What are eligible payroll costs for PPP loan forgiveness?

To have your Paycheck Protection Program (PPP) loan forgiven in full by the Small Business Administration (SBA), you’re required to spend 60% of the PPP loan proceeds on eligible payroll costs¹ during your covered period.² Additionally, you need to calculate the amount you spent on payroll costs to determine your maximum loan forgiveness amount. If you didn’t spend at least 60% of your PPP funds on eligible payroll costs, your forgiveness amount might be reduced.³ 

Eligible Payroll Costs

To calculate your eligible payroll costs incurred or paid during the covered period, you’ll add together the amount you spent on Cash Compensation, Employee Benefits, and Owner Compensation, as follows.

Cash Compensation

• Include: The sum of gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Period.
  
  
• Don’t include: Qualified wages taken into account in determining the Employer Retention Credit⁴ or disaster credit⁵. For each employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period. 
• For example, for an 8-week Covered Period, the maximum is $15,385; for a 24-week Covered Period, the maximum is $46,154. You can only include compensation of employees employed by the Borrower at any point during the Covered Period and whose principal place of residence is in the United States.

Employee Benefits

The total amount paid by your business for:

• Employer contributions for employee group health, life, disability, vision, or dental insurance, including employer contributions to a self-insured, employer-sponsored group health plan, but excluding any pre-tax or after-tax contributions by employees.⁶
  
  
• Employer contributions to employee retirement plans, excluding any pre-tax or after-tax contributions by employees.⁷

• Employer state and local taxes paid by the entity and assessed on employee compensation (e.g., state unemployment insurance tax), excluding any taxes withheld from employee earnings. 

Owner Compensation

• Any amounts you paid to owners, including owner-employees—with an ownership stake of 5% or more—a self-employed individual or general partners, are limited as described below.
• For each individual owner across all businesses, this amount is limited to the lower of: (a) $20,833 or (b) the 2.5 month equivalent of your business’s gross income in the year used to calculate your PPP loan.  

• If you applied for PPP using Form 2483-C or 2483-SD-C (for Schedule C filers using gross income instead of net profit), owner compensation includes proprietor expenses (the difference between gross income and employee payroll costs).
• Proprietor expenses are limited to the lower of: (a) $20,833 or (b) the 2.5 month equivalent of your business’s gross income in the year used to calculate your PPP loan. 

Maximum Loan Forgiveness Amount Calculation

Once you’ve determined how much of your PPP loan you spent on cash compensation, employee benefits, and owner compensations, you’ll add all of the amounts together to find the total amount you spent on eligible payroll costs. 

Second, you’ll need to compare your total payroll costs to the total PPP loan amount you borrowed to determine if payroll costs accounted for at least 60% of your PPP funds. To do this, divide your payroll costs by your PPP loan amount.

• If the percentage is greater than or equal to 60%, you will qualify for loan forgiveness up to your total PPP loan amount (depending on how many total eligible expenses you submit).

Example Problem # 1

• Total payroll costs (cash compensation + employee benefits + owner compensation) = $16,000  
• Total PPP loan amount = $25,000
• 16,000/25,000 = 0.64 or 64% 
• As 64% is greater than 60%, the individual’s maximum loan forgiveness amount is the total PPP amount or $25,000.  Their payroll costs will cover $16,000 of forgiveness; they will need to submit at least $9,000 eligible non-payroll expenses to qualify for full forgiveness.

If the percentage is less than 60%, your maximum PPP forgiveness amount will be reduced. The reduced amount is 60% of your total payroll costs.

Example Problem # 2

• Total payroll costs (cash compensation + employee benefits + owner compensation) = $4,000  
• Total PPP loan amount = $11,000
• 4,000/11,000 = 0.363 or 36%
• As 36% is less than 60%, the individual’s qualified forgiveness amount is 60% of the total payroll costs.
• 4,000/.60 = 6,667.00. 
• The individual’s maximum loan forgiveness amount is $6,667.00.

1 Payroll costs are considered paid on the day that paychecks are distributed or that the Borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period. Count payroll costs that were both paid and incurred only once. Include only payroll costs for employees whose principal place of residence is in the United States.

2 If you incurred eligible expenses during your Covered Period but paid them after your Covered Period, they are only eligible if you paid those expenses on the first applicable payment date following the end of your covered period. For example, if your Covered Period ended June 15, and you incurred payroll for the first half of June but did not pay it by June 15, you can include those expenses only if you paid them on the first payroll date following the end of your Covered Period.

3 Additional loan forgiveness reductions may apply. See our guide on Determining FTE and Wage Reduction for PPP Loan Forgiveness for more information.

4 Under Section 2301 of the CARES Act and Section 3134 of the Internal Revenue Code. 

5 Under Section 303 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020.

6 Do not add contributions for these benefits made on behalf of a self-employed individual, general partners, or owner-employees of an S-corporation because such payments are already included in their compensation. Do not add premiums for COBRA continuation coverage taken into account in determining the credit under section 6432 of the Internal Revenue Code.

7 Do not add employer retirement contributions made on behalf of a self-employed individual or general partners because such payments are already included in their compensation.

The information, opinions, and advice in this post are provided for educational purposes only and do not necessarily state or reflect those of Bluevine and/or its partners, including Celtic Bank. Neither Bluevine nor its partners are responsible for the accuracy of any content provided by author(s) or contributor(s). For information about Bluevine products and services, please visit the Bluevine FAQ page. For information about the Paycheck Protection Program, please visit the SBA’s page.