SBA Paycheck Protection Program (PPP) Loans are designed to mitigate small business losses from the COVID-19 coronavirus. The loan amount available for these PPP loans is a formula based on 2 ½ times the average monthly cost of the payroll for the business. Here’s what you need to know about one of the most important elements – payroll cost calculations.
Paycheck Protection Program details
Paycheck Protection Program (PPP) Loans outlined in the new CARES Act can only be offered until the $350 billion dollar cap is reached. One important piece of information you’ll be required to provide is documentation of your payroll costs. Here are details you need to know.
*Please note that SBA rules involving Paycheck Protection Program loans are subject to change given the nature of current events.
Paycheck Protection Program borrower application form
The first step to take is to download the SBA’s Paycheck Protection Program Borrower Application Form. Access a PDF of the form here.
To start, an entrepreneur must identify the structure of their business like sole proprietor, partnership, S-Corp, LLC, etc. Independent contractors can also apply.
It’s important here to note that the Small Business Administration is not a lender. You’ll be working with a bank or other financial institution who will approve your completed application and administer the funds.
Payroll calculation for PPP loan applications
After filling in general information, like your address and legal business name, you’re asked to calculate your average monthly payroll to come to your loan amount request.
It sounds fairly simple. However, the new law and regulations expand the definition of payroll in significant ways.
What counts as payroll costs?
According to the U.S. Treasury, payroll costs include:
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each
- Employee benefits including costs for vacation, parental, family, medical, or sick leave;
allowance for separation or dismissal; payments required for the provisions of group
health care benefits including insurance premiums; and payment of any retirement
- State and local taxes assessed on compensation; and
- For a sole proprietor or independent contractor: wages, commissions, income, or net
earnings from self-employment, capped at $100,000 on an annualized basis for each
Under the CARES Act, payroll costs do not include:
- Employee gross pay that exceeds $100,000
- Payments to independent contractors
- Workers compensation premiums
- Federal unemployment tax
- Compensation of employees whose principal place of residence is outside of the U.S
- Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
Calculating the maximum amount you can borrow under PPP
The maximum amount you are allowed to borrow under PPP is the lessor of $10M or 2.5 times your payroll costs. The Interim Final Rule released last Wednesday gave a step-by-step calculation:
Step 1: Aggregate payroll costs from the last 12 months for employees whose principal place of residence is the United States.
Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under the EIDL COVID-19 loan because it does not have to be repaid.
The element to remember is Step 3 is for your average monthly payroll costs and the total after step 5 is the maximum amount of your loan.
ADP and Gusto tools for calculating payroll costs
If you use a payroll provider, tools are available to help you more easily calculate your costs. Here are two popular payroll providers offering expert payroll calculation information.
ADP payroll calculation guidelines
What report is needed to calculate payroll costs?
To help determine the maximum loan amount that your company can request, use the CARES SBA-PPP: Monthly Payroll Cost Report from ADP. Maximum loan amount is based on certain monthly payroll costs based on an average monthly total over the applicable period.
Where do I access the ADP payroll cost report?
- Login to RUN Powered by ADP®.
- You will see a pop up, click learn more.
- On the next screen, click Run my payroll report button.
- On the next screen, confirm your dates and access your report.
Gusto payroll calculation guidelines
Gusto has created a report called the Paycheck Protection Program (PPP) report to help customers apply for a PPP loan.
How can I access the Gusto Paycheck Protection Program (PPP) report?
- You can access this report through both the COVID-19 and Reports tab of your Gusto account.
Are tax documents needed?
In addition to payroll costs, banks may also ask prospective small business borrowers for proof the business was operating as of Feb. 15, tax forms for workers from 2019, and documentation regarding health insurance premiums they pay, among other things. This can vary by lenders so be sure to check the specific guidelines.
The team at SmartBiz Loans has prepared a guide with information to help small business owners through this trying time: Small Business Loans & Resources in Times of Coronavirus (COVID-19). We’ll keep you up-to-date on changes that can impact your ability to secure small business funding at this time.
Sign up for more information regarding Paycheck Protection Program loans here.