The Paycheck Protection Program (PPP) is the chief provision in the CARES ACT It originally provided $349 billion in forgivable loans for small businesses, with more funds on the way. Like many government programs, however, the application process can be intimidating or confusing. This post will walk you through the application step by step to help clarify all of the details.
Are you eligible to apply for a PPP loan?
First things first. While most active small businesses are eligible to apply for PPP loans, the loan application will ask you a few additional questions that will determine whether or not you can receive the funds. Those are:
- Are you an independent contractor or sole proprietor? If so, you’re likely eligible. If you are a contractor or self-employed, the application process is mostly the same, but there’s some additional guidance you should review.
- Does your business have no more than 500 W-2 employees? If your answer is “Yes” then you are likely eligible. If you have more than 500, it’s up in the air. Some industries are eligible, some aren’t. If you have more than 500 employees, use the Small Business Administration’s size standards tool to find out whether you’re eligible.
- Do you have a patchy history with government loans? If you’ve borrowed money from the government before but had trouble repaying these loans, you probably won’t be approved.
- Do you have a rap sheet? Applicants with criminal charges or convictions in the last five years might not be eligible.
What you’ll need to fill out the PPP application
There are a couple of items you can grab now to make this application process go as smoothly as possible. They will be helpful if your lender has any questions or is helping you complete the application.
- Payroll reports: We’ll get into the details below, but payroll costs are the primary driver of the PPP loans. Completing the application will be much easier if you have ready access to payroll reports with the necessary details. PayDay has proactively created reports to help you, contact your CSR to request,
- Accounting information: If you don’t have payroll reports handy, the next best option will be to use your accounting software to compile the payroll cost information you need.
- Tax forms: While each bank or lender will have their own process, some tax documents that we’ve heard requested are:
- 2019 and 2020 IRS Form 941, or quarterly filing for quarterly wages and federal employment taxes
- 2019 IRS Form 940, or annual filing for FUTA tax
- 2019 IRS Form 944, or annual filing for the smallest of employers to pay federal taxes once per year
- 2019 IRS Form W-3, which reports employee wage info
- 2019 IRS Form 1099, which reports payments to independent contractors and other non-employees
Your business information
Fortunately, most parts of the application are short and relatively simple. Determining your average monthly payroll costs will be the most involved part of the process, so we’ve broken that down in a series of steps.
Before getting to those, however, we’ll start with some basics.
This first section requests basic business information, including:
- Business type: Is your business a sole proprietorship, partnership, C corporation, S corporation, LLC, or other type of entity?
- Business legal name: This is the business name you put on the application with the secretary of state.
- Business address: Whether you have a physical location outside your home, or not, this is where the mail will go.
- DBA, or “Doing Business As,” if applicable: That’s when you give your business a name that’s different from your entity’s.
- Business TIN, EIN, or SSN: Here you’ll provide your ID that was assigned to you when you created the business. If you’re a sole proprietor or independent contractor, this may be your Social Security number.
- Primary contact: Is this you? Someone else?
- Business phone number
- Email address: The application does not specify, but let’s presume a business email.
Average Monthly Payroll and calculating your loan request
Your PPP loan is determined by your average monthly payroll, and this is the second part of the application. Here’s what it looks like:
The fields for “Number of Employees” and “Purpose of the loan” are straightforward. We’ll focus on figuring out the average monthly payroll to calculate your loan amount.
How to calculate average monthly payroll for your PPP loan
Calculating the average monthly payroll isn’t as straightforward as it might seem. There are a series of steps to get the most accurate number possible.
Step 1: Determine which time period to use when calculating payroll costs
Depending on your business, there are a few different time periods that must be used for calculating the average monthly payroll costs. Here’s a rundown of them:
|Type||Definition||Required Time Period|
|Regular Businesses||Businesses that were active and paying employees between February 15, 2019 and June 30, 2019.||Jan. 1, 2019 – Dec. 31, 2019|
12 months prior to the date the loan is made
|New Businesses||Businesses that weren’t active and paying employees between February 15, 2019 and June 30, 2019.||Jan. 1, 2020 – Feb. 29, 2020|
|Seasonal Businesses||Businesses that have their highest monthly payroll during a specific period of the calendar year.||March 1, 2019 – June 30, 2019|
Feb. 15, 2019 – June 30, 2019
We recommend you use full months in your selection. Setting your start or end date as mid-month may cause your pay period to include an additional month. This, in turn, may decrease your average monthly payroll cost.
