What Is Included in Payroll Costs for PPP Loan Forgiveness?

If you’re wondering what payroll costs are eligible for PPP loan forgiveness, you’re in the right place. In this blog post, we’ll go over everything you need to know about payroll costs and PPP loan forgiveness.

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Introduction

The Paycheck Protection Program (PPP) loan forgiveness process can be complex, and borrowers may have questions about what types of expenses are eligible for forgiveness. In this article, we’ll discuss payroll costs and how they can impact PPP loan forgiveness.

Payroll costs are one of the most common expenses that are eligible for PPP loan forgiveness. This includes salaries, wages, tips, employee leave, health insurance premiums, and retirement benefits. All of these expenses must be incurred during the covered period in order to be eligible for forgiveness.

To calculate your payroll costs, you will need to use your average monthly payroll costs from the last 12 months. This number will be used to determine your maximum loan amount. Once you have determined your maximum loan amount, you can use it to calculate your loan payment forbearance period.

If you have any questions about what types of expenses are eligible for PPP loan forgiveness, contact a lender or the Small Business Administration (SBA) for more information.

What are payroll costs?

Payroll costs are defined as the compensation paid to employees (whose principal place of residence is the United States) in the form of wages, salaries, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis.

Wages

Generally, payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of:
-salary,
-wages,
-commissions, or
-tips (capped at $100 per employee per month);
-employee benefits consisting of:
-group health care coverage, including insurance premiums, and
-retirement benefits;
-state and local taxes assessed on employee compensation; and
-for sole proprietors or independent contractors: wages, commissions, income, or net earnings from self-employment, capped at $100 per individual per month.

Health insurance

Health insurance is one of the many payroll costs that can be included in your PPP loan forgiveness calculation. Other eligible payroll costs include:

-Salaries and wages (up to $100,000 annually per employee)
-Vacation, parental, family, medical, or sick leave
-Allowances for separation or dismissal (severance pay)
-Employee benefits including health insurance, dental and vision insurance, retirement benefits, and state and local taxes assessed on employee compensation
-Payroll taxes

Retirement benefits

In addition to salary and wages, payroll costs can also include:
-Retirement benefits: contributions to traditional pension plans and defined contribution plans (such as 401(k) plans), as well as similiar statutory retirement plans
-State and local taxes assessed on employee compensation
-Payments for disability, death, or health insurance premiums for employees
-Sick leave and paid time off

State and local taxes

State and local taxes imposed on the employee’s compensation are included in payroll costs. This includes:

-State income taxes
-Local (city, county, or parish) income taxes
-State unemployment insurance taxes
-Local (city, county, or parish) unemployment insurance taxes

What are not included in payroll costs?

Bonuses

Bonuses, commissions, hazard pay, and tips are not included in payroll costs.

Commissions

Commissions are a type of pay that is often based on how much product is sold or how many people are serviced. For most workers, commissions are a regular part of their paycheck and can fluctuate based on their job performance. In some cases, an employer may offer a draw against future commissions as a way to provide a steadier income stream for employees.

Sick leave

Sick leave, whether paid or unpaid, is not included in payroll costs for the purpose of PPP loan forgiveness.

Vacation pay

Vacation pay is not included in payroll costs.

What are the implications for PPP loan forgiveness?

You must use at least 60% of your loan for payroll costs

To receive loan forgiveness, you must use at least 60% of your loan amount for payroll costs, and no more than 40% on eligible non-payroll expenses. Payroll costs include:

-Salary, wage, commission, or tip income
-Employee benefits including vacation, parental, family, medical or sick leave
-Allowance for separation or dismissal
-State and local taxes assessed on employee compensation
-For a sole proprietor or independent contractor: Wages, commissions, income, or net earnings from self-employment

Eligible non-payroll expenses include:

-Interest on mortgage obligations incurred before February 15, 2020
-Rent payments under lease agreements in force before February 15, 2020
-Utilities for which service began before February 15, 2020

You have up to 24 weeks to spend the loan

The Paycheck Protection Program (PPP) loans are intended to help small businesses keep their workers employed during the COVID-19 pandemic.

Under the PPP, small businesses can apply for a loan from a participating lender. The loan amount is based on the business’s average monthly payroll costs, and can be used for expenses such as payroll, rent, utilities, and mortgage interest.

To be eligible for loan forgiveness, businesses must use the loan funds for eligible expenses and maintain their employee headcount and salary levels. Businesses have up to 24 weeks to spend the loan funds and must apply for forgiveness with their lender.

The SBA will forgive the portion of the loan that is used for eligible expenses, up to the full amount of the loan. The forgiven amount will not be considered taxable income.

If you have any questions about whether your business is eligible for a PPP loan or how to apply, you should contact your lender directly.

You must maintain your workforce

In order to have your PPP loan forgiven, you must maintain your workforce. You will need to provide documentation to your lender that you have not reduced the number of full-time equivalent employees (FTEs) or salaries and wages by more than 25% during the covered period (or the alternative covered period) when compared to the pre-specified reference period.

If you are unable to return to the same level of business activity that you had before February 15, 2020, you may still be eligible for partial loan forgiveness, as long as you do not reduce your FTE employees or salaries and wages by more than 40%.