Confused by PPP Forgiveness?

by Denai Wolfe

Let’s talk all things PPP FORGIVENESS!

There have been many questions surrounding how PPP Forgiveness will work. I hear your frustration and I understand it because a lot of the guidance is NOT very clear! As more and more comes to the surface I will keep you posted but for now, here is what I know:

What can PPP be used for?

Payroll Costs: Gross wages, employer-paid state taxes NOT federal, costs related to the continuation of group health care benefits, paid sick leave, medical or family leave, and insurance premiums. Mortgage interest payments (but not mortgage prepayments or principal payments), rent payments, utility payments, and interest payments on any other debt obligations that were incurred before February 15, 2020. If applicable – refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020. There is one big stipulation, at least 75% of the PPP loan proceeds must be used for payroll costs.

Can I pre-pay payroll OR back pay it?  Is it based on payroll you PAID during the period or the pay-period it relates to?

This is blurry. The current wording says “costs incurred and payments made during the eight-week period”. Say what?!  Does it mean costs have to be BOTH incurred and paid during the period? Or just one of those?? Until further guidance comes out, we don’t know. For now make sure that you actually make the payments during the 8 weeks. 

How do I calculate payroll as a Sole Proprietor?

In order to calculate your portion of payroll as the owner you can use your W2 wages and pull payroll reports for any portion of pay you take via a paycheck BUT if you are NOT taking a paycheck you will need to look at your “Net Profit” this is line 31 on the Schedule C in your tax return.

Take this number and divide it by 12 and then multiply the answer by 2.5 and boom you have calculated your PPP loan! BUT keep in mind you can NOT take more than 100k per year so if you are currently making $150k per year you will be capped at $100k making your calculation $100k divided by 12 is $8,333 x 2.5 equals $20,833 for your total PPP Loan.

Please also note that you can NOT spend the entire $20,833 on payroll to yourself as they have added rules to ensure this does not happen. Instead, you have to take the annual pay of $100k and divide it by 52 weeks which is $1923 x 8 weeks equals $15,384 as the MAX you can pay yourself which leaves a remaining balance of $5,448. Since most Sole Props will not have rent or utilities or interest payments, and NO your home office does not count, you will need to save this money and pay it back OR keep it as a loan with a 1% interest rate and a 2-year term.

What are payroll costs?

Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of GROSS 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). Please note there is a CAP of $100k on annual wages per each employee. This means no one can be paid more than $1923 per week so the max for the 8 weeks is $15,384 for an employee and or owner who typically makes more than $100k per year.

Leave payments, employee benefits such as health insurance, vision, dental, life insurance, and retirement are all included. The employer-paid portion of state and local payroll taxes are also included.

PLEASE NOTE the employer-paid portion of FEDERAL payroll taxes is NOT going to be forgiven. This means you still have to pay the 7.65% payroll taxes. BUT there is an option to defer these taxes and pay them in 2 lump sums at the end of 2021 and 2022.

If mistakes are made is ALL of the forgiveness wiped out?

No.  You can qualify for partial forgiveness.  

How should I run my payroll to ensure it is all forgiven? 

This one is very confusing – so watch your step as we venture on down this rabbit hole. So the fact sheet says that you can’t cut your average payroll by more than 25% of what it was previously. Which basically means that employees have to make close to what they were making before. BUT they ALSO say you have to use 75% of the loan on payroll and this math doesn’t add up. Let’s look at some numbers:

Your average payroll is $5000 per month so your PPP total loan is 5kx2.5= $12,500

Let’s say you reduce your average payroll by 25% and payout 3750 per month x 2 is $7500. This is ALLOWED, right? BUT in order to be compliant you would have to spend 75% of the $12500 on payroll which means your payroll spend must be $9375….So someone in DC needs to check the batteries in their calculator. These two rules don’t work TOGETHER.

You can see how there are glitches here so we need to be very careful with how we use these funds in order to ensure the max when it comes to forgiveness. My stance as of now, April 21, 2020, is to follow the 75% must be spent on payroll rule and forget about the 25% “allowable deduction” for payroll.

Since 75% of the loan has to be used on payroll can I take a raise and give my employees a raise? 

For business owners, the answer is NO. They have updated the guidelines to explain that since most Sole Props don’t have additional expenses such as rent, or utilities they want to make sure that the excess funds of the loan are NOT spent on the owner’s payroll. Think about it. They are giving you 2.5 times payroll and asking you to spend 75% of it on payroll and other forgivable expenses. Well if you don’t have other forgivable expenses and paid it all to yourself in payroll you would get 2.5 times of payroll in just two months which means you would actually make MORE in those two months and the government has said NOPE. This is ironic considering half of the people on unemployment are making MORE but we can save that discussion for another day.

For the employees, there has not been anything released to say that they CAN’T be paid more so it seems likely that the answer is yes. BUT keep in mind that you have to keep your headcount up to pre corona levels so there may not be much room in the budget for raises.

What’s the deal with the headcount? How is it calculated? Can I replace employees or does it have to be the same ones?

Your baseline headcount is calculated as “full-time equivalents” during the period from Jan 1, 2020, to Feb 29, 2020.  This means that if you have a part-time employee who works 15-20 hours a week, they would be equivalent to about .5 of a full-time employee. The SBA is going to compare your average monthly FTE headcount from Jan 1, 2020 – Feb 29, 2020, to your average monthly FTE during your 8 week forgiveness period.

I know many of you are stuck in situations where your employees will not come back as they are making more on unemployment but please realize that you do NOT need to keep the SAME employees. You can replace them. Since it goes by full-time employees you could replace two part-timers with ONE new full-time employee.

Based on this ruling it does seem plausible that you could hire your spouse or kids as employees but I wouldn’t be surprised if they start to crack down on this but for now, I see no reason why you can’t.

They are also saying that you have until June 30th to bring employees back from furlough and off of unemployment BUT if your loan has already been issued and your 8-week timeline is ticking you really dont have up until June 30th. Again another guideline that doesn’t seem to be well thought out.

If I get the PPP loan and my employees come back from unemployment don’t I have to find work for them? Can I wait to start the 8 week timeline and let them continue to collect unemployment?

The 8 week period starts as soon as you get the loan.  You cannot DELAY it.  If you want to delay it then you will have to keep the funds and it will turn into a loan with a 1% interest rate due back in 2 years. And let me be clear your employees do NOT have to work. Which means for many of you you’re going to be paying them their average wages to NOT work…

Can I get PPP AND unemployment?

You can NOT collect unemployment and be paid out of PPP as well. This also applies to your employees. However, at the end of the 8 weeks once the PPP paychecks have stopped if you are eligible you can apply for unemployment.

Can I take the PPP and the EIDL grant/loan?

Yes, BUT not for the “same purpose”.  Since PPP is for payroll this means you can’t also use the EIDL grant and or loan for payroll. One thing to keep in mind is that it does appear that the GRANT portion of the EIDL will be deducted from the forgivable portion of the PPP which means you can’t double-dip on the free money. Let’s say you get 10k from the EIDL grant and then the PPP loan forgiveness is 20k the 10k from the EIDL would be deducted meaning that the PPP forgiveness would drop to 10k and you would now owe 10k back to the PPP.

I know this was a TON of info! If you still have more questions please head over to my private Facebook Group where we are constantly posting updates and going Live to answer your questions! 


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Denai Wolfe with laptop

My name is Denai Wolfe and I’m dedicated to helping big thinking entrepreneurs increase their profits and decrease their stress. I’m laser-focused on turning your passion into profits. When it comes to business I have one core truth – If it doesn’t make money, it doesn’t make sense.