Step 2: Determine your “Monthly Payroll Cost”
Once you have the time period identified, then it’s time to calculate the monthly payroll cost for that time period. The CARES Act specifies what should be included and what should not be included in the total cost. Here’s a quick summary:
|– Salary, wages, commissions, tips, bonuses|
– Severance pay
– Paid leave payments (no FFCRA paid leave)
– Employee and employer payments for state and local taxes
– Employee payments for federal taxes (e.g., Federal Income Tax and FICA)
– Employee contributions to retirement and group health plans (e.g., health insurance, dental coverage, etc.)
|– Contractor pay|
– Payroll reimbursements
– Owner’s draw payments
– Workers’ compensation fees
– Fringe benefits (e.g., commuter benefits, HSAs, etc.)
– Ancillary benefits (e.g., short-term disability, group life insurance, etc.)
– Employer-paid federal taxes (FICA or Social Security and Medicare)
Step 3. Adjust for cash compensation exceeding $100,000
The CARES Act specifies that cash compensation (i.e., salary or wages) for an employee that exceeds $100,000 per year cannot be included in the monthly payroll costs. If none of your employees earn more than $100,000 in salary or wages, you can skip this step.
For example: Say Jim earns $10,000 per month. The most Jim’s employer can include in its monthly payroll cost is $8,333.33 ($100,000 / 12). The excess $1,666.67 will not be used in the calculation of monthly payroll costs.
Note: Non-cash compensation (e.g., employer-paid health insurance) does not figure into the $100,000 cap.
Step 4. Add in certain employer payments
Employer payments for state and local taxes and employer contributions to employee retirement and group health plans (with the same inclusions and exclusions from Step 2) are included in your monthly payroll costs.
Step 5. Calculate your Average Monthly Payroll Cost
Once you’ve done the above, you’ve found your Monthly Payroll Cost. Do this for each month in the time period you selected in Step 1, and divide it by the total number of months (e.g., 12 for regular businesses, two for new businesses). This result is your Average Monthly Payroll Cost.
Use your Average Monthly Payroll Cost to determine your loan amount
The next step is to multiply the average monthly payroll costs by 2.5 to determine your eligible loan amount (with an absolute maximum of $10 million per business).
For example: If your average monthly payroll cost is $1 million, your loan amount will be $2.5 million ($1,000,000 x 2.5).
The maximum amount a borrower can receive under the PPP is $10 million. If your needs are greater than this, discuss additional assistance like EIDLs with your lender.
Next in the application is a table to include ownership information. Each owner (either an individual or parent company) that holds 20% or more equity in the business applying will be listed here.
If you are a nonprofit and don’t have an owner with percentages of ownership, you’ll likely be asked to provide information on your authorized signatories. This can be a single control person such as the president, CEO, or director—whomever has signatory authority.
And just a few questions
A brief questionnaire follows that, depending on your answers, may result in your loan not being approved or require you to provide more information. Here’s the first half of the questions:
- Questions 1 and 2 ask if either the business or owners have been forbidden from participating in the program via another government agency, involved in bankruptcy, or have been delinquent or defaulted on other government loans.
- Question 3 requests information about other businesses that have the same owners or management as the business applying for a PPP loan. Note that affiliated companies may not be able to submit more than one PPP loan application. See the SBA’s Interim Final Rules on Affiliation for more details.
- Question 4 requests information from applicants who have obtained an EIDL between January 31, 2020 and April 3, 2020.
As you can see, if an applicant answers “Yes” to either Question 1 or 2, the loan will not be approved.
Here’s the second half of the questionnaire:
The two key questions are 5 and 6. They ask about owners who are currently being charged with, or have been convicted of, crimes in the past five years. Similar to the section above, applicants who answer “Yes” to either question will not be approved for the loan.
Question 7 asks about the applicant’s employees’ principal place of residence. Question 8 inquires whether the applicant is a franchise listed in the Small Business Administration (SBA)’s Franchise Directory.
Certifications and authorizations
Page 2 of the application is a list of certifications and authorizations that the applicant makes. Essentially it says that you’ll follow all the rules and regulations under the CARES Act as it relates to the PPP.
One of the key certifications relates to the forgiveness feature of the PPP. It allows borrowers who comply with the rules for documenting and spending the proceeds to have their loans forgiven (i.e., they won’t have to pay the loan back).
Here’s the condition from the application:
I understand that loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities, and not more than 25% of the forgiven amount may be for non-payroll costs.
In other words, 75% of the loan proceeds must be spent on eligible payroll costs in order for 100% of the loan to be eligible for forgiveness. The signature of the business’s authorized representative goes at the bottom of page 2.