How to Calculate PPP Payroll Amount for Independent Contractors, Sole Proprietors, LLCs and Corps
DISCLAIMER: The Treasury Department has changed the rules on this multiple times in the past two weeks. They likely will again. This is based on current guidance and information from trusted accountants, Treasury, the SBA, and others. Listen to your bank or lender! THINGS CHANGE!
Paycheck Protection Program Basics
As part of the CARES Act passed on March 27, 2020, a large amount of money is allocated towards a program known as the Paycheck Protection Program (PPP). In a nutshell, this program allows for a loan of 2.5x average monthly payroll which, if you use it only for a few specified purposes (payroll, rent, utilities, etc.) during the 8 weeks post-funding, the loan will be FORGIVEN! Meaning you don’t have to pay the money back. NOTE: Only the portion of the loan funds used for the specified purposes will be forgiven.
This program is open to all small businesses, 501(c)(3)’s, sole proprietors, LLCs and independent contractors.
If you want to get the most important info about the PPP in lots of detail, click here to read our regularly updated post on the PPP.
The MOST IMPORTANT Basics Used in Calculating Payroll Amounts: It’s not about what you made…it’s what your company paid out in TAXABLE PAYROLL and APPROVED PAYROLL COSTS.
(P.S. Very shortly our massive, detailed FAQ will be up. This will turn into a link when it is live. These questions and so many more will be included.)
Q: What is included in the calculations (in detail please)? The basics to include – salary, wages, commissions, tips, and bonuses, including severance pay. Other things to include are:
Owner’s Draw compensation ONLY if the company is a sole proprietorship or you have otherwise paid payroll tax or self-employment tax on this amount.
Any paid leave (unless its FFRCA paid leave – that you exclude).
EMPLOYEE-PAID: state and local taxes, group health benefits, and retirement contributions. Careful here… you include only those amounts that the employee pays. Not the portion the employer pays.
EMPLOYEE-PAID: Federal taxes. Like above, you only include the amount of Federal payroll taxes that your EMPLOYEE pays. So the employee portion of Federal Income Tax and the employee’s share of FICA. Last week, some were advised to include all Federal taxes, and some were told none, but then Treasury came out with a great FAQ page that addressed this specifically. Read that here (look for Question #16 on Page 5 for details). And now we know.
Finally, add in the EMPLOYER-paid: state and local taxes, benefits for group health plans, dental and vision, and health FSA’s. Also include EMPLOYER-paid retirement contributions. Note this does not include Federal payroll taxes paid by the employer, and also does not include some specific benefits such as Short- or Long-Term Disability, Group Term Life Plans, and a few other things. If you have benefits other than those listed, please check to see if they are included or not.
Q: What should I definitely not include?
Contractor pay. (Yes. if you only use 1099 workers, you can’t include that. The reason is that IC’s are also eligible for this program. So it wouldn’t make sense to include them twice.)
Payroll reimbursements (remember that the money includes has to be subject to payroll taxes. Reimbursements are not.)
If you’re an S-Corp or C-Corp, in most cases you need to exclude Owner’s Draw compensation (except for Sole Proprietors – if you are a SP or an LLC taxed as a SP you would include draws if they are subject to payroll tax or self-employment tax. But if you are an LLC taxed as an S- or C-Corp, or an actual S- or C-Corp non-taxed draws should not be included. Also don’t include whatever else these might be called: for an S-Corp, don’t include Shareholder Distributions. For a C-Corp, don’t include Dividends. Are these subject to payroll tax? No? Don’t include them.
Worker’s Compensation costs and fees.
Q: Is this just full-time employees? No. You should include both full-time and part-time employees.
Q: What’s this cap about? You stop adding up when you get to $100,000 for each employee. That’s the max any one employee can count for the calculation.
Q: What time period should this include
Regular Businesses – January 1, 2019 – December 31, 2019 OR One-Year Period prior to date of application.
Newly Formed Businesses – If you weren’t in business by 2/15/19, you should use January 1, 2020 – February 29, 2020.
Seasonal Businesses – Read this please. Basically, if you were not open on 2/15/20, then you may still be eligible if you were in operation for an eight-week period between February 15, 2019 and June 30, 2019. Essentially, if you were open two of those five months, you are eligible. If so, you then use the numbers from February 15, 2019 (or March 1, 2019) and June 30, 2019. What if you were not in business then? You can use payroll costs from January 1, 2020 – February 29, 2020. Confused? I am. Talk to a CPA if you are a seasonal business.
Total up your 1099s for 2019 then deduct related expenses. The your Net Income subject to payroll tax or self-employment tax is your eligible Payroll Income. Divide by 12 to get your Average Monthly Payroll Cost and multiply by 2.5 to get your eligible PPP loan amount. If you file a Schedule C, then this number should be Line 31 of that form. Sometimes you will see it under “Other Income” on a Schedule 1. Again… think if the money is subject to payroll or self-employment tax. If so, that is the number you use after expenses.
If you have your 2019 taxes done, take a look at your Schedule C, then look at Line 31 (Net Profit or Loss). Remember, this has to be taxable income paid. You get 100% of the net income that is taxable. If you don’t have your 2019 taxes done, create or run a report or Income Statement getting you to the same place. Lenders will ask for different levels of proof here. Additionally, add to this the payroll (as defined above) for any separate W-2 employees. Boom. There’s your number.
Figure out what you collected that was subject to self-employment tax. If you have your 2019 taxes, look for the K-1 Partnership Distribution, and find Line 14. That should be the number that matters. Additionally, add to this the payroll (as defined above) for any separate W-2 employees. Bingo, you got it.
If you are a disregarded entity as an LLC (generally meaning you are taxed as a Sole Proprietor or General Partnership) then follow the guidance above. If you are taxed as an S- or C-Corporation follow the guidance below. Either way, remember the basics: amount paid that was subject to payroll tax or self-employment tax. Additionally, add to this the payroll (as defined above) for any separate W-2 employees. Glad you’re an LLC. It makes the risk-adverse lawyer in me happy.
So if you have an S-Corp, you have to pay yourself a “reasonable salary”. That’s your first number to add here because this is subject to payroll tax. You include this amount. But what about Shareholder Distributions (sometimes called Owner’s Draws). Earlier we saw that Owner’s Draws were supposed to be added in a Sole Proprietorship or LLC as a disregarded entity. But here? Not so much. These Distributions are generally not subject to payroll or self-employment tax, and therefore, not eligible.
If you’re C-Corp, the corporation has to pay taxes on net profits, and then you as an owner pay taxes on dividends related to that profit. Dividends are NOT included here because you are not paying payroll taxes on those Dividends. This is different than an LLC that is acting as a pass-through, so no go on including them in your calculations. In short, in a Corporation, Owner’s Draws or Dividends are not a salary for this program. Unless you were paying separate payroll tax on these, don’t include them. Take the amount in salary and add to this the payroll (as defined above) for any separate W-2 employees. Like everything else with Corporations, this is tricky. It is best to talk to an accountant.