CRITICAL UPDATE: As of Friday, April 24, the new bill authorizing $370 billion to the PPP and EIDL programs has been signed by the President and now we are waiting on the SBA to let us know when they will be processing new EIDL Advance applications. They have told banks that they will start processing new PPP applications on Monday, April 27 at 10:30am EST. Check here for the latest updates straight from the SBA.
CRITICAL UPDATE #2: This information is based on new guidance put out in the last seven days by the SBA, Treasury Department, and from certain lenders and banks. Please listen to your bank or lender! They will be the ones getting you money!
You might not think that a two-page application could cause such confusion, but today we are going to try to cut through that confusion in a very direct way. This article will look at how each major business type should calculate their payroll costs that would be eligible for inclusion in your average monthly payroll costs for the Paycheck Protection Program.
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. Please double and triple check on your own and with your advisors and professionals before relying solely on this info! THINGS CHANGE!
PLEASE LISTEN TO YOUR BANK OR LENDER!
Paycheck Protection Program Basics
Let’s get into it. First, some 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 for a few specified purposes (payroll, rent, utilities, etc.) will be FORGIVEN! Meaning you don’t have to pay the money back. Read that again.
Ok, so what’s such a big deal? Well, this program is open to all small businesses, 501(c)(3)’s, sole proprietors, and independent contractors — that’s right, sole-proprietors, freelancers, and IC’s? You are included in this too. There is plenty of great information going around out there about the PPP, but I want to focus on the main details, and how you can get ready for what you need to be doing.
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 Three MOST IMPORTANT Thing to Keep in Mind When Calculating Payroll Amounts
Three things I want you to keep in mind when determining what to put in that box on the PPP application:
- It’s not about what you made… it’s about what you paid (that was subject to payroll or self-employment tax). What I mean by this is that the accounting and tax rules for each business form are different. But from a point of view about WHY the PPP exists, you need to think that this program is designed to give businesses the money to not layoff their employees for two months. That means, the main numbers you need to think about are your “payroll costs.” Below, I will go into what that includes for each business form. If you are an S- or C-Corporation, and you made $1,000,000 last year, but have one salaried W-2 employee making $24,000 per year, your average payroll costs are what you paid that employee divided by 12. Likewise, if you made $25,000 last year and paid your employee the same $24,000, your numbers would be the same. Remember, the loan amount is to allow you to keep your employees in a job. It’s not what your company made, it’s what your company paid out in TAXABLE PAYROLL and APPROVED PAYROLL COSTS.
Your main thought should be “TAXABLE PAYROLL” salary and payments. This is all about including in the payroll costs the amounts that people had to pay payroll taxes on. If you are a W-2 employee of your own business or have W-2 employees, this is simple. You get your W-2 and grab the numbers. Better yet, use a 3rd party payroll provider and they will run a report for you. But what if you are an IC? Sole Proprietor? Partnership? S- or C-Corp? Well read on, but keep thinking… “payroll taxable.”
- One size does not fit all! I am saying it again here. If you are on your own, or if you are unsure what you need to do, reach out to an advisor. Don’t have one? Now’s a good time to get one. So much of these loans and stimulus matters are tax-based, you want to get a bookkeeper, or tax preparer or CPA to ask (p.s. there are some great online companies that cost very little and provide quite a lot). Trust me, but double-check me! Things change by the day (and I am not a tax attorney).
