How to Calculate Payroll Costs for Your Paycheck Protection Program Loan
The PPP has been one of the most popular relief programs and you need to know about its implications (if you took one out) for tax and accounting purposes.
While it is no longer available, people still need to understand its consequences and how to calculate future payroll costs. For instance, you need to know how to calculate it for filing tax returns for the year-end 2020. Otherwise, you get a fine from the IRS for incorrect tax filing.
The accounting methodology for calculating payroll costs for the PPP loan is actually very straightforward, though there are certain intricacies with the reporting requirements afterward.
PPP Qualifying Criteria
In order to qualify for PPP loan forgiveness, you must basically be able to demonstrate that you could not otherwise have gotten by during the COVID disaster. There is nothing really ‘concrete’ about the guidelines.
Hedge funds and large businesses are exempt from PPP applications, as they have the capital reserves at hand to survive. There is one main requirement, governed under section 1102 of the CARES Act that brought the PPP into effect. This section stated that:
The other main criteria is that you accurately calculated the PPP amount you were entitled to, which is a function of how many employees you have, of what type, and how much they were paid.
If you did qualify for a PPP loan, you are required to keep documentation for a minimum of 6 years. The SBA is reviewing individual applications on a case-by-case basis. If it is determined that you do not qualify for PPP forgiveness, then you can appeal the decision.
The 3 Steps to Calculating Payroll Costs
The SBA has released a list of scenarios as to how to calculate payroll costs in relation to the PPP. However, it is still a little complicated as there are so many permutations and it is hard to figure out what the terms really mean.
Which is why we have broken it down into 4 simple steps for you to easily handle. However, you still have to understand that it depends on your legal entity type and your unique situation.
The relevant forms to keep in mind for the legal entity types include the schedule C for a Sole Proprietorship, a Schedule K for an LLC or Partnership, a Form 1099 for an independent contractor/freelancer, or a Form 1120 for a C-Corp or S-Corp. If you are unfamiliar with these forms, then it is best to get familiar with them, as they are essential for tax purposes and basic accounting.
It is actually more straightforward than you might think, despite all of the jargon. Calculate your monthly payroll costs and multiply the amount by 2.5 to determine your maximum PPP loan eligibility.
Because there are so many permutations, we have given the following example based on a partnership with employees (keep in mind that LLCs can choose to be taxed as an LLC, Partnership, or Sole Proprietorship).
Step 1 – Compute Yearly Total Payroll
The first step can be broken into a series of steps you need to take to compute your payroll costs.
- Find the total net earnings per partner (Schedule K-1 i.e. IRS Form 1065) and multiply this by 0.9235. earnings of your employees. You can find this information on the IRS Form 941 in tandem with your payroll software. Include pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages tips.
- Include 2019 employer contributions for employee health insurance, if any (IRS Form 1065).