnings to determine what you can borrow. And then the loan forgiveness formula will look at the W-2 wages paid over the eight weeks after you get the loan to determine forgiveness.
If I own two separate businesses: One is a LLC that files as an S-Corp and the other is an S-Corp. Can I apply for a PPP for each business?
I think so. The PPP loan application, btw, has you disclose other businesses you own.
Thanks Steve for the insight! Question: I have a small 5-person printing business. What if apply for the PPP loan, but my business revenue doesn’t really ramp up again until later this year, say in August or September? Then I might be “stuck” paying for salaries of people with nothing to do?!? And, it’s not certain when my employees will be allowed to come into work again, so taking the loan right away seems a risk in that case, too. If I apply for the loan right away and I am granted the loan, when’s the latest I can re-hire my employees and still benefit from the loan??
The PPP loan amount will be determined by looking at your 2019 payroll, per the loan application instructions. So you’re good there.
The loan forgiveness amount will be determined by looking the payroll you paid in the eight weeks following the loan funding.
I think what you do is get the loan and put people (including you) on the payroll. Period. That’s what the law is for. And if folks sit at home binge-watching Netflix and Hulu, that’s okay at least from the Feds point of view. (Maybe your point of view too… you’d probably like to keep the team intact.)
Hi, wow you are providing a great service. Thank you! For a two-employee S-Corp that runs all it’s W-2 payroll in one quarter of the year (the 4th) does this mean that during the eight week payback period a W-2 payroll will have to be run (as opposed to owner’s draws/dividend/distributions) to qualify for forgiveness? If we contribute annually toward a SEP/IRA retirement plan through the S-Corp but not directly through payroll. Would retirement contributions still qualify towards forgiveness of the loan (up to the 25% max of the annual W-2 payroll or just a two-month (eight week) share of the maximum allowed)? Finally, what state and local taxes assessed on compensation are included (does this include state payroll taxes like unemployment and disability insurance?) Thanks again!
Regarding the PPP loan amount: The average payroll calculation looks at your 2019 wages to determine the PPP loan amount. If they were all in Q4, it won’t matter. You’ll be fine.
Regarding the forgiveness formula: You’ll want to do your wages within the eight weeks that follow the loan funding.
Steve: You provide answers I cannot find elsewhere. Thank you. My daughter is a full-time cosmetologist and so her business has been hurt. She works at a very high-end salon, and they have max 4 people. She has an LLC in which she is the only employee, so it is a sole proprietorship, in 2019, she got paid by the salon, but decided to own her own business, and got paid and received a 1099-MISC for the first 7 months. The rest of the year and forever going forward, she gets a 1099-K from Square that processes her payments from clients. She has her office in her apartment, and does advertising and setting up appointments, but travels to a salon to meet with clients. She has to buy her own products and equipment and special products for clients like hair extensions, and pays for all of it. She was paid $80,000 plus between the 1099-MISC and 1099-K this last year, and of course has business expenses like chair rental. So just for ease of the question, she got an average of 6666.67 and so I am taking 2.5 times (Loan for $16,667) for her Paycheck Payment Program application. She has a Business Credit Card, and a Business Checking account.. Is this the way I should apply for her? I don’t expense anything for her office apartment and take standard business mileage for the car she leases. I like to be conservative. So I am planning on submitting her application to Wells Fargo on Friday April 3. She doesn’t really pay herself a salary, and has a savings account specifically for her quarterly tax payments. So how can we provide proof that the money is going for her salary, and obviously, there will be no decreases in employees since she is the only one and doesn’t use any assistants or contractors. Am I doing this correctly, in the amount I am applying for her SBA PPP Loan, and will all of it be forgivable or how do we make it all forgivable, legitimately?? Thanks, I did read all the regs for the loans, and all the questions that were posed to you, but LLC Sole Proprietors in her situation and the instructions from Treasury are not exactly clear for a licensed cosmetologist that has only high-end clientelle with a 1099-Misc and 1099-K split year. Please advise, and thank you once again for the amazing answers you give..
I don’t think this is right, “she got an average of 6666.67 and so I am taking 2.5 times (Loan for $16,667) for her Paycheck Payment Program application.”
I think you look at her Schedule C and Schedule SE, which calculate her self-employment income. So maybe the $6666.67 a month becomes $4000 a month after expenses? Or $5000? And then that’s the value you multiple by 2.5.
The multiple isn’t “times” the revenue. It’s “times” the payroll or self-employment earnings.
Great article, thank you! Question: Say my sole proprietor income for calculation on Form SE is $20,000. That’s the number you suggest as using for “payroll”. But my actual net income on Schedule C (before deducting $5,000 for business use of home) is $25,000 – and that’s the amount I actually paid myself. The Form SE says only $20,000 because it takes into account a $5,000 business use of home deduction. But since the $25,000 is what I ACTUALLY paid myself, wouldn’t the $25,000 be a more accurate number to use to calculate my average monthly payroll? Thoughts? Thanks & hope that makes sense! 🙂
I’m just keying on the SE income since statute uses that several times.
BTW, the way to think about this, PPP loan gives you two months of payroll income… and then an extra 25% for things like rent, utilities, etc. The expenses your home office represents.
My business partner and I have…
One LLC owned 100% by me
One LLC owned 100% by him
One LLC owned 50/50% by both of us.
three different EINs
Is there a way to cover all the employees, or is one group left out because of the “single loan” wording?
Thanks
Each entity can probably get its own PPP Loan. The PPP loan application asks you to identify all the other businesses you own 50% or more interest in. It’ll be more work to get three PPP loans and probably require trickier documentation. But you should be able to do.
“I think you apply tomorrow. If you can.” — using our SSN and not our EIN for the LLC, right? And each individual LLC owner applies separately using their SSN? Awesome of you to be so responsive, you are coming up first on Google right now!
Your LLC is a sole proprietorship. So I think you file that way. And you’re right… you want to use your SSN. Good luck,
Thank you for this site. My husband and I have a 2 member LLC w/S Corp status. My husband is the only employee and takes a reasonable annual salary of $50,000, with distributions to each of us at $35,000 annually ($70,000 total). Annual revenue is around $180k. Our LLC provides contract work to other companies. Do we apply Tuesday for PPP (and just salary?) or wait until April 10 and file as independent contractor? If independent contractor, what documentation do we use to support our income?
I also have a part time job and can apply for unemployment benefits but will only be about $900/month. Can I still get benefits with either scenario above or does one filing as independent contractor preclude me from getting benefits?
You apply in the early group using husband’s $50K salary (average roughly $4166 a month… so loan is 2.5 times $4166.)
You getting unemployment on the basis of another job someplace else shouldn’t matter.
Hi Steve,
I’m getting some conflicting advice.
I own an LLC (marketing company) and whatever is left from my business after expenses I transfer to my personal account. The monthly amount varies but the last three months have been in excess of 10k each month that I’ve been transferring to myself. Under the PPP, do qualify to apply for this? Am I able to get this loan, pay myself the $8,333 limit and have it forgiven? Or am I excluded from this since I’m not on the payroll technically.
Thanks!
I think you will look at what your Schedule C and/or Schedule SE showed last year (assuming your LLC is a single member LLC)… and that will determine what your average monthly payroll is. E.g., you made (say) $60K in self-employment income. That’s $5K a month. So 2.5 times $5K equals a $12,500 PPP Loan.
If you averaged $10K a month over last year, you won’t get $10K as the monthly average… it’ll be $8333 as you note.
I have read all comments and still am unsure of my situation:
My wife and I own an insurance agency LLC (taxed/elected as an S corp.) I take $35k per year of w-2 and have $70k of K-1 distributions. We also pay three individuals as independent contractors:
1. is an insurance agent-we pay her entity monthly commission of $1.5k.
2. is a customer service rep-we pay her hourly and individually $2k per month.
3. is an insurance agent we pay her hourly and individually $6oo per month.
Questions:
1. Can we claim any of our K-1 as payroll? I am guessing no.
2. I can still add manual q-1 payroll to increase my payroll to k-1 ratio. Should I?
3. Can any of the independent contractor pay be claimed?
Answers questions:
#1: No. Sorry.
#2: Probably not. The easy way to do the loan will be to look at 2019.
#3:
Not sure. Sorry. I kind of think you might be able to. And if you can’t, they may be able to…No. (This from the interim final rule published on April 2.)Hi Steve,
I am an S corp as the only employee on payroll which is paid a monthly salary that I understand will be the amount on my w2 for payroll expenses. However, I also get paid through an employee leasing company for the labor I perform at actual job sites. This insures I have the appropriate coverage for workmans comp, etc. The S-corp pays the leasing the company and I get a paycheck from the leasing company. I applied for the EIDL and was going to apply for the PPP. If applying for the PPP loan would I include the amount paid to leasing company as a payroll expense? The entire amount? Or less federal taxes, workmans comp, disability, etc. Or would it be better for me to file for unemployment?
I kind of think both the amount that shows in box 5 of the W-2 you get from your S corporation AND the money you pay the leasing company to provide for things like workers comp count as payroll. But it may be hard to document that. I’ve read your description several times and I’m still sort of confused. (My impression is these amounts paid to the leasing company are essentially state level payroll taxes which do explicitly count as payroll.)
BTW I don’t think you dial down the box 5 amount from your W-2 for the federal taxes to determine your payroll. I am pretty sure I know what part of the statute make some folks think that. But I think that part of the statute just says that federal payroll taxes don’t count as payroll. Which makes sense. The Feds aren’t going to give you money so you can turn around pay it right back to them…
Hi Steve,
I own a S corp and I am the only employee. I do have a contractor I pay $9,000 per month to for the past two years that handle certain aspects of my business. I also have money I send to Philippines, India and El Salvador through wire transfer every month for the past 12 years of business as I have call centers in those countries. I have to keep paying my rents there and salaries plus all my phone and technology systems that I have. Where do I stand with us? My monthly expenses is about $60,000, what program can I apply for? Do they look at my bank statments to see that I have been consistently paying for those expenses ?
I think only your US payroll counts. So not the independent contractor. (He or she does their own PPP loan.) And not non-US employees.
so the independent contractor is U.S. based/U.S. citizen that I have been paying the $9,000 a month to for the past 2 years. Are you stating that I can not apply or qualify for the PPP to continue paying them?
That’s what the statute and the interim final rule say.
The Treasury just listed the “Interim Final Rule” here: https://home.treasury.gov/system/files/136/PPP–IFRN%20FINAL.pdf
My partner and I have an LLC of which we are 50-percent partners.
We receive “guaranteed payments” and a K-1 for filing taxes.
Do our guaranteed payments count as payroll and thus become eligible for these loans based on paying ourselves?
I think your SE earnings count. So GPs plus box 1 distributive share.
Steve,
Thanks for the feedback and info. Must appreciated in this time. I have a situation here that I have tried to find but cannot seem to.
The application says if you are in business last year then use last years number. The problem is last year I paid myself 50k owners distributions, and 50k Salary. I only had 2 part time employees. Since January 2020 however, I have hired more employees, expanded 3 more sites, and have shifted my salary to 75k with 20 owners distributions. My last years average payroll (taxable w2) was 6k a month. This year it has spiked up to 16k a month. So based on the math and application orders I can only get 15k which will only last 1 month, but this years numbers I can get 40k which will last 2 months plus rent.
Which one can I use?
Thank you!
You can look at preceding 12 months. So if that’ll help (as compared to looking at 2019), you probably want to do that. It’ll be harder to document…
AFTER FILLING OUT THE APP WHERE DOES IT GO
To the bank…
Hello Steve!
Thank you so much for all the info! I am in a strange situation.
I work as a bookkeeper and have a home office in our basement under a single-member LLC and EIN. I started my business in Jan 2019. My client pays me $1,020/week under my business name but issued me 1099-MISC with my SSN and business name instead of business EIN. My husband is currently unemployed and owns the home under his name. He also helps me with my business.
Now, I am the only earning member of the family and paying all the expenses, including the monthly mortgage. Can I apply for this loan? I live in NY.
Thanks again for your time!
Yes, you apply on basis on your SE earnings.
Great! Thanks a Lot!!
I have a small retail store with one employee: ME
Last year I made 25,000.
This first quarter I haven’t paid myself because business os on the slow side. What I did do actually is write a check every week to myself but not cash it until business improves. This is generally how I pay myself. When its slow I don’t case my paycheck, when it gets busy I case a bunch of checks.
If approved for the PPP loan can I pay myself all the payroll that is owed to me, or is this only for future payroll?
Second question, when I set up this corporation I had my sister in law as VP 50% shareholder with my as President 50% shareholder. This is just on paper. I haven’t spoken to her in 10 years and I don’t even know where she is. Does she need to sign the document? I see places for initials but only one signature line. Thanks
I apologize for all those typos. I need to wear my glasses when I use the computer
🙂
Your 2019 self-employment earnings will determine your PPP loan amount. I think you’ll get forgiveness for amounts you pay yourself during the eight weeks.
What about a S Corporation with one employee (me), the owner, with a personal health insurance policy, paid for each month by the corporation. The cost of health insurance gets added to gross wages (Box 1 of the W-2, but not Box 5 which is subject to FICA). This is obviously not “group health insurance”, but it definitely falls under “compensation”. Would the cost of my health insurance be considered a payroll cost under PPP? I seem to remember reading elsewhere on this blog that this is considered similar to a “guaranteed payment” and definitely not in the same category as a distribution.
