UPDATE: THIS POST IS ALMOST A YEAR OLD AND NO LONGER IS USEFUL INFORMATION.
(Way too many folks are landing on this page and I want to dissuade them from using this as a reference — there have been so many changes to the PPP since this was published. Make sure you restrict any internet searches to posts made in the past month!)
I’m getting this question a lot:
I have someone telling me that they can use all 100% of their PPP for payroll instead of the 75/25 rule of payroll/rent+utilities. Is that correct?
Yes, it is — and yes, you absolutely want to include all of your payroll costs in the forgiveness application calculations!
Some folks are in the situation whereby they have more payroll costs than 75% of the loan will cover. In fact, in some cases, the entire PPP loan — 100% — will be used on payroll costs. And that’s a good thing when it comes to requesting forgiveness, for reasons I’ll explain.
In my firm, for example, I’m paying staff tax-season rates right now, and I have a new employee as of January 2020… but my loan total was calculated based on the average of all of 2019 — so it’s much lower than my actual current payroll costs. I’ll be using 100% of my PPP funds for payroll (and then some). By including all my payroll costs in the forgiveness application and projection calculations, I don’t have to worry about going to the effort of submitting rent/mortgage interest and utilities costs (which are very low for me anyway, as my staff is entirely work-from-home).
But it’s not just a matter of having low overhead and not wanting to spend administrative effort to gather mortgage interest and utilities cost substantiation… it’s more importantly because for forgiveness, we’re all aiming to hit three important tests: the FTE reduction, wage/salary reduction, and 75% of forgiveness hurdles. These are all based on payroll measurements, so it’s best when plugging in your forecasting calculations to first include all the payroll you can… and then just make up the difference with non-payroll costs. The total forgiveness cannot exceed the loan total, so there is no harm in taking this approach.
It is, after all, a Paycheck Protection Program.
Reminder: owners themselves (be they sole proprietors, partners, or shareholder-employees) cannot have more than 8/52 of their 2019 compensation forgiven for PPP purposes, which does mean that for a business owner with no employees, they will not be able to use 100% of the funds for payroll. But for everyone else, yes!
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Hi! As a 1099 worker, this still seems not totally correct to me, but I would LOVE it if you could tell me I’m wrong. I received a PPP loan, and only have payroll (paying myself) as a coverable expense, so 100% of the loan should “technically” be forgivable. But I don’t believe it is, based on the forgiveness guidance just issued by the Treasury.
For the sake of simplicity, let’s say my loan was the max, $19,230, the equivalent of 10 weeks of pay. The forgivable part is only 8 weeks of pay, though. So of that original number, only $15,384 can be forgiven. Now, according to the guidance and calculator issued, it says that the second number — the 15K/8 weeks of pay — must now be multiplied by 75%, a short cut way of ensuring that at least 75% of expenses were spent on payroll, and this is the only amount that is forgiven, which takes the total down to $11,538 for the forgivable amount. This is only 60% of the original loan, and the rest would need to be paid back. Am I wrong? I would very much love to be. And I imagine a lot of 1099 employees who received their loans earlier on and have already spent it all would love me to be wrong as well. :) If not, they would probably like time machines so they could go back and NOT pay themselves their full normal wages. Ugh.
Luckily you are wrong, at least in part. The guidance does not restrict the second number by 75%. What the guidance says is:
1) no owner (this includes ALL OWNER TYPES: sole proprietors, partners, and shareholder-employees) may have more than 8/52 of their 2019 compensation forgiven; and,
2) no owner or employee can have more than $15,385 forgiven for the 8-week period (the max salary of $100k x 8/52).
So if you are a sole proprietor with no employees and made $100k or more in 2019 (Line 31 of your Schedule C) you would have $15,385 automatically forgiven, plus any rent (or mortgage interest) and utilities that apply to your situation.
There is nowhere on the AICPA calculator or the SBA PPP Forgiveness Application that further reduces that amount by 75%. I think you’re looking at the fact that total payroll costs are DIVIDED BY 75% as a shortcut way to make sure the total forgiven amount is no more than 75%.
Schedule C folks are actually the only ones who don’t need a time machine, since we actually knew about this restriction from pretty early on… I have advised all my Sch C clients to run the numbers with the AICPA spreadsheet and then set aside any portion of the funds that will not be forgiven. However, it was a surprise that partners and owner-employees would be subject to the same restrictions. It sort of made sense for Schedule C folks, since in exchange for the restriction, they got automatic forgiveness for that amount, as well as the inclusion of the federal Social Security and Medicare tax “employer” portion that everyone else has to subtract. But now all owners have the cap, unfortunately.
I’ve updated the post to point out that the 100% of payroll only applies to your employees, not the owners themselves — thanks for helping me realize that needed to be emphasized.
Um I LOVE YOU and will be sending a tip. ❤️ Thank you so much!!
Hi Nancy, you state here as an independent contractor you…
…”cannot have more than 8/52 of their 2019 compensation forgiven for PPP purposes”
However in reading up on it elsewhere I found qhere it says…
…”For self-employed individuals without additional employees on payroll, the OCR of 2.5 months’ worth of 2019 net profit will equal the loan amount, which means the loan can be fully forgiven through OCR alone.”
So my question is what gives? As an independent contractor I’m looking to have it forgiven through OCR, so whoch is it, the 8/52 you state or the 2.5 months of 19 they state?
The other site I got it from is:
https://bench.co/blog/operations/ppp-forgiveness-24-8-weeks/
Hi, Michael — this post is from May 27th of last year and is completely outdated. Practically every rule in it has changed more than once since then. In this specific question, it is 2.5 months now, not 8/52 weeks. I did a webinar in June on the Act that changed all this — https://www.thedancingaccountant.com/?p=1887 — but honestly, everything continued to change through December, so I wouldn’t trust any article on this topic that wasn’t written in 2021. Please make sure to check the dates of the sources you’re using!
I am a sole proprietor. Can I pay myself in one lump sum vs. dividing it out over weekly/monthly installments and still qualify for PPP forgiveness?
Why are you reading this post? It’s ancient. Seriously. I have desperately tried to ask people not to refer to this post anymore. Please check the dates of anything you read!
Here are the instructions you’ll want to follow. You do not need to pay out anything at all as a Sch C sole prop with no employees.
For borrowers of $150k or less who are self-employed with no employees:
• For self-employed with no employees, it’s an “owner compensation replacement” approach, which means you will have 2.5 months’ worth of your 2019 net profit automatically forgiven. That is why the form is so simple. Your forgiveness amount should exactly equal your loan amount, presuming the original loan was calculated properly.
• For reference, here is the forgiveness application form – but you will actually be applying through your lender’s loan portal and it will walk you through the process – just be clear that you are a self-employed individual with no employees, that your loan was $150k or less, and so you qualify for Form 3508S. https://home.treasury.gov/system/files/136/PPP–Loan-Forgiveness-Application-Instructions–Form-3508S-1192021.pdf
• Instructions here: https://ri.score.org/blog/PPP-loan-forgiveness-self-employed-3508S
• Have your original PPP loan application and loan documents handy so you can make sure the info on your forgiveness application matches it exactly (legal name, DBA, address, NAICS code, EIN/SSN, loan number, number of employees at time of loan application).