While there is a lot of speculation surrounding payroll costs as they pertain to the Paycheck Protection Program (PPP), below are answers to questions that we have at this time. The most important thing to remember if you apply for this program is to document, document, document.
What qualifies as “payroll costs” under the Payment Protection Program (PPP)?
Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of:
- salary, wages, 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
- for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation
Is there anything that is expressly excluded from the definition of payroll costs?
Yes. The Act expressly excludes the following:
- Any compensation of an employee whose principal place of residence is outside of the United States
- The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary
- Federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees
- Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (FFCRA) (Public Law 116–127)
Do independent contractors count as employees for purposes of Paycheck Protection Program (PPP) loan calculations?
No. Independent contractors have the ability to apply for a PPP loan on their own, so they do not count for purposes of a borrower’s PPP loan calculation.
Do independent contractors count as employees for purposes of Paycheck Protection Program (PPP) loan forgiveness?
No. Independent contractors have the ability to apply for a PPP loan on their own, so they do not count for purposes of a borrower’s PPP loan forgiveness.
Remember that at least 75 percent of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any Economic Injury Disaster Loan (EIDL) refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness.
While the Act provides that PPP loan proceeds may be used for the purposes listed above and for other allowable uses described in section 7(a) of the Small Business Act (15 U.S.C. 636(a)), the Administrator believes that finite appropriations and the structure of the Act warrant a requirement that borrowers use a substantial portion of the loan proceeds for payroll costs, consistent with Congress’ overarching goal of keeping workers paid and employed.
As with the similar limitation on the forgiveness amount explained earlier, the Administrator, in consultation with the Secretary, has determined that 75 percent is an appropriate percentage that will align this element of the program with the loan amount, 75 percent of which is equivalent to eight weeks of payroll. This limitation on use of the loan funds will help to ensure that the finite appropriations available for these loans are directed toward payroll protection, as each loan that is issued depletes the appropriation, regardless of whether portions of the loan are later forgiven.
What happens if Payroll Protection Program (PPP) loan funds are misused?
If you use Payroll Protection Program (PPP) funds for unauthorized purposes, the SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, the SBA will have recourse against the shareholder, member, or partner for the unauthorized use.
What certifications need to be made?
On the Paycheck Protection Program (PPP) application, an authorized representative of the applicant must certify in good faith to all of the following:
- The applicant was in operation on February 15, 2020, and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.
- Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.
- The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; the applicant must understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold them legally liable such as for charges of fraud. As explained above, not more than 25 percent of loan proceeds may be used for non-payroll costs.
- Documentation verifying the number of full-time equivalent employees on payroll, as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following this loan will be provided to the lender.
- Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. As explained above, no more than 25 percent of the forgiven amount may be used for non-payroll costs.
- During the period beginning on February 15, 2020, and ending on December 31, 2020, the applicant has not and will not receive another loan under this program.
- The applicant must further certify that the information provided in the application and the information provided in all supporting documents and forms is true and accurate in all material respects. The applicant understands that knowingly making a false statement to obtain a guaranteed loan from the SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
- The applicant will acknowledge that the lender will confirm the eligible loan amount using tax documents to be submitted. The applicant will affirm that the tax documents are identical to those submitted to the Internal Revenue Service. The applicant also understands, acknowledges, and agrees that the Lender can share the tax information with the SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with the SBA Loan Program Requirements and all SBA reviews.
Documentation will be critical for all applicants. Remember to provide documentation verifying use of the funds to pay for all approved costs.