I don’t think you get PPP loan amounts for SE health insurance.
Hi quick question if anyone knows the answer I’d appreciate it. I have a family business I hold 70% and have all control over everything my sister has 30% but doesn’t have anything to do with it no salary or anything. I filled out all the paperwork for the ppp loan and I’m reading anyone that owns more than 20% must sign the loan documents as well. My sister will not sign anything dealing with a loan. I tried to explain everything to her but we really don’t get along so I’ll just leave it at that. Thanks
I think that might torpedo your application. Sorry.
Hi Steve,
Thank you so much for this article! I have been searching for an answer to my question for a few days but haven’t been able to figure out yet…
I am a single person s-corporation. I am the 100% owner and the only employee of the s-corp. Am I only be able to count the payroll portion of my income towards the payroll amount for PPP? My s-corp is small, so the payroll portion won’t be that much. It seems self-employed people can count the whole income towards the payroll amount for PPP, so I feel a bit unfair… I am pretty much like a self-employed or sole proprietorship because my s-corp gets paid on contract basis from various clients. I made the single person s-corp because some potential clients said they can’t hire a self-employed individual.
I was talking to someone who works at a bank today and she said PPP might consider me as sole proprietor. What is your opinion about this?
Thanks!
You only count the shareholder-employee wages.
Steve… You are the man! Thank you so much for your help. Here is my question…
1. I own an LLC taxed as an S-Corp. After reading all the above comments I am still a little confused… I have a form 1120-S (for 2019 taxes) with a gross receipts/ sales of $31,500. My business doesn’t have a monthly amount I made each month last year. Money comes randomly throughout the year based on when work comes, and I use some funds to pay myself ($24,450) and some for purchase of equipment/ marketing ($7,050). I’m so confused on how I would go about addressing this for the PPP loan?
2. I also did work as an independent contractor and have 3 1099’s from 3 different jobs/ gigs totaling $26,000. Do I apply for the PPP as an independent contractor for this work, or as an LLC/ s-corp for my business, or both?
Thank you
I think there are potentially two PPP Loans here because there are two businesses: the S corp… and then the sole proprietorship.
Thank you for taking time to reply.
Hi Steven
Thank you for the detailed article. I have an edge case that I was hoping you could clarify. My wife has a S-Corp, established a few years back. In 2019, she did not pay herself a wage but paid for another individual through their own S-Corp. That remains true in 2020. A couple of questions. Can the amount that she paid the individual, through their S-Corp count towards the 2019 Wage calculation? Also, if she starts paying herself a wage after the SBA loan, could her wages qualify for forgiveness?
thanks in advance,
Victor
If your 2019 payroll equals zero, it’ll pay down your loan amount. But you can probably do a twelve month lookback?I want to edit my original answer. Think I misunderstood first time I read question. If you have zero payroll costs (because you have no employees), the PPP loan amount equals zero. So an S corporation without employees can’t get a PPP loan.
I’m a sole proprietor looking for a little clarification as how to determine payroll cost. Would I use Unadjusted Gross “Income” or do I need to factor in my expenses and use my net earnings? The law says the (aggregate) of “wage, commissions, INCOME, or net earnings” but I haven’t been able to find a clear definition of what’s type of “income”.
For example: I’m in online sales. I received a 1099-k from Amazon for $100,000.
Do I take 100,000 / 12 x 2.5 = PPP?
or
Factor in expenses ($30,000)
$100,000 – $30,000 = $70,000 / 12 x 2.5 = PPP?
So confusing. Please forgive me Steve if I butchered this question I’m a 100% bonafide newbie. Thanks!
You probably use your self-employment earnings. Definitely not gross income.
Great article-thank you. Question on double dipping between EIDL and PPP. If I take PPP and cover 2.5 months of payroll but I expect my payroll to be disrupted for longer than 2.5 months, can I use EIDL to cover some of the remaining 9.5 months of payroll or am I now precluded from using EIDL for anything related to payroll? Thanks!
I think you can double-dip in effect. The interim final rule provides examples.
Regarding 1099-Misc subcontractors counting in the PPP calculation, I am moving more towards a position they will not count. I did find one firm addressing this issue:
https://www.wilaw.com/can-payments-to-independent-contractors-be-included-in-calculating-payroll-costs-under-the-paycheck-protection-program-uncertainty-exists/
I also found a pretty definitive statement from an SBA document (Page 11) stating they will not count:
https://content.sba.gov/sites/default/files/2020-04/PPP–IFRN%20FINAL.pdf
Yeah, I agree and have updated post and answers to blog comments. The interim final rule makes this clear.
Seems a rather large local bank is counting 1099 payment? This was just sent to customers today.
https://www.bbvausa.com/content/dam/bbva/usa/en/pdf/PPP-Loan-Amount-Worksheet.pdf
How confusing.
Totally, totally, agree Allan. Ugh!
IN 2019 was part of a partnership LLC. Jan 2020 partner retired and is now working as an independent contractor for me. Our 2019 Tax return, K1 has not and do not expect it to be filed until July. We both took a draw of more than $100,000 every year.
1, Can I apply using April 2019-April 2020 Payroll or Jan-Dec 2019 Payroll for loan amount?
2. Does my $100,000 still factor into the equation
3. Will my former Partners Draw factor into either equation.
4. Will former Partners 2020 1099 payments factor into the 1st equation.
5, Do I have the option of using Jan-Feb 2020 FTE as my denominator when determining my forgiveness, or do I have to use the Feb15 2019-June30 2019?
I don’t think there’s a short answer for the above questions… sorry. But here’s an idea… can your bring your old partner back into the partnership? That would seem to fix a couple of issues. You’ll still have the partnership so the same entity… and the amounts you pay “old” partner in 2020 can be payroll costs plugged in forgiveness formula.
Hello Steve,
I have rental property in LLC and managed thru a LLC, We have subcontractors we pay to do
work them, we 1099 the ones required. If they are incorporated we do not 1099 them.
Can we use the PPP to pay 1099 s?
Can we use the PPP to pay the ones we do not 1099?
The income is pass thru income , can we calculate that in any of the PPP?
I also have a S- Corp that we have payroll and subcontractors. Can we file 2 PPP, one for
each company?
Can you also indicate were I can find the documentation for 1099 contractors and pass thru?
Thank you
You can’t use a PPP for the rentals. Also per the interim final rule, your independent contractors do NOT count as payroll.
Hi,
I have a few questions about the PPP loan forgiveness, especially the language “to retain workers and maintain payroll”. My business has been closed since March 16 due to local mandatory quarantine and I will not be able to make payroll payments until I receive PPP funds.
Will I still have the loan forgiven once I receive the funds and pay 8 weeks of payroll to all of them?
What if some of them apply for unemployment in the meantime? Does that affect loan forgiveness?
Thank you!
You can and should apply. You would rehire.
We have a 4 member LLC that employs 7. The 4 members take varying weekly draws and I am curious what portion (if any) of the payments to members can be deemed “payroll” for the purposes of a PPP loan. Since sole proprietors are permitted to include “net earnings from self employment” it would only be fair for some portion of member distributions to be allowable. Thank you for your help!
I agree. Look at SE earnings.
Thank you!
HI Steve, Matthew’s situation is similar to mine. So does Matthew fill out one loan at the LLC level to include both the employees (based on W-2) and the 4 working members (based on self-employment income), or do they have to do 5 different loans?
One PPP loan.
My wife and I are both hairstylists. We are have an S-corp shop which i am a paid employee and there are 2 other people employed, they are currently receiving unemployment from the state. When this pandemic is over they will come back to work..Do they come off the state unemployment during this pandemic when I do this ppp and realistically by the time I get this loan they will probably be back to work. Question is, do they receive money from the state and my loan? Because I’m an S-corp I had opted out of employment security so I cannot get unemployment. Would it be better to just take the EIDL 10,000 for the S corp and pass on the PPP especially since they are already getting unemployment? Secondly,My wife is an independent contractor at a different shop. Can she apply for the EIDL too? We also own a building,which is an LLC and rent out to the barber shop and 2 other businesses.We take dividends every week out of this LLC but now these rentals are not paying because of the pandemic. Can we do an EIDL on that also? The EIDL seems less onerous and would cover us if we could do all 3. I just dont know if its legal or allowed under these circumstances. I appreciate all your work on this, its just confusing to pick the right way to go. Thanks, Gary
I think, once you get the loan, that you bring the folks back to work. And then the loan will basically provide for payroll money for you and your two other folks. I.e., it won’t matter that they’re already at work once you get the loan. And it won’t matter that they were receiving unemployment earlier.
Thank-you! What about the LLC and the EIDL and my wife being able to apply for an EIDL being an independent contractor ?
We have a single-member LLC, 6 payroll employees plus myself and my spouse who work in the business.
– 6 employees are paid through payroll
– myself and my spouse are paid through my owner’s draw as we file jointly (annually, me over $100K, spouse $50K)
– we have yet to complete our 2019 taxes as our accountant closed before our tax prep
Q: How do we submit payroll documentation to ensure we are covered for both payroll and owners draw?
Q: What documentation will be needed in lieu of 2019 tax documents?
Q: Is it possible to include both myself and spouse as two separate employees in terms of the payroll calc, even though we both are using the same owner’s draw?
Thank you for the very helpful insights on your blog.
I think your payroll costs will equal your employee W-2 totals PLUS the self-employment earnings you guys get from the business.
The documentation required will depend on the lender a bit. But it looks like payroll returns and maybe your income tax return from 2019 will do the job. (I’d try to connect with your accountant about having her or him finish your 1040 return.)
Hello,
I’m a single member sole proprietor (LLC) of a startup where I get hired as a contractor/vendor to US companies to do software development.
My gross income on my LLC profit and loss was 170k
My expenses were about 150k
Everything in between is my net income which is say $20k
I pay myself as a draw
Most of my expenses are paying out other offshore contractors who do the actual work.
Which number can I use for my payroll figure when applying for a loan? is it the net income or can I use gross income?
I think you use your Schedule SE self employment earnings.
Hi Steve,
Thanks so much for helping the small business community!
I own a two member LLC within the travel industry. My business partner and I pay ourselves through disbursements at the end of the year, based on the company’s performance. At the beginning of 2020, we each paid ourselves $75,000 in disbursements based on our 2019 performance. We started the company in late 2018, so we had no income for that year. Would our monthly payroll expenses be based on our company’s net income (what we used on our K1 for self employment taxes) or based on our individual disbursement?
Are we even eligible for the PPP loan? We do not have any W2 employees and we are not W2 employees ourselves. If we are eligible, would we file as a small business (application open April 3rd) or would we file as Self Employed (application open on April 10th).
Additionally, my partner and I both work out of our home offices. Would a portion of our home rent and utility expenses be eligible to be forgiven under the PPP Loan, or does the rent have to be specifically for a commercial building?
Thanks in advance for your support, it is much appreciated!
I think you two will be eligible. And I think the loan amount formula will look at your self-employment earnings (shown on your K-1s) for 2019.
E.g., if both of you show $72,000 of anual SE earnings, that means a monthly average of $6K per member, or $12K in total for the LLC. The PPP loan then equals $30K. You calculate that as 2.5 times $12,000.
Thanks Steve!
Would we each individually need to file as a self employee, or would we file together as a business?
Given that we have no W2 employees, does it make more sense to file for unemployment rather than the PPP? We live in Illinois, which I believe has a max unemployment benefit of $471/week plus the additional $600 federal.
Thanks again for your support!
I think LLC applies for one PPP loan.
Regarding unemployment vs. PPP loan, yeah, you need to compare your options.
Two comments: This isn’t necessarily an “either-or” situation. I think you can do both, just not at the same time. Also, think about how you guys restate the business when the storm ends. It won’t last forever…
Hi Steve,
It believe that April 10th is when the PPP application opens for self employed. However, it seems that the banks will not have a different application compared to the applications available as of April 3rd.
I’ve reviewed the April 3rd application and it requires you to put an employee count greater than 0. Should we just put “1” here, and then when it asks for W3 forms, upload our K1 forms instead?
Thanks again for your continued support!
Good info Dale. Thank you. I would put a 1 in the form for the owner.
This is a great site.
Last night or early this morning the SBA issued the Interim Final Rule (31 page document) on the PPP Loans. Regarding including amounts paid to independent contractors, on pages 6, 8, 10 and 17 it states to INCLUDE the amounts paid to contractors. Then on pages 11 and 15 it states to exclude the amounts. The document seems to contradict itself.
Thoughts?
I think the document says your (and my) independent contractors need to get their own PPP loans. And that we don’t count what we pay them as payroll costs.
It seems to me that the published IFR says that 1099-MISC payments to independent contractors can be used to establish eligibility for a small business to participate in PPP, but don’t count as payroll costs (as you have pointed out) for loan amount or forgiveness calculation. This is why it is so confusing. Any thoughts?
I think that’s part of it. And then the statutes suggest, sort of, kind of, that you might be able to include amounts paid to independent contractors as part of your payroll costs.
For the record, I didn’t read statutes myself that way… but I agreed with folks who said, gosh darn it, you sort of have the sense they’d let you do that…
We are a single member LLC – husband and wife (me) both work in business full time. We have 6 employees. All the family income is from Owner’s Draws on the business and reports on Schedule C, and 2019 return has not yet been filed. My question is in regards to the Owners Draw that we take In calculating the PPP average monthly payroll, can I add 2/12’s of the 2018 Schedule C income, or can I calculate 2019’s draw from the net income? The second instance will be higher.
