How to Calculate Forgiveness for the Paycheck Protection Program Loan

Apr 15, 2020

The Paycheck Protection Program (PPP) is part of the CARES Act that was signed into law on March 27 and includes $367 billion in federally guaranteed loans for small businesses. The loans are retroactive to February 15 and apply through June 30, which is about 10 weeks of payroll costs. The main purpose of the program is to assist small businesses who have been impacted economically by the COVID-19 pandemic, with the goal of retaining workers and keeping the business operational. A key part of the PPP is that the loans can be 100 percent forgiven if a business maintains the average size of its workforce and uses the loan for approved purposes.

Here is how employers can calculate the amount of forgiveness for the Paycheck Protection Program loan.

Loan Usage

The first step in receiving forgiveness for the PPP loan is to make sure you are using the loan for the intended purposes. The loan can be used for the following items:

  • Costs to retain workers and maintain payroll
  • Health care benefits, including paid sick, medical, or family leave, and insurance premiums
  • Mortgage interest obligations
  • Rent obligations
  • Utility payments
  • Interest on any other debt obligations incurred prior to February 15, 2020

Payroll Costs

It’s also important to note that at least 75 percent of the loan must be spent on payroll costs. Any amount spent over 25 percent on non-payroll costs will not be forgiven. Payroll costs include the total payments for employee compensation from:

  • salaries, wages, commissions, or similar compensation
  • cash tip or equivalent payments
  • vacation, parental, family, medical, or sick leave payments
  • dismissal or separation allowances
  • group health care benefits, including insurance premium payments
  • retirement benefit payments
  • state or local taxes assessed on the compensation of the employee

Payroll costs do not apply to the following:

  • Individual employee compensation in excess of an annual salary of $100,000, as prorated for the period February 15 to June 30, 2020
  • Payroll taxes, income taxes, or railroad retirement taxes
  • Compensation of employees that principally reside outside the United States
  • Qualified sick and family leave credits allowed under the Families First Coronavirus Response Act sections 7001 and 7003

In order to calculate your average monthly payroll costs, subtract your excluded costs from the payroll costs you can include. This gives you your total payroll costs, which you will need for determining your loan amount.

Loan Forgiveness Amount

If you maintain staffing and payroll levels, you can get loan forgiveness during that 8-week period for payroll, rent or mortgage obligations, and utility payments. If your employee count drops or you reduce payroll, the loan forgiveness will be proportionately reduced.

The forgiveness amount is equal to the sum of these costs during the 8-week period:

  • Payroll (compensation above $100,000 excluded)
  • Payment of interest on mortgage obligation
  • Rent obligations
  • Utility payments

Forgiveness Reduction

If you reduce staff, you can calculate the forgiveness reduction by multiplying your total payroll costs by the average number of full-time employee equivalents (FTEs) per month during the 8-week period. That number is then divided by one of the following two options:

  1. If you were in business in 2019: Average number of FTEs per month from February 15, 2019 to June 30, 2019
  2. If your business started in 2020: Average number of FTEs per month from January 1, 2020 to February 29, 2020

The third option to calculate FTE is for seasonal employers: use the average number of FTEs per month from February 15, 2019 to June 30, 2019.

If you retained all your employees during the loan period but reduced employee wages, the loan is not 100 percent forgivable. From your total payroll costs, you need to exclude wages for any employee who earned less than the annualized rate of $100,000 whose wages were reduced 25 percent or more compared to the most recent full quarter.

Rehiring Employees or Restoring Wages

If you do reduce your workforce or wages from February 15, 2020 and 30 days after CARES Act, that will not impact the loan forgiveness amount, provided you eliminate the reduction in employees or wages. So if you hire your employees back or reinstate wage levels, the loan forgiveness amount will not be reduced.

Applying for Loan Forgiveness

To apply to receive forgiveness on a PPP loan, you will need to contact your lender and include documentation that verifies your FTE count and pay rates. You will also need to verify payments made for your payroll costs as described above, including receipts, account statements, invoices, canceled checks, and other documents that may be required.

You must also certify the accuracy of the documents, and that you used the loan to retain workers and pay for the eligible expenses. Your lender must decide within 60 days on your forgiveness amount.

Final guidelines on loan forgiveness from the SBA are expected by the end of April. GTM will continue to monitor this issue and post updates on our blog and in our COVID-19 Payroll and HR Resource center.


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