Thank you.
I think you file your 2019 tax return and use its Schedule SE number, the self-employment earnings in other words, as your payroll cost. And then you add that payroll cost to the employee W-2 totals.
E.g., say you pay your employees in total $180,000 for 2019. Also say your 1040 for 2019 shows another $60,000 of SE earnings. That’s $240,000 for the year and a monthly average of $20,000 payroll cost.
The loan will be $20,000 times 2.5, or $50,000.
Hello!
We have a 2 person (husband and me) LLC partnership that just started 7/1/2019 and have not taken any owner draws since the business was new and is seasonal. Will we be able to apply for this program and if so, how would we calculate “payroll expenses”? We fully intended to start taking draws in April when business picked up. My husband acts as an employee of the company. Thank you!
In your case, you probably want to calculate the self-employment earnings you’ve earned from the period that runs April 1, 2019 to March 31, 2020. (Use the IRS Schedule SE form to do this.) And that’s what you’d use.
BTW, your situation is WAY more complicated because you need to mash up two different years. Other folks, in comparison, can just look at the actual 2019 Schedule SE that TurboTax or their accountant prepared.
Question
How are affiliated groups treated? Our parent company (PLLC filed as partnership) has its own employees which are paid through it.
Draws from the parent company are then distributed to the owners individual PAs who don’t take salary/wages from the parent company but from their individual PAs (filed as S-corps).
The parent company and individual PAs have their own EIN numbers.
So does the parent company and the individual PAs need to file their own loans? Or since they are all affiliated groups is it all done under the same loan? Any advice would be helpful. Thanks
You probably want to look through the interim final rule and read the relevant paragraphs about affiliated entities and then also the linked to sources. Then you want to compare your situation to that stuff. (Sorry I’m not providing more info. This topic would be sort of like Alice falling down the rabbit hole.)
You have been so amazing to answer all of these questions, I read through all of them thank you so much for your time. My family has an S-Corp that runs payroll for four employees who are the owners as well. We filed late and were approved for S-corp in December 2019 so we didn’t start running payroll until November 2019 so our annual payroll amount looks very low. Also, we were off two weeks in January so only have February and half of January payroll of 2020 so it will not reflect our actual payroll needed for the next eight weeks. Do you know how we should calculate our payroll costs?
You maybe want to look at the twelve months that run through until March 31, 2020 if that’ll give you a higher payroll number than looking at the ful calendar year 2019.
But the fact pattern you describe will probably mean your payroll costs are lower than you’d like them to be just due to the startup phase… Sorry.
Steve, you have done such a service for folks with this information and all your help in the comments. Thank you so much.
I am a W2 employee of an S Corp I own 50/50 with my wife; I am the sole employee. I’m filling out the PPP form, and was unclear on what I should enter in the average monthly payroll box. I do a monthly 50/50 payroll/draw for my personal compensation.
* If I understand correctly, the draw/distribution amount does not factor in to the average monthly payroll number, only the actual payroll
* Should I also factor in monthly amounts for employee benefits the company pays for separately/outside of payroll, such as employer contribution to solo 401k, health insurance premium, etc.?
Thank you again for all your help in this time.
I think you just take the W-2 box 5 value.
Thanks Steve. We were closed for 2 weeks for xmas and new years, and closed since March 15th after the city shut us down so it all works out to be around 6k a month payroll for past year, instead of the 16k I need to keep paying them. Its unfortunate because now I wont be able to cover everyone on the payroll because the loan wont be big enough, therefore I will have to lay someone off, therefore I wont get the loan forgiven. Is that correct? So I shouldn’t get this loan based on that alone.
Appreciate your help!
Hi Steve,
So I am a realtor who has an LLC that files as an S-Corp. I made $150,000 last year and it all went into my business checking account. I then paid myself every month $10,000 to pay for business expenses, personal expenses like mortgage and living expenses, and the rest went into my personal savings. My question is if I can show that I pay myself $10,000 every month, is that seen as payroll? If so, I figure I can get the loan for $20,832. Now my main question is if I get this loan, and use it to pay myself my normal payroll, as I would have if this virus had not halted my business, may I use that money to then do my normal living? Just as if you had multiple employees and pay them their monthly payroll, those employees are allowed to use that money for whatever they would like to.
I just want to make sure that if I use that money to pay my normal debt, mortgage, and living expenses like groceries, that I won’t be seen as using it incorrectly or fraudulently.
Thank you!
You use the W-2 you got from the S corporation by virtue of you being an S corporation shareholder-employee.
If you didn’t get a W-2, you don’t have payroll and so won’t be able to get a PPP loan.
BTW, if you didn’t get a W-2 but someone working in the S corp did, that W-2 obviously creates wages…
Steve, thank for your tremendous assistance!
After reading the SBA’s latest guidance I am still unclear. Boutique LLC law firm with 3 equity partners who take draws (K-1) after all firm expenses are paid, including payroll for 20 employees. In what scenarios are the partners’ draws includible for purposes of calculating payroll costs for the law firm’s PPP loan application?
Thanks!
I think you guys basically add up the employee W-2 amounts… and the partner K-1 SE earnings amounts. And that total, subject to the limit that only the first $100K counts, is the annual payroll cost.
Thanks for all the awesome advice. I have a carpet cleaning business and file schedule C (and yes schedule SE as you pointed out). My business is not a separate legal entity, just sole proprietorship and I pay self- employment tax. My first question is do I fill out the app as a sole proprietor or eligible self employed individual? I am a one man show- no employees. Not sure of the distinction.
Second question is that I do pay myself a salary, but I did write a few checks to my wife in 2019 to deposit in our joint account to pay some household expenses, as she is no longer employed. So, do you think those checks to my wife will be considered draws? Those checks are only a few thousand and my net income is over $100K and that’s the amount SE taxes are based on..
Thanks
I think you’re sole proprietor and use the Schedule SE numbers.
Clarify, I do NOT pay myself a salary.
Yeah, I understand. You’re a sole proprietor. So you use your Schedule SE numbers.
Schedule SE takes your Schedule C profit and converts it into self-employment earnings.
HI-
I’m an S-Corp with one employee, myself, and pay freelancers. I have a couple of questions:
1. I work out of my home office, but have never taken a deduction for it on my taxes. Can I still use the money to pay my home rent and utilities?
2. I take a small monthly salary to keep money in the business and if there is money left, I take it as a dividend. Do you use my small monthly salary or my K1?
3. I understand the freelancers are now not considered part of payroll but they are essential in my keeping my clients and keeping my business afloat. Are they considered then, or not at all?
Thank you!
I doubt your home office works for the “rent” part of the PPP formula. But you should do the home office thing for your S corporation as described here: https://evergreensmallbusiness.com/s-corporation-home-office-deduction-revisited/
Regarding that you use for the payroll cost, that’ll be your W-2 amount. I.e., you don’t count your independent contractors. (They would get their own PPP loans.)
Our partnership LLC ended in December when my partner retired.. We each took a draw last year, but do not yet have our 2019 K1 completed (and do not expect it for a few months). Does his draw count toward the total payroll and toward the maximum loan amount?
Theoretically, there’s probably a way to get this to work… but it may be too tricky given the fact that you can’t really get any personalized help from the banks and your CPA can’t get involved in this. Seems like you’d use the LLC’s 2019 K-1 numbers (when available) for the payroll cost that plugs into the PPP loan formula… and then the 2020 SE numbers on the LLC (except now it’ll be reported on a Schedule C and not on a K-1) for the loan forgiveness formula.
Hi. Do you know how it works for those doing owner withdrawal in an LLC? We do an owner withdrawal from our business on a monthly basis as an income. We won’t have any sales coming in for at least 30 days. Would we still qualify for the PPP loan?
Thank you.
I think you use self-employment earnings for 2019 or if you weren’t in business in spring of 2019 that you use self-employment earnings for January and February of 2020.
My business partner and I only started doing payroll this year after hiring our first full-time employee. We used owner draws in 2018 and 2019 to pay ourselves.
Should we use the first two months of 2020 (our official payroll numbers), or use the K1 numbers from 2019?
Thanks so much for your guidance!
I think you use the SE earnings numbers from your 2019 K-1s. E.g. if your two partner 2019 K-1s shown each partner earning (for example sake) $60,000, that means partnership has $120,000 in total in payroll cost. Monthly average equals $10,000. That produces a PPP loan amount of $25,000.
Hi Stve. I am a single member LLC, taxed as a sole proprietor (a disregarded entitiy for tax purposes), do I apply as a Sole Proprietor on the PPP and 7a loan applications with the LLC in my business name ?
I don’t know. Sorry. I would think you use your name, so Cheyenne, as the sole proprietor name, but then identify the DBA as the LLC.
Thanks for all this great information. I have a question about my S Corp and eligibility for this program. I established my S Corp in January of this year and do not yet have payroll setup but plan to do the whole paying myself a W-2 salary with a CPA I’m working with. Given that I am a new S Corp can I use the number I plan on paying myself each month for the application or would I have to furnish proof of payroll?
Thank you for your help.
Thanks Steve!
Would we each individually need to file as a self employee, or would we file together as a business?
Given that we have no W2 employees, does it make more sense to file for unemployment rather than the PPP? We live in Illinois, which I believe has a max unemployment benefit of $471/week plus the additional $600 federal.
Thanks again for your support!
Hi Steve,
You have been the most insightful by far. Especially with these questions. As it relates to applying for the PPP: I am the only member of my LLC and if I’m remembering correctly, I count as a Sole Prop for tax purposes. I can apply April 3 (today), correct? I do not need to wait until next week even though I’m Self-Employed?
That’s correct.
I apologize for the duplicate comment but I think I need to provide additional color:
I recently established my S Corp in Florida in January 2020. Before I was issued an EIN and could establish a bank account I had income from my business that was paid to me individually. Probably 95% of my business income is paid quarterly (Jan, Apr, Jul, Oct) so January was a big payment. Moving forward, I planned on having all income paid to my S Corp for 2020 and at the end of the year my CPA was going to process my payroll and W-2 for a specific $ amount.
My question: It seems I may be ineligible for my S Corp to apply but can I apply as a sole-proprietor with the 1099 income I received in January 2020 as proof of income? Although couldmy plans to move all future 2020 income into my S Corp create problems down the road? I have not yet received any payments this year into my new business account…
Thank you very much for any advice you can offer.
There are ways to “move” income a customer pays to John the proprietor so it appears on John’s S corporation as revenue. You might ask your CPA about that.
Here’s a blog post I did a while back about the issue: https://evergreensmallbusiness.com/s-corporation-paperwork-problems/
Also, if you have a business that wasn’t yet “live” from Feb 15, 2019 through June 30, 2019 AND you can get income and payroll into January and February of 2020, the statutes let you use that payroll for your PPP Loan amount formula.
This all seems like more complexity than a person can do themselves. You might need to ask your CPA help. And be forewarned, he or she may have trouble doing this. The statutes appear to say they can’t charge for any help. And the malpractice insurance companies are telling CPA firms not to provide a risky service on a pro bono basis.
Steve,
Thank you so much for the information!
I do believe my CPA is capable of doing what you mentioned above and believe that is his intent at the end of the year.
However, and I will ask him this too, instead of going through all that hassle to recategorize my income and retroactively process payroll, could I simply apply to PPP as an independent contractor? I would use my revenue in Jan/Feb for the monthly income calculation. Just curious as to how my plans to pay future income this year into my business and then from there a W-2 to myself could compromise that or get me in trouble in anyway?
My LLC has one full partner (me) and two minority partners, all of which receive a K-1.
Can I claim the salaries for the three of us for the PPP?
Thank you,
Kevin
Not “salaries” per se… but the self-employment earnings that show up on partner K-1s should count as “payroll costs” and plug into both the PPP loan amount and the loan forgiveness formula.
I’ve been banking with bank of America for thirty years and they won’t let let me get a ppp loan because we don’t have a credit card with them.
I forgot to ask. Is there anywhere else we can apply?
Thank you
I don’t know.I know that U.S. Bank says they’ll accept applications for non-customers. Also, late Friday, Bank of America updated its policy so now you can get a loan. (I’m not sure if their systems support this change in policy yet, but let me publicly thank Bank of America for rethinking and changing its original approach.)Between you and me? I think Bank of America’s behavior here is terrible. Not to go off on a rant–we should all work hard to stay calm–I think they sent out an email early last week that I read as saying “Hey, we got you covered on this PPP stuff.”… and then Friday morning they follow up with a new message that says you need a business? Friday morning when it’s basically too late to go anyplace else? That’s cold, man… Ice cold.🙁
Hi Steve,
I’m an S corporation. I run payroll for the entire year (all 12 months) in December every year. So, I have not run payroll yet in Jan/Feb/Mar 2020. Does this have any impact on PPP filing?
Thank you for all you do!
Vik
You’re going to use your 2019 calendar year payroll, which includes that December one-time check, to calculate the average payroll. So your PPP loan amount calculation will work just fine.
Here’s where you’ll need to make a change. You’re going to want to do monthly payrolls during the months that follow the loan funding. Those payroll amounts paid during the eight week period will create most of your forgiveness.
Hi Steve,
I am a single member LLC who takes a draw as payroll. You’ve explained we will use Schedule SE numbers for the PPP application. Your response to Vikram brings up a good point. What should single member LLC’s/ sole props do during the months that follow loan funding to substantiate payroll for forgiveness? Should we continue draws or set up formal payroll even though we have not done this in the past.
Thank you so much for your time and expertise,
Lisa
I think you explicitly take owner draws each week that match up to the imputed owner’s payroll amount. I’m going to blog about this in detail later. Maybe next week. But if implicitly the SE earnings show up as exactly a $1K for the owner, I think the owner takes a $1K draw each of the eight weeks “considered” by the loan forgiveness formula.
My wife works in a two-member partnership that has lost many clients due to the virus. All income is reported on K1 with SE deducted on our personal return. Other partner doesn’t want to take on debt, Can we file for EIDL or PPP as self-employed? or contract worker without a 1099? We both work part-time jobs and this business is our “third-leg”. Thanks for your help Steve!
So you guys need to have the other partner understand this is free money. And then you need to have the partnership file using as the payroll costs the K-1s’ self-employment earnings numbers.
My first reaction to the other partner, btw, is to make some snarky comment. (Sorry everybody!). But with a bit more reflection, I think we’re all processing this COVID-19 crisis in different ways and at different rates. The storm will pass. But this is a TOUGH situation.
First, while you’re not risking your life, let me say that you deserve *almost* as much kudos as health care workers. Thank you for this service.
Ok, so here’s my situation: I’m a partner in a small FINRA broker-dealer LLC. We have 3 owners, each of whom own the LLC through their own single member LLC. Only one of those LLCs files as an S-Corp and pays W2 wages.
We have 8 Registered Representatives, each of whom we pay via 1099, plus two W2 employees. Until yesterday, we thought it was clear: the W2 wages, the 1099 payments, and the guaranteed payments for services (K-1, Box 4a) for the partners would be included in the PPP calculation.
With yesterday’s Interim Final Rule (IFR) publication, we’re unclear about both the 1099 payments and the guaranteed payment for services.
On the one hand the IFR states:
2.h. Do independent contractors count as employees for purposes of PPP loan calculations? No, independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation.
On the other hand, the IFR also states:
2.t. What certifications need to be made? On the Paycheck Protection Program application, an authorized representative of the applicant must certify in good faith …[t]he applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.
In other words, it says you CAN use the Form 1099-MISC as evidence of worker compensation expense.
We believe our bankers are not “independent” contractors because they’re Registered Representatives affiliated with our broker deal and we have the 1099 documentation requested in the new PPP guidance document.
So the two questions regarding the the PPP calculation are (1) can we include the 1099 compensation to our bankers? (2) can we include the guaranteed payments for services (K-1, Box 4a) for the partners?
If the answer to either question is no, then can each of the bankers and the partners’ LLCs claim these amounts in their own individual PPP applications?
I don’t think there’s any question we do NOT include 1099 contractors in the payroll costs either for purposes of the PPP loan amount… or the forgiveness amount. These 1099 contractors, as the interim final rule notes, need to get their own PPP loans.
For the partners, I think you look at the self-employment earnings, so boxes 1 and 4a. Or box 14.
P.S. Thank you for the kind words. 🙂 We need to get through this. And we need our small business community to quickly recover.( The storm will pass!)
Hi Steve –
I’ve been reading everything and this is the best source of info I have found for sure. Thank you so much!
I am an independent contractor and file Schedule C (and SE). I just started this work in September. Do you think I can/should apply for a loan amount using my 2019 SE income divided by 4 (which will max me out)? This is what I want/need to do. I can provide bank statements or invoices or something from client that shows start date as documentation?
Thanks!
Hi Steve,
Thank you for being such a great resource here for so many people. It’s an invaluable help!
I’d greatly appreciate your help on my situation, which I imagine is common for many as well:
• I have a single-member LLC that all my income goes through (my management consulting contracts/invoices are paid to the LLC, and the LLC receives all 1099-MISCs in its name)
• I have no employees, and I claim all of that income on my Schedule C of my personal tax return (thus, the LLC is known as a ‘disregarded entity’ for IRS purposes)
• I do not have a biweekly “payroll” in the sense of many traditional corporations or LLCs. My LLC gets paid, and less some operational expenses, I move remaining funds into my personal bank account
On the PPP Application Form, I have a few questions that I imagine are shared by many here:
(1) On the form, am I a sole proprietor, LLC, independent contractor, or eligible self-employed individual?
(2) I’ve taken Line 31 from Schedule C of my 2019 Tax Return, capped it at $100k per the PPP guidance (it was above it), divided by 12, and listed that as my “average monthly payroll.” I’ve then multiplied this number by 2.5 to get my “loan request.” Is this right?
(3) Number of Employees. I’ve put “1 (single-member).” Is this accurate I’m technically the owner of the LLC and it has no “employees” (e.g. anyone but me)?
Thank you!
You’re a sole proprietor, your self-employment earnings (so what appears on Schedule SE) count as payroll costs, and if it’s only you, I think you don’t have employees.
Thanks so much Steve!
I am in a similar situation and when I reviewed Steve’s reply to this post, I thought I might have erred by stating on the application that I had 1 employee (meaning myself). But I just re-looked at the application form and it actually asks “Number of jobs” rather than how many employees. So it seems like it makes sense to answer 1 job rather than zero jobs ?
I think that would make sense. What applicants may be dealing with here is the bank’s quick and dirty online system not being able to handle the complexities of real life.
In response to a link provided by a fellow local merchant, earlier in the week we filled out a very short application for what I assume is an EIDL loan which was to provide an immediate $10,000 advance as a forgivable grant prior to dispersal of an actual SBA loan which would require addition documentation for qualification and approval. Does this earlier application preclude application for the PPP loan? Can the application process for the EIDL be aborted so long as the actual full application is interupted?
On the other hand, might the “bird in the hand” adage be applicable here in light of the potential for the PPP loan applications to far exceed the funds allocated?
I don’t think the EIDL precludes you from PPP. There’s an interplay between the two however. The interim final rule provides examples of how the EIDL impacts the actual loan forgiveness amount.
BTW, I think the money will shortly be gone for PPP. That’s just based on the funding numbers from Bank of America for part of Friday. So, yeah, bird in the hand principal applies.
Hi there.
My husband and I are 50/50 partners of an LLC.
Two questions:
1. Can you reiterate what you anticipate we’ll need to show for loan forgiveness if using our 2019 K-1s as our income? (Ie “use the 2020 numbers from self employment income’)
2. Our shop is super small, we had 3 PT employees working a total of 43 hrs/wk since inception in 2015 until end of Feb 2020 when two of them resigned to begin their own business (talk about timing), leaving us with one PT employee or .5 FTE.
Any suggestions on how you’d handle the loan so we don’t use a bunch of money that is not forgivable?
Thank you !
OK, so first, this CRUCIAL point. The formula for the loan amount, 2.5 times the average monthly payroll cost (probably for 2019), works one way…
And then the formula for the loan forgiveness works another way. You want to understand this… 🙂
Second, your loan forgiveness amount will probably equal the sum of the following amounts you pay in the eight weeks that follow you getting the loan: net payroll checks to remaining employee, rent, utilities… and then the big one distributions to partners equal to (probably) the average monthly self-employment earnings for 2019.
E.g., if husband and wife together earn, just say, $4K a month (so $2K a piece), the partnership (the LLC) should be able to make a $2K distribution to husband each month and a $2K distribution to wife each month.
Steve,
We are very grateful for your explanations on this site! We have an LLC with monthly distributions that are reported as SE. We are capped at the 100K per partner, but we will continue to pay monthly distributions at our normal higher rate of 15K per partner. For forgiveness, I believe we’d be limited to the 8333 per partner per month even though we will document the 15K monthly draw for each partner?
We have no other expenses that are forgivable. I believe this means that we will need to repay the .5 portion of the 2.5x multiplier at 0.98% interest?
Thanks!
Hi Mark,
I think that’s right… though do notice that the new rules make let you include amounts above that $100K rate for health insurance and pensions.
This blog post explains: https://evergreensmallbusiness.com/paycheck-protection-loan-formula-explained-and-illustrated/
See the discussion of the retirement plans near the end…
Hi. Here is a tough question if you could help
I have a S-corp where i own 99% of the company and my wife is 1%
We both take a draw and basic payroll salary. My Insurance premiums
are listed under S-Corp Medical on my W2. My wife get a Schedule SE for $36,000
plus some 1099 for side gigs.
Should the company file for a PPP for my salary and my wife file an independent PPP for her Schedule SE?
We are on extension on 2019 Corp tax return. I have my 2019 W2 and 2018 personal and corporate tax returns.
Whats the best route here? THANK YOU!
I think S corp files using its W-2 and W-3 for 2019… and or the quarterly 941s.
If you had your 2019 1040 return done, you could probably easily use the Schedule C and Schedule SE for wife’s business for another PPP loan. But that may be too late. (If wife had $36K of SE income in 2019, her PPP loan amount is $7500.)
Hi Steve.
I’m a farmer with $50k SE income from a single member LLC and another $50k SE income from a sole proprietorship in 2019. My understanding is I would qualify for a PPP loan of about $20,833. I have no employees or payroll. The normal course of business during the next 2 months would be to pay cash rent, fertilizer, seed, utilities, mortgage, etc. What can a farmer use PPP loan funds for that would qualify for loan forgiveness?
Thanks,
Jack
I think you’ll be to pay draws to Jack the proprietor and get forgiveness for those amounts. So that’s roughly $17K over first eight weeks after receiving loan funds. And then also any rent, mortgage interest or utilities that were already “contracted for” work for forgiveness.
If we are filling out the PPL application for our clients, what mailing address do we send it to? Its unclear on where to send it. Also, do you recommend, we add payroll reports and tax returns, etc to the PPL loan application? Thank you for your comments
You turn in the application to the bank you’re working with. I think you use the W-2, W-3, 941s and if applicable any tax forms that show self-employment income.
there is no specific bank on the PPL loan application. Should we send it to the local SBA address?
there is no specific bank listed on the PPL form – do we send it to the local SBA office?
Hi,
I own a short term rental in Kissimmee FL. All of my bookings have cancelled, so I have no income from my villa, but am still incurring $1100 a month costs.
Although I have a registered company in the USA, I actually live and am a citizen of the UK.
Is there any relief for people like myself.
Thanks
Fraser
Not from the PPP loan. Sorry.
Hi Steve,
This thread has been extremely helpful.
I am the 100% owner of a single member LLC with 4 employees (Dentist). For the application I’m planning to include W2 payroll for my 4 employees and $100k annual for myself (even though I’m not technically on the payroll. i.e I’m an owner, not an employee). I file a schedule C and Schedule SE with >$100k of income.
Does this sound reasonable and on the application would I state the Avg Monthly Payroll is for 4 employees or 5? Also I’m thinking I mark as LLC with EIN instead of SSN.
Thanks
Hi Lacy, I think you’re doing it right.
Thanks, any thoughts on if I mark as 4 or 5 employees?
Earlier was stated: “So if you run a sole proprietorship, make $60K in SE earnings AND you also pay your employees in total $60K , I think your payroll cost is $120K for the year… so your average monthly payroll is $120K / twelve months… or $10K a month… And that’s the figure you plug into the calculations. You want to work out your own numbers of course.”
Does that mean that if I am a single member LLC with two employees (I have SE income they have W-2s) on the sba application I enter 3 employees? I usually state 2 on withholding forms.
Thank you in advance. This is a super helpful website.
You have 2 employees and 1 proprietor. All three people create payroll costs for the formulas.
Hello, Thank you for the article. I am a single member LLC. I have (1) 1099 contractor that I pay a monthly salary too, but they are not a W2. We opened in November of 2018 so we actually took a loss with everything we had to invest in last year (2019). Last year I did not pay myself. Could my business apply for the PPP loan? We are a brick and morter crossfit gym with rent and other overhead costs.
Probably not. You don’t have self-employment earnings for 2019 nor W-2 payroll, so you don’t have any easy way to calculate an average monthly payroll amount based on 2019.
P.S. It’s possible that if you look at the twelve month interval that runs from April 1, 2019 through March 31, 2020, you have some SE earnings… but from the sound of it, unlikely.
Thank you for getting back to me.
The total loss was mainly do to the 1099 contractors paid to run the gym with a total of pay of $65,266.62 in 2019. If I remove that payment we had a net profit of $36,698.72 in 2019.
As the owner I did not take any payments this first year. I went back and did April 1st 2020 – March 31st 2020 and although there was a profit this year we are still $22,000 in the negative.
I have read on this source: https://www.valley.com/VNB/media/Library/Images/Borrower-Information5-PDF.pdf
It looks like payments to 1099 contractors who were paid monthly similar to a salary could be included. This is so confusing, but we are a brick and morter gym that has expenses and rent due. Thank you so much for your help and I hope there is an option here?
You can’t count contractors. Some people thought that initially. But when SBA published the “interim final rule,” they said “no.”
Sorry. 🙁
Steve,
I have an SMLLC which is taxed as a disregarded entity so my income goes on Schedule C. My business has three employees whose salaries run through our ADP payroll system. I do not draw any salary for myself that runs through the payroll system. In 2019 my Schedule C income was $180,000.
1. Because I did not run anything through ADP for myself, can I not claim anything for myself as part of the PPP? Sure, some of the $180K was business owners profit but most of it is normal “wages”. Thinking I should claim $100K for myself. ???
2. I hired a new employee (who does the same job as me but is not owner) on Oct. 1, 2019 so they only have 3 months of salary in 2019. Their W-2 wages are $175K annually or $14,583 monthly. Because I only paid them $175K/4 = $43,750 last year due to three months employment, may I only “claim” $43,750 /12 = $3,645/month for them despite that I have been and continue to pay them $14,583/month?
I’d much appreciate your thoughts. Thanks.
Steve,
I have an SMLLC which is taxed as a disregarded entity so my income goes on Schedule C. My business has three employees whose salaries run through our ADP payroll system. I do not draw any salary for myself that runs through the payroll system. In 2019 my Schedule C income was $180,000.
1. Because I did not run anything through ADP for myself, can I not claim anything for myself as part of the PPP? Sure, some of the $180K was business owners profit but most of it is normal “wages”. Thinking I should claim $100K for myself. ???
2. I hired a new employee (who does the same job as me but is not owner) on Oct. 1, 2019 so they only have 3 months of salary in 2019. Their W-2 wages are $175K annually or $14,583 monthly. Because I only paid them $175K/4 = $43,750 last year due to three months employment, may I only “claim” $43,750 /12 = $3,645/month for them despite that I have been and continue to pay them $14,583/month?
I’d much appreciate your thoughts. Thanks.
I think your 2019 payroll costs equal the sum of these two amounts: What your W-3 shows as the employee wages subject to Medicare… and then another $100K for Chris the proprietor.
The average will equal this amount divided by 12. E.g., if the “employees plus Chris” total equals $240,000, monthly average equals $20,000. PPP loan amount will equal $50,000.
Note that you won’t get in a sense “full credit” for the employee the way the formula works.
Thanks Steve, If I may follow up please”
1. By not getting “full credit” do you mean that the $175K annual employee who started in Oct 2019 and worked for me during Oct/Nov/Dec 2019, (for the purposes of the loan amount) is equivalent to someone who worked for me all last year and made 1/4 of the salary?
2. Is it possible to use “trailing 12 months” of W-2 instead of calendar year 2019?
That should do it!
Regards,
Chris
Steve,
Sorry I just checked the new SBA “Interim Final Rule” and it says:
Aggregate payroll costs (defined in detail below in f.) from the last twelve months for employees whose principal place of residence is the
United States.
So it appears I can use payroll from 3/31/19 to 3/31/20 as the measurement period as opposed to calendar year 2019?
Chris
I am sole owner of an LLC and a 50/50 owner in another business.
Can I apply for a PPP loan for the business I own 100% of and have my partner in the business that is owned 50/50 apply for a PPP loan?
I think so.
Thank you for your insight and assistance in navigating through the PPP application process! My husband is an owner-operator truck driver that is “leased” and under contract with a trucking company and receives a 1099 from them each year. He has an S-Corp set up in his business name and the S-Corp pays him a modest amount of wages and he receives a W-2 for this. The 1099 he receives from the trucking company is issued to his trucking business name, DBA as Keith G. This 1099 is issued under his EIN. My question is: Can he apply for the PPP as an independent contractor in his own name using the 1099 information or does he have to apply using the S-Corp information? Thank you!
You apply as an S corporation based on the W-2 amount.
E.g., to keep math really simple, say business makes $6,000 a month before wages. Say the S corp pays Keith the employee $3,000 a month in wages. And that other $3,000 leftover goes to the shareholders in the S corporation, Keith and Kim.
In this case, just the $3,000 counts. The PPP loan amount equals $7500.
Thank you for all of this helpful information! I’m a single-member llc who files a schedule C with my 1040.
The application form asks for us to distinguish between sole proprietor and LLC, so I’m assuming that I have to check off LLC, even though I receive pass-through income like a sole proprietor. My concern is that the form also asks for number of employees. Do I put zero, since I don’t pay myself as a W-2 employee?
Would my average monthly payroll be my net profit (sched c, line 31) on my 2019 tax return, divided by 12?
Also, with respect to loan forgiveness, the guidelines indicate that at least 75% of the loan should go to payroll. Is there anything prohibiting 100% of the loan being used for “payroll”? Put another way, would it be appropriate to make regular payments to myself (essentially transferring from biz to personal account) that add up to 100% of the loan, during the applicable 8-week period? Or would it be better to use a portion of the loan for utilities, paying directly from my biz account? What if I have a home office and only a portion of my utility bill is for my business?
I sincerely appreciate any guidance that you can provide (based on the limited information provided about this program).
I think you’re a sole proprietor and that you’ll calculate your average monthly payroll costs as your SE earnings for 2019 plus your employee W-2 wages for 2019.
Example: Your Schedule SE shows $60,000 of self-employment earnings… your have W-2s that show $60,000 of wages. The $120,000 total for the year means $10,000 a month in payroll. This means the loan amount equals $25,000.
You can use all of this for payroll. But if you cut your employees payroll, you will receive either reduced forgiveness or no forgiveness. (See the blog discussion of how reductions in headcount and or pay reduce forgiveness.)
I have a s-corp in which I have paid myself 4k month for the past 12 months. I also have a sole proprietor computer business as well, schedule c, that has shown a loss on my 2018 taxes but has shown an increase in net profit in the last quarter of 2019 and the first part of 2020 before the crisis hit, A profit of approximately 20k? If I understand correct, I will only be able to apply for the PPP for the s-corp wages and can not include distributions or what flowed over to my personal return on the K1 correct? What about my sole proprietor computer business, Can I also apply for PPP for it as well? If so, how would I go about figuring the amount since 2018 tax shows a loss? I”m also paying for a loan for my s-corp for essential equipment that the business has to use in order to operate, Can the interest on this be included since it was established prior to the crisis?
You won’t want to hear this… but I think you probably combine your W-2 numbers from the S corporation with the sole proprietorship negative self-employment earnings. You would ignore your S corp K-1 income.
TIP: You may want to make the average monthly payroll cost calculations for two periods: for the full calendar year 2019 and for the twelve months that ends on Marc 31.
Regarding the loan interest. I don’t think that works. I read the statute to say you get forgiveness for mortgage interest. Sounds like your existing loan isn’t a mortgage.
The past 12 months is more beneficial for me for both the s-corp and the sole proprietorship, so I was going to use those numbers.. Should I include both amounts in the PPP app for small business that became available April 3? Or do I wait til the 10th for the sole proprietorship?
Thanks Steve for all your help in these trying times. I have a question which I think I know the answer to but I feel I will ask anyway.
I’m a single member LLC using S Corp status and my income is seasonal, usually the first quarter of the year. I only was able to pay myself last year (2019) $4k total in w-2 wages and after expenses and depreciation my K1 is a small loss. This year I’ve done well and in the first quarter of 2020 was able to pay myself $10k. Can you tell me if it’s even worth filing for the PPP with that low of wages in 2019? I am looking to continue paying myself monthly this year but I don’t know if the 1st quarter of 2020 will count.
Thank you so much for any information that you can give me.
Your situation may be one where the PPP loan amount formula returns too small a value to make a meaningful impact. Sorry…
HOWEVER, you should probably check that the “seasonal employer” rule doesn’t help you out. That rule says for seasonal employers, you determine the monthly average by looking at “the 12-week period beginning February 15, 2019, or at the election of the eligible recipient, March 1, 2019, and ending June 30, 2019.”
In 2019 we were a partnership and we had 2 partners ourselves & a family member we were both issued k1s.
Jan we became a s Corp and started paying 4 people payroll . Any guidance if we qualify ?
Thanks so very much
I think so… Possibly the entity was an LLC treated as a partnership in 2019 and then as an S corporation in 2020? In that case, the business really is the same legal entity even though the tax return changes from 2019 to 2020.
And then I would guess even if that’s not the case that the affiliation rules combine the entities. The Treasury (maybe over the weekend?) published an FAQ on these here: https://home.treasury.gov/system/files/136/Affiliation%20rules%20overview%20%28for%20public%29.pdf
Thanks for all the info. I’m part of a law partnership. We have about 20 partners and about 30 employees. We are comfortable with applying for the PPP loan to help with payroll for our employees. We are trying to figure out if we can also apply for our partners. All of them made more than $100k in 2019, so it would just be the $8333 / 12 x 2.5 for them. They all get 100% of their money on a k-1. They take draws through the year equal to about 70% of their anticipated year end compensation with the balance paid out (or paid back if they’ve overdrawn) on 12-31.
Thanks so much!
I think the partner self-employment earnings count. And just the way you describe.
E.g., say you have 30 employees making $33,333. That’s $1,000,000 of payroll. (30 times $33,333.)
Say you have 20 partners making $200,000 each. As noted, these guys get limited to “only” counting as $100,000. So that’s another $2,000,000 of payroll. (20 times $100,000)
All totaled, then, 50 people… total payroll $3,000,000… on average $250,000 per month… PPP loan amount equals $625,000.
Wow, thanks for this breadth of wisdom, Steve!
Per the Interim Final Rule, the bank must certify “You were in operation on February 15, 2020 and either had employees for whom you paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.”
I wonder if there is an exemption to this for S-Corps in which the only employees are owners. We are not required to process Payroll more than once per year and have not yet done so in 2020. Shouldn’t the Act treat S-Corps where the owners are the sole employees as they would a sole proprietorship or a Partnership, using net income rather than Payroll?
Additionally, we are not required to make SEP IRA contributions until we submit our 2019 tax return, so 25% of our income (our retirement fund) isn’t being counted in the 2019 calculations.
And finally, we started the business mid-year last year. Can we divide the annual income by the number of months we were in business rather than 12?
Shareholder-employees are employees. So they count. I.e., I think your 2019 W-3 provides the payroll cost number you’ll plug into the PPP Loan amount formula.
Example: You guys do annual payroll. Say, to keep math simple, you pay each shareholder-employee $60,000 at end of year… so $120,000 in total. That means average monthly payroll equals $10,000. And the PPP loan amount equals $25,000.
Regarding the SEP, I know some people treat the employer pension contributions as payroll costs. I don’t read the statute that way. (I assume the payroll cost reference to “retirement benefits” means benefits paid to retirees. Not amounts contributed to employee pension accounts.
Regarding a mid-year start, I think you need to look at just twelve months. So either all of 2019 or maybe the twelve month period that runs though the end of March 2020.
Thanks Steve! My first question is relating to an eligibility requirement. In order to be eligible for the loan, you must have processed payroll around February 15, 2020. This is stated on page 6, part ii of the Interim Final Rule. We haven’t processed payroll this year yet. We are only required to process once a year because the only employees are owners. If we had additional non-owner employees, we’d be required to process payroll 2x/month minimum. I’m hoping banks will look at S-Corps with only owners as employees differently because the rules are different for them.
Hi Steve, as a two member partnership with multiple independent contractors (1099), I think I understand that it would only be the income of my partner and I would be eligible. Also, are we able to apply now or do we need to wait until the April 10 application cycle?
Just the partners. The 1099 guys do their own PPP loans. I would apply now. I bet money is gone before the week ends. Sorry.
P.S. Maybe Congress will add more PPP loan funding with the next round of stimulus? So don’t give up if you miss the boat this time.
Thanks for all your help!
I have a single member LLC (so sole proprietorship) which I file a schedule C for, and which has a business name and EIN (separate from my SSN).
I also receive a 1099 from a separate gig, for which I file a separate schedule C for (with my personal SSN).
The total of these two schedule C line 31’s goes on my schedule SE as a combined amount.
My question: Do I have to file 2 separate PPP’s to capture both of these schedule Cs? (Note on both the schedule Cs, the “name of proprietor” is the same name: mine). If i can file just one, do I put the business name that matches my EIN, or do i just use my given name and SSN?
Sorry, I don’t know. I would think you can do one loan. Using your Schedule SE form and the two Schedule C’s as your documentation. You are a sole proprietor (one person)…
BTW, it’d also be interesting to look at whether you could just file the two Schedule Cs as instead a single Schedule C. You need to check the Schedule C instructions to see if you can really combine them because they can also be considered a “single business.”
For what it’s worth, as a tax accountant, I feel like I often see folks break apart a business into two Schedule Cs for no reason.
thank you. for some reason in 2018 i filed them as a single schedule C and then in 2019 i did them separately. i dont quite know why; just sort of followed my taxact prompts
Hi,
I am am a single member LLC that is a tech startup. I have been in business since 2018 developing a software and did not pay myself a salary. I recently landed a contact which I was going to pay myself a salary from but the contract has been held up due to the virus situation. I have paid all expenses for the business, etc since 2018 and have a +800 credit score. Am I eligible to apply for a PPL loan, EIDL loan? Also, another problem is that Wells fargo, etc are requiring you to have an existing business checking account relationship with them to apply for these loans. So I am not sure how I can even get a loan even if I am eligible since I have only a regular bank account with them.
Thank you!
The formula calculates the PPP loan amount as 2.5 times your average monthly payroll costs for previous twelve months. That’s probably going to be 2019… you cant use self-employment earnings. But in your case, those may be zero? Because you were in startup mode?
So unfortunately the formula in your case seems to calculate zero for the PPP loan amount.
You may be eligible for an EIDL loan. I’d look here to begin determining that: https://www.benefits.gov/benefit/1504
Hi Steve,
I own a single member LLC and the only payroll would be my member draws (aside from contractor payments that won’t qualify). Last year I only drew about $45K as the result of a lot of business expenses. One of those expenses was a section 179 vehicle that was accounted for in a 1yr writeoff despite it being on a 6yr loan. That said, my schedule SE is showing only about $3K of earnings. This won’t even be close to enough to cover my minimal monthly draw amounts. Do you think I can base the figure in the PPP loan off the actual bank transfer amounts of the draw from last year rather than what’s on the schedule SE? Thank you for doing this!
Wally, see my answer to Isaac Esterman and Ari for more detail on the contractors question.
Regarding the Section 179 expense deduction, yeah, you’re right… That probably does hurt you for purposes of the PPP loan amount formula.
Idea: You may get a little better result if you look not at calendar year 2019 but rather at the twelve month period that runs through 3/31/2020?
I own a single member LLC and i have 6 employees (I neither draw a salary nor have a w-2 income) . My spouse owns a Sole proprietorship with three employees, (she draws no income from the business but has personal W-2 income.) are we able to apply for/receive one loan for each business(or are we limited to one loan per family?)
I limit is one PPP loan per business. So I think you could each do a loann.
I’m a single member LLC with 3 W-2 employees. However these employees were 1099 employees last year until 12/31/2019. I assume I need to use the Schedule SE, but can I still deduct the workers as payroll?
OK, I think you’re right. HOWEVER as just noted a response to Isaac Esterman, the one PPP loan application wizard I’ve been able to watch someone step through EXPLICITLY included amounts paid to 1099 contractors in the payroll costs that get plugged into the PPP loan amount formula.
I have pretty good self-confidence about this kind of stuff… But if a big bank with an army of lawyers thinks that’s the way you do it, hey, not going to argue. (I would stay alert to possibility the final rules or calculations work differently.)
But say you do include the 1099 contractors because your bank says “include,” If in that case you showed $60,000 of self employment income last year and the 1099 contractors received total payments of $60,000, I think you count your annual payroll as $120,000. That means a monthly payroll of $10,000. That means a loan amount of $25,000.
Hi Steve –
I have to offer my thanks again for your patience and clarity in responding to everyone’s questions. There’s a lot of anxiety out there right now and I’m sure that you’re doing more than your part to make some folks more informed and calmer.
I commented before on your thread on Employee Retention Credit. We’re a general contractor in NYC – about $100K in payroll costs, technically a two-member LLC, to avoid being a pass-through entity, but one member is 98% so takes the plurality of the distributions, which were about $150K last year reported as self employment income on a K-1 form. In your comments you seem to indicate that this $150K income is, for the purposes of the PPP, reportable as payroll cost. Is there something you’ve seen, either in the legislation or in subsequent guidance that leads you to this conclusion? My thinking is that this is self-employment income and that the partner would have to make their own PPP application and that the construction company can apply for PPP just for the payroll wages.
We bank at Chase and did get a preliminary email from them suggesting that as backup for the loan application we have payroll documentation ready, as well as tax returns (the document which would indicate K-1 compensation).
I’d advise everyone that ultimately the interpretation of eligible payroll costs will be up to the actual lender. In speaking with the rep. at Chase as well as reading between the lines of their messaging – banks are still confused as to how to administer the program. They want you to get your application in and get in the queue for a loan. This buys them time to learn more about the program between the time when you submit your application and when they actually gather documentation to process the loan.
Also, for those business owners / individuals for whom the PPP isn’t helpful, as you said, I’d encourage them to look at the EIDL (and particularly it’s $10K “grant” provision) as a decent alternative.
Thanks again – I appreciate all the work you’re doing on this site.
The statute says the self-employment earnings count. So that’s not my opinion. Also, it’s really not up to the bank to define the term. Congress defines.
I think in your situation the majority LLC member creates $100,000 of payroll cost that gets added to the total W-2s of employees. That’s true even though he or she made $150K…
Example: The total wages paid via W-2s equal $500,000 for 2019. The majority LLC owner adds another $100K of “payroll”. In total, firm annual payroll equals $600,000 for 2019. That means a monthly average of $50,000. The PPP loan amount is basically $125,000, or 2.5 times that $50,000.
Let me add this: I’ve just worked my through one of the big bank’s online wizards… and that makes me want to make a couple of clarifying details. First, payroll costs do include health insurance. And this bank says (incorrectly I think but they surely had a team of $1000 an hour tax lawyers and SBA specialists looking at this) that payroll cost for the PPP loan amount also includes 1099 contractors and pension costs.
So a more realistic and detailed example might say $500K of W-2, $100K of owner “payroll,” $60K of health insurance, $30K of pension, and $30K of some contractors. In that case, the total equals $720K for year. That’s $60K a month. The appropriate PPP loan request amount equals $150K.
Afternoon
Single member llc. My rev is from a single contract. Ive not been impacted as of now but fear I could as this thing continues. I make a draw biweekly and the amount varies slightly.
Can I apply based on the idea of future impact? I hate the idea of finally needed the loan but everything is gone. Thanks!
Are we sure we’re interpreting the “$100,000 per employee” number right? Let’s say there’s a business with 2 employees. One employee’s “payroll costs” are $50,000, and the second’s are $150,000. If you cap the second INDIVIDUALLY at $100,000, your total payroll costs would be $150,000, then divide by twelve and get $12,500 per month.
But why not this way: your total REAL “payroll costs” are actually $200,000 ($50,000 plus $150,000). There are 2 employees. Therefore “payroll costs per employee” or payroll costs/employee is $200,000/2, or $100,000. Which is at the cap. Divide by 12 and you get $16,666 per month. I honestly don’t see how it couldn’t be interpreted that way, but I’m no lawyer or accountant, that’s for sure.
I think the statute is very clear. And The logic goes like this: The feds will give you money to pay people. But only up to essentially $2K a week per employee.
Per that formula, they’ll give you (basically) $16K to pay the one fellow $2K a week for 8 weeks. And then (basically) $8K to pay the other fellow $1K a week for 8 weeks.
That’s $24K for the payroll…
And then they’ll give you an extra 25%, or $6K, to pay rent or mortgage interest or utilities.
Hi Steve,
Single member LLC with 3 employees:
-When can I file?
-Who is the applicant, me or my LLC?
-3 employees on the application, not 4, correct?
-Can my private health insurance be included as a payroll cost (in addition to the $100,000 salary)?
Thank you!
One more question please:
If only one out of the three employees is full time, I still include the salary of all three employees when calculating both the loan amount and the forgiveness amount, correct? But I would only have to theoretically hire the full time employee back?
All the W-2 wages plug into the PPP loan amount formula. That’s right.
Probably you’re right the part-time employees don’t count in the loan forgiveness formula as a headcount reduction that shrinks your loan forgiveness percentage. (BTW I think you could pay them and those wages would count.) But you’d want to be careful you were doing everything right. E.g., that your definitions of a full-time employee, etc. match the statutes. (I’d say get your accountant’s help to determine this in a few weeks when hopefully the rules and guidance become clearer.)
I think your LLC applies for the loan. And ASAP. (Your LLC is a sole proprietorship probably.)
The payroll costs include the W-2 wages paid to the employees, probably the self-employment earnings of the LLC owner (i.e., you), and then the group health insurance. Note that you shouldn’t per statute include your SE health insurance. Only group health insurance provided to employees.
Great service you are providing. I am still confused by what I can apply to the application 2.5X formula. I do understand that as a single member LLC with employees I can use my SE and my employees’ W2. The Interim Final Rule seems to include payment for group health care coverage, retirement and state and local taxes – which I take to also include Workers Comp and disability,
Question 1: Are my assumptions correct?
Question 2: I directly pay the health insurance premium but it is not a company group plan. I am covering individual plans that employees obtained through the marketplace. Can I assume these payments to be valid?
Thank you in advance.
I am a handyman, have s-corp and have already filed my personal and corporate 2019 taxes. For the PPP form, do I enter into the “average monthly payroll” box, 1/12th of my schedule K income? Thanks.
That sounds right.
Hi Steve:
H&W are 51/49% members of an LLC and they pay themselves each month and get K-1’s issued to themselves each year. Is the PPP application submitted by the LLC (which has no employees) or does each spouse submit an application as a self-employed individual? Or am I putting too much emphasis on the fact that the IRS may consider them to be self-employed?
Thanks for your time and help.
I’m not sure you’re putting too much emphasis on the ” fact that the IRS may consider them to be self-employed”… rather you may be thinking the banks, etc, are more organized than they are.
I think your LLC (a partnership for tax accounting purposes) makes the PPP loan application. And then I think you use the self-employment earnings from 2019 as the LLC’s payroll costs.
I am in a similar situation. Wife & I are 2 member LLC, 51/49 % same as Sean above. Our income was over the $100k cap for each of us. Would we be limited to just $8,333 for total, or can we put 2 x $8,333 for $16,666 total? OR can I put our full SE Box 14 total for each of us combined (would be more than the $100k cap?
Hi Steve, this is a great information, and yours is probably the clearest. So thank you for this.
I have a quick question, on the PPP application, for the box that ask for the # of Employees, is that Full Time Equivalent Employees? I run a small frozen yogurt shop and all my payroll is part time except for me. So if my payroll is 120 hours a week for my employees, that is equivalent to 3 Full Time Employees, plus my 40 hours a week, so I would put down 4 Employees?
Thank you in advance!
I think you indicate the number of W-2 employees for the year. And I think the number here should probably match the number of W-2s you turn in later?
I’m a single-member LLC freelancer (no other employees) who files with my personal taxes and a schedule SE. I’ve read the other comments here for those with similar circumstances. A few clarification questions.
1) I assume I take my net profit (line 2 schedule SE) and divide by 12 to come up with my monthly earnings (ie. paycheck)?
2) If I do receive a PPP loan, is it best to write myself a “paycheck” each week/month for documentation (even though I never write myself paychecks).
3) There must be some way at the end of 8 weeks that they are going to want “proof” that the loan was used for payroll so that it is forgiven? I just want to make sure I do it the right way.
Just trying to understand the process.
I’m going to do a blog post about how the accounting and documentation for the PPP loan “spending” should probably work. Probably soon if I have time.
But I think you do write yourself “draw” checks each week equal to 1/52ths of the Schedule SE earnings you plug into the loan amount formula.
As far as the “proof,” hopefully they’ll provide more guidance. But say your SE earnings in 2019 equaled $52,000. Coincidentally, exactly $1,000 a week. I’d write a $1,000 “draw” check each week. In your accounting system, I’d flag that as a PPP loan transaction. (With a “class” if you use QuickBooks or Quicken.) And then I would assume that at the end of eight weeks, when you document your spending that you show your 2019 Schedule SE and it’s $52,000 of SE earnings… and then a list of eight $1,000 checks… and then copies of the eight $1,000 checks to Dave the proprietor.
Thanks for the info Steve…
I have a Schedule C business with SE income that I would like to file a PPP application for…BUT i also have a Farm schedule F with a loss. Both flow to my schedule SE and net to compute my total SE income. Will i be able to apply using only my SE sole proprietorship income from schedule C or will i need to use the NET SE income from schedule SE?
thanks again……..
I think using the actual Schedule SE will be easiest. That is your self-employment income…
My husband set up an LLC. He is the sole owner. He has 9 employees. He filled out an application for the PPP loan, but the bank he is working with is saying he cannot include the salary he draws (and pays taxes on, including Medicare and Social Security). The payroll calculation is only for the employee salaries through the payroll company with W-2s. How can this be true? Any thoughts on how we add his salary to be included? It does not seem correct that a sole proprietor can apply independently (and with employees) but under the LLC my husband cannot include his salary. PLEASE HELP ASAP, He wants to finish this filing 4/8/2020. Thank You for any clarity you can provide! We are in dire need of the funds.
Hi Steve!
My husband set up an LLC. He is the sole owner. He has 9 employees. He filled out an application for the PPP loan, but the bank he is working with is saying he cannot include the salary he draws (and pays taxes on, including Medicare and Social Security – and files a Schedule C). The payroll calculation is only for the employee salaries through the payroll company with W-2s. AND, the forgiveness will only be for the employees on payroll, not the employer. How can this be true? Any thoughts on how we add his salary to be included? And will his salary be forgiven? It does not seem correct that a sole proprietor can apply independently (and with employees) but under the LLC my husband cannot include his salary or be forgiven as it is not part of the W-2 payroll. PLEASE HELP ASAP, He wants to finish this filing 4/8/2020. Thank You for any clarity you can provide! We are in dire need of the funds.
Hi Laura,
Sorry the bank is fumbling around with this. But the statute very clearly says that a sole proprietor’s compensation counts. So you’re right that they should be giving you additional PPP loan funding for this. I am not sure what you should do though. In the unlikely event that you’re talking with a real person, you might point them to the FAQ that obliquely says 1099 independent contracts qualify. (They are also sole proprietors.) Or to the other banks who are making loans to self-employed individuals. (The are also sole proprietors.)
Two other thoughts about this, too. First, is it possible the LLC isn’t a Schedule C business any longer? E.g., did it file a Schedule C in past but has it made an S corporation and so is now an S corporation? And if that’s possibly true, did your husband not take a salary in 2019? If that’s true, the bank would be correct in its approach.
Second, another thought: Even if the bank gets this wrong and you only get funds based on the W-2 amounts, you should still be able to use some portion of the funds for draws for your husband, the proprietor. And then get forgiveness. I say this because while it sucks to fail to get $10K or $20K of loan funding due to the bank not yet knowing the law, getting a $90K (even if you’re entitled to $100K) or getting a $180K loan (even if you’re entitled to $200K)… and then receiving full forgiveness is a good deal.
Hi Steve
Thank you for taking the time to answer all our questions, you are a life saver.
We are seeing this issue on BOA which is insisting on their application form for the required documentation Per the Small Business Administrations Interim Final Rule Docket No. SBA-2020-0015 that if you file a 940 you use the salary from the Form-940.
They are distinctively separating situations by saying that if you’ve filed a Form 940 you must use the salary as of the Form-940.
You should only use a Schedule C only if you don’t file a Form-940
Just like this couple is asking, there is no provision to then add on the Scheduce SE income.
What does one do in this situation, do we just ignore it and include the SE income capped at 100K also? Completely lost at this point…
Thank you in advance
We have a staff of 18 employees. Before the CARES act passed we were going to lay off three employees, have two job-share at a reduced salary, and the two owners took no salary for March payroll.
My first question has to do with one of the employees. Her husband told her to get laid off to get a better unemployment benefit. I was surprised. Management said okay to her.
Now were are bring back staff once we get approved. Her husband said she’s better off staying unemployed. However, this sort of sucks for the company because it reduces our forgiveness on our PPP loan. Can she actually say she doesn’t want to come back if we want to bring her back?
If you get your loan, you want to bring your employment back up to “full strength.” So “rehire” owners to put their payroll into the calculation of forgiveness. And, I think, replace the worker who doesn’t want to return.
P.S. Regarding an employee who refuses to return to work, I’m not sure how that impacts employee’s (former employee’s?) unemployment benefits or your unemployment insurance rates. Not a lawyer. But in my state in normal times, her refusal would probably stop her benefits.
Thank you for all of these comments!! I’ve read through every single one and still have a question. I have a 5% stake in a Partnership, the company is an LLC. I receive “member payments” on a K-1 (box 4a), and I am listed as an Individual entity on the K-1.. The majority partner has told me that I need to file for PPP on my own because “you are self-employed since I don’t think member payments get calculated as payroll for the company. They are also only concerned with owners that have greater than 20% ownership for the company information”
Several of your replies showed me that if I were to apply on my own (checking the”Eligible self-employed individual” box on the application), I would use my SE earnings listed on the K-1 to calculate the average monthly payroll. HOWEVER, I saw another answer lower down where it seemed as if a partner receiving member payments was going to apply as part of the LLC, not as an individual.
My question is — who should apply in my case? Me as an self employed individual? Or the LLC Partnership??
I should add, we live and operate in a VERY rural area, and while our local bank is doing what they can do become an SBA lender, they seem to have ZERO expertise or help to offer.
THANK YOU!!!
So I think the majority partner is wrong. If you’re a partner receiving self-employment earnings (see box 14 on your K-1), then I think the partnership includes those self-employment earnings in their calculations of the partnership’s payroll costs. And then they should if they want full forgiveness pay you some draw against those SE earnings over the eight weeks that follow funding.
I don’t believe, just to explicitly say this, that you can get a PPP loan personally because you receive a K-1 from a partnership.
Thanks for your input!!! Below in quotes is the information we’d used so far to determine that the LLC Partnership CANNOT count my member payments as payroll to apply on my behalf. I feel like this particular situation is a black hole of no clear guidance. I’m terrified the majority partner won’t apply because of the below, and I”m terrified my bank will not accept my application as an individual. Do you have any further input based on the below? THANK YOU AGAIN!!
“The IFR and the new application still do not explicitly address the issue of partners receiving guaranteed payments for services or an allocated distributive share of partnership self-employment income. The PPP statutory provisions do not expressly include partners or guaranteed payments for services as payroll costs. At this juncture, there does not appear to be a sufficient basis to include an allocated distributive share of partnership self-employment income in a partnership’s or partner’s payroll cost computation. However, the PPP’s definition of “eligible self-employed individual” ultimately references the income tax code and regulations addressing self-employment tax. Because those regulations treat the recipient of a guaranteed payment for services, but not distributive share, as being self-employed in a trade or business, it is possible that such a recipient may themselves be eligible to apply for a PPP loan. Moreover, whether PPP lenders will accept applications on that basis remains to be seen.”
Thank you!! The statement in quotes summarizes why he doesn’t think he should file on behalf of the partnership. Do you have any further insight after reading the below? Basically, I’m afraid he won’t file for the partnership, and then afraid the bank (who doesn’t know what they’re doing) won’t be able to approve me filing as an individual.
“The IFR and the new application still do not explicitly address the issue of partners receiving guaranteed payments for services or an allocated distributive share of partnership self-employment income. The PPP statutory provisions do not expressly include partners or guaranteed payments for services as payroll costs. At this juncture, there does not appear to be a sufficient basis to include an allocated distributive share of partnership self-employment income in a partnership’s or partner’s payroll cost computation. However, the PPP’s definition of “eligible self-employed individual” ultimately references the income tax code and regulations addressing self-employment tax. Because those regulations treat the recipient of a guaranteed payment for services, but not distributive share, as being self-employed in a trade or business, it is possible that such a recipient may themselves be eligible to apply for a PPP loan. Moreover, whether PPP lenders will accept applications on that basis remains to be seen.”
I’m so sorry if this shows up as a duplicate comment, but I can’t seem to get my Reply to your reply above above to actually post. The information below summarizes why the majority partner I mentioned in my earlier comment doesn’t think he should file on behalf of the Partnership. Do you have any further insight after reading the below? Basically, I’m afraid the below language will keep him from applying on behalf of the Partnership, and I’m afraid the bank (who has minimal guidance either and admittedly doesn’t know what they’re doing), or the SBA portal they’re trying to use, won’t approve my application as an individual.
“The IFR and the new application still do not explicitly address the issue of partners receiving guaranteed payments for services…..The PPP statutory provisions do not expressly include partners or guaranteed payments for services as payroll costs…..However, the PPP’s definition of ‘eligible self-employed individual’ ultimately references the income tax code and regulations addressing the self-employment tax. Because those regulations treat the recipient of a guaranteed payment for services, but not distributive share, as being self-employed in a trade or business, it is possible that such a recipient may themselves be eligible to apply for a PPP loan. Moreover, whether PPP lenders will accept applications on that basis remains to be seen”
Thank you so much for this incredible information. I’m not finding it anywhere else. You may have answered this question — from DMF on April 5. I’m uncertain so asking again. My husband and I own an S corp with two full-time employees (us) and 35 part-time (who get W2s). We are a tourist-driven theatre in Charleston, SC, so were shut down on March 15. We may not get fully back up and running until the fall. When we get the PPP loan, we probably won’t be able to bring the part-timers (actors and waiters) back on board — we won’t be open yet. Can I give my husband and me a raise (our combined salary is currently $48,000 annually) and still get forgiveness on the loan, though our employee number will decrease to 2 instead of 37? I hope that doesn’t sound greedy — just trying to figure out how to stay in business. Thank you again!
That won’t work. Or at least not very well. And because of the way the forgiveness formula treats a reduction in headcount.
I’d need to re-read the statute with your situation in mind. But I think if you drop from 4 full-time employees to 2 full-time employees that you’re going to lose half your forgiveness anyway.
And then I wonder how “compliant” that plan looks when you compare it to the “self-certification” statements you’ll make.
Let’s see if anyone comments, but here’s what I think matches both the spirit and the letter of the law. You bring back all your FT people. So you, your husband. Those other two FT people. (That’ll mean you don’t lose forgiveness due to a reduction in headcount of FT employees.) And then I’d look at trying to add back as many other people as necessary to get you to place where you’re paying out 75% of the PPP loan as payroll. (This is another requirement as you’ve hopefully seen here or someplace else.)
My thought is, even if you rehire a former employee and he or she sits at home watching Netflix, that counts as qualified payroll. Congress is firehosing small businesses with cash so employees continue to earn an income.
We have only two full-time people — my husband and me. Sorry I wasn’t clear. But I hear what you’re saying — you don’t like the “raise” idea.
Sorry. 🙁 Though one thing that’s interesting about this is, you don’t need to worry about the reduction in headcount issue.
This is my visceral reaction to your situation: I think it’d be okay to get a PPP loan for your two salaries and that extra 25% for overhead.
BTW, some people optimize with those employee retention credits: https://evergreensmallbusiness.com/the-50-percent-section-2301-employee-retention-credit/
Thank you. And thanks for the reminder about the Section 2301. That is going to be extremely helpful for us, given our situation with a bunch of employees who don’t work very much so aren’t paid very much.
Hi Steve,
My single-member LLC consulting business has been operating for 5 years. For 2019, net income was $40,000. In January of 2020 I elected S-corp treatment, but we have not yet heard back from the IRS regarding approval of that election. For the tax year 2020 I plan to pay myself a salary of $27,000 ($14,000 of which I have already paid myself and withheld payroll taxes from).
I plan to apply for the PPP loan based upon tax year 2019 “self-employment earnings” of $3,333 per month = total PPP loan of $8,333.
QUESTIONS: Do you see any potential problems here with the LLC now operating as an S-corp (pending approval from IRS)? Should the $8,333 go toward my salary amount of $27,000 (i.e. pay myself the $8,333 and withhold payroll tax)?
No, I think that works. (I mean the part about LLC used to be a sole proprietorship for tax purposes but now is an S corporation for tax purposes.)
And yes, if you get an $8333 loan, you want to pay “Andrew the employee” enough legitimate payroll (if possible) within the 8 weeks to create a bunch of forgiveness.
Note that you can use health insurance and pension for “payroll.” And note that you can possibly also get forgiveness for rent, mortgage, and utilities,
Great, thank you for your time!
Hi Steve!
I can’t tell you how thankful I am that I stumbled upon your blog. Finally answers I’ve been looking for. I scrolled through most of the questions + answers but since things are changing daily I was wondering if you are familiar with any updates in filing for PPP with K1’s?
My company is an LLC and our (only) 3 full-time employees are all equal owners of the company. For the past 2 years we file K1’s and take monthly draws. My bank is saying that we can still apply for PPP but I was wondering if you are able to answer a few questions that my banker does not know the answers to.
1.) We haven’t filed our 2019 taxes yet. Do you think this is necessary since we are filing as a K1 instance?
2.) What is the best way to report our monthly draws? We have it recorded in Quickbooks but do we need more proper documentation?
Thank you so much in advance!
I think you do need to file your 2019 tax return. You need its self-employment earnings numbers.
For documentation of the owner draws, see my response to Lisa Ostrom’s question. Your situation works the same way.
Hi Steve, great job answering everyone’s questions so quickly.
I operate an S-Corp with my partner. We did not file our 2019 Tax Return or 2019 K-1 yet. But we did draw our 2018 K-1 in mid-2019. We paid the taxes for the 2018 K-1 in 2018. We did include our 2019 annual salary in the average payroll cost that we have included but we are wondering if we can include our 2018 K-1 into the average 2019 Average Monthly. That would increase our request
Question: Can we apply the 2018 K-1 as a payroll cost into 2019?
No. And for two reasons. Sorry. First, the amount shown on an S corporation K-1 doesn’t count as payroll. And, second, the formula looks at either 2019 (the calendar year) or the previous twelve months (so from April 2019 through March 2020.)
Hi Steve-
I own an LLC taxed as an S corp. I’m the only employee on my payroll. For 2019, I paid myself a salary of 100k through my payroll processor, and took other business income out in the firm of dividends to myself. Do the dividends need to be counted against my payroll, so that I would not qualify for a PPP loan?
Thanks,
Joe
The S corp shareholder-employee qualifies. That W-2 income he received is payroll. Limit is $100K… or $8333 a month. So apply!
Hi Steve-
This is all amazing information. For the last couple of years, I’ve had an S-Corp in California. I’m paid as a 1099 and had payroll setup to pay myself as an employee. I moved to NJ in January 2020, dissolved my California entity and formed a brand new New Jersey S-Corp. I initially set up payroll in NJ but after moving yet again to AZ, my payroll guy voided out all NJ payroll so we could eventually start fresh in AZ which we haven’t done yet. Because I have different EINs for my CA and NJ businesses, am I out of luck for the PPP?
Thank you so much for any insight you can provide!
Sorry. I think you’re out of luck. The problem is you don’t have an entity for which you can go back and point to payroll costs AND for which you can look forward with and point to a need for a PPP loan.
Rather, you have one entity that provides the historical payroll costs… and then a different entity that needs a PPP loan.
Great resource. Thank you. I am a banker dealing with many entities, but the big question for sole proprietors seems to be, “Can I add back to ordinary income depreciation expenses for equipment used in my business and owned by the entity in which I have applied for the PPP loan?” So far, the answer appears to be “no;” however, I note that other entities with depreciation are not subject to reduction of their applicable expenses (payroll and benefits), but sole proprietors are as they are directed to use net income, which has been reduced depreciation. This does not seem equitable.
Do you think the SBA might revisit this issue when the window for sole proprietors opens tomorrow?
I think you do deduct depreciation. Sorry. So, for example, someone who is working RIGHT NOW on their 1040 tax return and the Schedule C it includes, with hopes of using its information to apply for a loan? They might want to consider this.
BTW, I think same thing happens for partnerships. (The look at their net self-employment earnings. So their business income after all their expenses.)
One thing the self-employed sole proprietor needs to understand here: The sole proprietors can’t use a PPP loan to pay their all business expenses. They can use it to cover payroll including the owner draws basically. And then a little bit rent and the utilities.
Hi Steve,
Great information. I’ve scrolled through it all and didn’t find my situation yet….
I own a S Corp and am the only employee. Being a newer business, I reinvest all profits into my business and only take a very very low payroll. Last year was only 5K..
I have read that some business can use the annual business earnings up to $100K
I’m thinking that I pretty much screwed myself by drawing such a low wage, but it’s often suggested for newer businesses to reinvest everything.
Do you have any thoughts for me?
Your 2019 payroll amount is modest so a loan that uses that as the input will be really small. Roughly $1K?
You might be able to get the average up by starting to do big payroll now. But as you conclude, the formula probably doesn’t really work for you. Sorry.
Hi Steve,
This has been the most info I have received regarding the PPP, Thanks.
my question is:
I am a single owner LLC with 6 part time employees, mainly in the summer. .I take owner draws throughout the year as needed, roughly about $130,000 in 2019, my employees averaged only $719 for 12 months. How can I include my owner draws when submitting ppp to the bank without taxes, and 2019 schedule c?
Best
I guess we’re all hoping that the loan applications many banks start accepting today, for sole proprietors, cover this. I.e., that they provide instuctions for determining and then entering the owners compensation as payroll costs. Those amounts clearly count as payroll per the statute.
Steve,
Thanks in advance, my question is this…I own pilates studios as an LLC and all the trainers are independent contractors who will file on their own behalf. I still have rent, utilities etc for the studios and on the PPP application there is only a formula for “payroll x 2.5” and doesn’t allow for any other modifications. How can I file if I’m applying for those items and not payroll itself? Thank you!!
Maybe the loan application process that begins today will let you count your own SE earnings on the pilates studio? I think that’s what you, Jenny, will get the PPP loan based on.
Thanks for the great info! What about this scenario… 2 separate S-corps each own 50% of an LLC, which files a 1065 partnership return. The LLC pays each S-corp partner a guaranteed payment of over $100,000 (4a), plus pays various 1099s to independent contractors. At least one of the S-corp partners, who files 1120-S, pays wages to owner plus pays shareholder health. I believe this S-corp can request the PPP loan based on 2019 monthly average wages x 2.5 (but not on shareholder health) and can also request the $10K EIDL grant. Is my understanding correct? And can LLC get any funds? Thanks in advance for any help!
I think that’s a really problematic scenario. The LLC, if it doesn’t have any employees with W-2 wages and if it isn’t the common paymaster, doesn’t have any payroll costs probably. Even my rather forgiving reading of the statute can’t spot payroll costs there at the LLC level for the S corporation’s shareholder-employees.
Maybe you can apply for the PPP loan at the S corporation level. But frankly you would want to understand the SBA affiliation rules better than I do to do that. (I’m a tax accountant, not an attorney who specializes in SBA law.) Sorry.
Hello Steve, thank you for your insight! We just received the email from BofA stating we can upload our documents. We are a 50/50 LLC partnership with W-2 employees. I understand you recommend us using our K-1 to show our self-employed income, but BofA’s application is asking for the payroll costs to equal the amount on form 940 (and to submit form 940 as well). Would you recommend we ignore their direction and include our self-employed income and send a K-1 anyway? My concern in our loan will get bounced back and this will delay the possibility of even getting funded for at least our employees’ wages. Do you think there is any chance we can apply as self-employed individuals if BofA won’t allow us to apply under our LLC?
I don’t know what to tell you in this situation. Your bank (and others as shown by the comments in this thread) don’t know how to include the owner compensation in the “payroll costs.” I think they’re doing it wrong. But you’re right to ask whether it makes sense to delay… what if the money is gone by the time B of A changes tune? Or what if I’m wrong.
By the way, just to get this out there, and I’m quoting, the statute says the term ‘payroll costs’ includes
I read the boldfaced part of the above quote as including self-employment income from a partnership. It would be strange that the SBA administration is providing these funds to a number of nonprofit organizations but not to small partnerships. Like a husband and wife.
Yes, this is where I’m concerned. We aren’t technically a sole proprietor or a contract worker, are we? We are self-employed individuals from our own LLC so it makes sense we apply under our LLC. I understand we are considered self-employed but the statute you quoted above says net earnings from self-employment of a sole proprietor or independent contractor. . I fear if we don’t include our income on our LLC application, we won’t qualify as a sole proprietor. It’s like this small subset of self-employed individuals have been forgotten about. Would you apply with the added income and submit the k1 or just follow the directions and leave us out? I understand this is only your opinion, of course. I would appreciate the direction.
I think I would follow the bank’s instructions. My worry is you reach for bigger number… and then the money runs out.
Hi
Is it possible to take the sum of all of my 1099’s and divide by 12 to get my monthly average vs taking line 31 of my 2019 Schedule C? There is a significant difference in the amount and in the end if I just take the line 31 of my schedule C (Talking $7000 vs $2500). This is hugely in part to taking expenses as I would normally do as a IC/Sole Prop.
No, that doesn’t work. I keep saying this, but the PPP loan provides money for payroll (including a reasonable amount for the owner’s compensation).
Those first two “P”s? They stand for “paycheck protection.”
Small businesses don’t get money to replace their lost revenue (which is what shows on your 1099s). The program isn’t, in other words, “revenue protection.”
However “payroll” comes back to the individual as it passes through in a situation like this…that is not covered?
How do we get assistance then when these side gigs help pay bills and put food on the table…correct we don’t get a paycheck but the funds come through to us as independent contractors
Thanks as always for the great content. I struggle with the self-certification:
The actual language from the statute says you must provide, “a good faith certification… that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient…”
Our revenue is down, but the real issue is two of our three operations staff cannot work. One is sick and the other is caring for her husband is sick. Their positions require a long training period. We’ve had to fill the gap by having the one remaining operations person work longer hours along with my wife and I working 12-14 hour days. Both my wife and our remaining ops person deserve a raise/bonus, but we’d also like to pay the other two who cannot work right now. Both have said they would likely file unemployment if they can’t return to work.
I know it’s “self-certification”, but any thoughts about what it means to support ongoing operations?
This is the riddle for folks blessed enough to have businesses that continue to chug along… but not in any way that resembles “normal operating conditions.”
I’ve said this a bunch, but I think you read (maybe out loud) the language. And you emphasize words and phrases like “economic uncertainty” and “support” and “ongoing operations.” And maybe in that sort of reading, you get some clarity.
The question isn’t, “Well, can we still fight our way through this?” It’s more like, “Hey, would a short-term loan SUPPORT us a bit in this crazy UNCERTAIN ECONOMY… make it more likely we’re able to continue our usual ONGOING OPERATIONS.” That’s the question.
Many small businesses, even successful firms that will survive, would say “Yeah, you know what? Scary times. A loan would help. It would support us.”
Sorry to ramble on, but two other points. In this crazy economy and given the pandemic, what if your firm loses someone key to the operation either permanently or for an extended time frame. Would a quick loan help with that uncertainty? I think so.
And then one other and my last point. I think we ignore fact that loan will be forgiven. The forgiveness is something different. And it muddies the waters. But the statute doesn’t make “need” or “distress” factors in determining whether someone deserves forgiveness. Rather, it looks at a firm keeping its headcount and wages stable up to $100K.
Hello Steve, Great article. I have one question. I was scheduled to have my 2019 taxes done but with all that has happened I had to reschedule and I’m not getting then done for 2 more weeks. I’m anticipating my 2019 taxes will have a zero on line 31 of my schedule C. My gross was $125,000. In 2018 my gross was around the same and I also had a zero on line 31 of my schedule C. I’ve been in business for 21 years and the last two years I’ve had to do a complete overhaul of my equipment which meant a lot of spending by the business. Which hurt my net income. I have no employees and I also use a 8829 form for business use of home
on my taxes which I use 35.71% of my home for business. My question is whith all that is occuring with COVID-19 my state has labeled my profession as non life essential. And has put me completely out of work as of March 19th. With numbers still climbing i see it being a while before I return. How does the PPP loan work for my situation or am I better off just applying for the EIDL loan. At the current state I’m in I am at jeopardy of loosing almost everything!! Cause of the having to buy and overhaul all my equipment and also business vehicle. I have left pretty much used all profit up the past two years. Does this ultimately disqualify me for any PPP loan. I don’t mind having to pay loan back if no way of being forgiven. But I don’t think I will even qualify now. Please any advice would be appreciated. Thanks Paul
I think if you don’t have payroll costs in the year before the PPP loan, that you basically can’t get the PPP loan formula to work. Sorry.
Hi Steve,
We appreciate all the advice you give.
Here is our situation:
– LLC, files taxes as a partnership. 2 partners, 50/50.
– Launched in 8/2018. No net earnings in 2019 so no distribution for the partners. Only costs, so “negative earnings”. No draws etc, partners not on payroll.
– 2020 looked like there would be profit but the pandemic destroyed that prognoses.
– 1 employee . Our payroll agency can provide the numbers for that.
Is there a way to add some compensation for the 2 partners on the same PPP application?
.
I don’t think so. Sorry.
BTW as you’ll see if you poke around the comments much, the statute doesn’t EXPLICITLY say partnerships operating businesses get to count partner SE earnings as payroll costs.
Congress surely intended they would count. But the statute, perhaps because of quick and dirty drafting, doesn’t really say this. It only references other entities that generate self-employment earnings.
Hello, I have a single member LLC filed as a schedule C on my taxes; we both file together jointly on the taxes with our children. My wife and I both run the business and we technically have two employees (both husband and wife); she does shipping and inventory and I do customer service/sales.. On our state filing for our LLC both husband and wife are listed; husband is president and wife is a member/manager. Since we file a schedule C only the husband is listed on the 2019 taxes. We normally write one check per month for both husband/wife since the LLC is co-owned to husband. Does this allow us to qualify for a higher loan amount (e.g. greater than 100k) as there are husband and wife running the business as documented with the LLC at the state? I am confused here and my CPA cannot provide good information on this. Do we need to document going forward the amount husband and wife per check? Confused on what we actually qualify for as we do have 2 employees. Thank you
Your easiest path to a PPP loan is to treat the Schedule SE earnings (which count only for you) as the payroll costs.
BTW, as is becoming clear from comments in various threads here, if you treat your LLC as partnership, many banks won’t do a PPP loan for you because they feel the statute doesn’t explicitly let them do that. (I bet this will change. I also think it’ll possibly be too late to matter.)
In retrospect, and it’s too late now, what you should have done is treat your wife as an employee. Then you could probably include her W-2 wages and then your self-employment earnings. If the bank has their act together. Which they may not.
Something I keep saying again and again. This may be situation where you take what you can get. And then leave it at that. I.e., if you can get $30K, grab that. Don’t reach for $40K. You be left with zero. Sorry.
Steve,
Can a employer increase their employee full time head count? Can a employer increase employees wages during this 8 week period? Will employer that takes payroll themselves as a “s” corporation be allowed to also take a distribution not related to the loan amount?
The payroll costs that is forgiven the employer will not be able to take as a deduction on income statement for that time period?
I think you can hire and raise people’s pay rates.
Also, shareholder-employees can be paid and shareholders should be able to take distributions.
The issue about whether a firm can deduct the spending funded with the loan is odd. This doesn’t really make sense to the accountants. But it appears to me that you can count amounts spent as deductions… and that contrary to the usual way things work (and maybe contrary to common sense and logic) you won’t count the cancellation of debt as income.
Hi Steve.
Any advice would be appreciated on this;
Wife & I are 2 member LLC, 51/49 %. Our income was over the $100k cap for each of us. Would we be limited to just $8,333 for total, or can we put 2 x $8,333 for $16,666 total? The SE income being shown on our K-1 line 14.
Trying to understand if we apply together 1x for our LLC and include both our $8,333 as total per month or $16,666 per month vs if we would need to apply separately.
Thank you for your guidance.
I think if you have two partners each earning over $8333 a month, that you apply for $16,666 times 2.5.
See the reader comments though about problems of applying as a partnership…
I am a member of a 2 person LLC categorized as a Partnership (no employees). We take bi-monthly withdrawals to pay ourselves.. As I understand from earlier comments here, we would use our K1 to determine our monthly “payroll” to the purpose of the PPP loan. My question is about how we would document our usage of the loan when it comes to forgiveness. How would we show this? Use our 2020 K1 (which won’t happen until April 2021), checks used to pay our draws, something else?
This blog post provides best explanation I have: PPP Loan accounting tips.
We have a 2 owner (50-50%) S-Corp with no employees. Our profit is split 50-50 and reported on our business’s K-1 as ordinary business income.
Because we’re an S-Corp, the amount on our K-1 is passed through to our personal taxes and reported on Line 17 of Schedule 1 (Rent, Royalties, Partnerships, S Corps, etc).
Is our business eligible for the PPP Loan? Would this type of income be considered as payroll? If so, would the amount of the loan used toward lease payments and overhead be forgiven?
The building our store is in, is closed to the public…so we have zero revenue, but still have to pay our monthly lease….
We applied for the EIDL loan over a week ago. I feel like this is more applicable given our situation, but we still have not heard back.
Thanks in advance
To qualify for a PPP loan, your S corporation needs wages. It sounds like you guys haven’t done that. I.e., that you haven’t paid shareholder-employee W-2 wages as is required.
Bottomline: I think you can’t get a PPP loan. Your monthly payroll costs equal zero. So the PPP loan you qualify for, 2.5 times your “zero” monthly payroll costs, unfortunately, equals “zero.”
Sorry. 🙁