Here’s a Handy Chart
Ok, right off the top, let’s get to it. Include these things in your payroll calculations for each entity. And be sure that you read the rest of this article (and the Treasury docs, and your payroll provider docs, and your bank docs…)
Type of Entity | Include This (But Check Section Below) |
| Independent Contractor (1099 Worker) | 2019 1099-MISC total. If you file a Schedule C, then look at Line 31. If you have expenses then deduct the expenses from your Gross Income to get your Net Income. That is your number. Stop when you get to $100,000. If Line 31 of your 2019 Schedule C is $0 or less than $0, you are NOT eligible for a PPP loan. You will have to provide copies of your 1099-Misc or a 2019 1040 Tax Return with a finished Schedule C. |
| Sole Proprietor | 2019 Net Profit (Line 31 on your Schedule C). If you don’t have a Schedule C for 2019, make one. NEW GUIDANCE: The most recent guidance seems to indicate that this is now a requirement to apply. Add to this any amount of W-2 salary and payroll costs you have (see below). |
| Partnership | NEW GUIDANCE: If you are in a general partnership, you should apply for a PPP on behalf of the PARTNERSHIP and not yourself individually. You will add up the “self-employment income of general active partners” up to $100,000 annualized on the application submitted by the partnership. |
| LLC Taxed as Sole Proprietor or General Partnership | 2019 Net Profit (Line 31 on your Schedule C). If you don’t have a Schedule C for 2019, make one. NEW GUIDANCE: The most recent guidance seems to indicate that this is now a requirement to apply. Add to this any amount of W-2 salary and payroll costs you have (see below). |
| LLC Taxed as S- or C-Corporation | First, see below for the S- or C-Corp specific language. Salary report from a 3rd-party payroll service (or your payroll records). Likely W-2 income. Careful – only include money that has been subject to payroll tax or self-employment tax in this calculation. Don’t include Owner’s Draws (on any equivalent) here unless you paid separate payroll tax on them. That is very rare. Add to this any additional amount of W-2 salary and payroll costs you have (see below). |
| S-Corporation | You have to pay yourself a “reasonable salary.” Start there with a salary report from a 3rd-party payroll service (or your payroll records). Likely W-2 income. Careful – only include money that has been subject to payroll tax or self-employment tax in this calculation. You can’t include non-taxed Shareholder Distributions (Owner’s Draws or their equivalents). Add to this any amount of additional W-2 salary and payroll costs you have (see below). |
| C-Corporation | You have to pay yourself as a W-2 employee if you are involved in the “day-to-day operations” of your business. Start there with a salary report from a 3rd-party payroll service (or your payroll records). Likely W-2 income. You can also pay yourself with Corporate Dividends. Careful – only include money that has been subject to payroll tax or self-employment tax in this calculation. You cannot include non-taxed Dividends (or their equivalents). Add to this any amount of additional W-2 salary and payroll costs you have (see below). |
A Selection of Common Questions and Pitfalls
Q: What is included in the calculations (in detail please)? For a week at the beginning of the program, there was confusion on such topics like if FEDERAL payroll taxes were to be included. Current guidance says… its a mixed bag. Here’s the low down as of today on what to include (check the date last updated above to see if this is still valid).
A: 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?
A: Some of the common ones to not include are (but note that I can’t list everything that you shouldn’t 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?
A: No. You should include both full-time and part-time employees.
Q: What’s this cap about?
A: 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?
A: This is all based on recent guidance from the Treasury Department, but, this is still slightly up in the air. If your CPA or lender asks for a different period… well, give it to them!
- 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.
Independent Contractors
Ok, this one is pretty easy. Let’s use a real-life example. You’re hired as a photographer for events and parties. You do 20 of those jobs for different clients throughout the year. Each one generates a 1099-MISC so to get the amount, you would add up your 1099’s. No expenses? Then your net income (and the amount subject to payroll tax or self-employment tax) is the total of your 1099’s. Be prepared to give copies of your 1099’s or Schedule C. Done. Go have a drink.
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.
Sole Proprietorships
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 payroll taxable income paid. You get 100% of the net income that is taxable. Most recent guidance suggests that you MUST submit your 2019 Schedule C, but listen to your lender. Additionally, add to this the payroll (as defined above) for any separate W-2 employees. Boom. There’s your number.
Partnerships
NEW GUIDANCE: If you are in a general partnership, you should apply for a PPP on behalf of the PARTNERSHIP and not yourself individually. You will add up the “self-employment income of general active partners” up to $100,000 annualized on the application submitted by the partnership.
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. Add this up for all the general active partners. 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.
LLC’s
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.
S-Corporations
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.
Bottom line? It’s the amount you paid out via W-2 income and other sources that is payroll taxable (generally not Shareholder’s Distributions or Owner’s Draws).
C-Corporations
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. 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 (but if you were using accounting that is above my head, go ahead – just be ready to prove it up). So… 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. Careful here, and talk to an accountant.
Wrap-Up
Most important thing: if your CPA or Bookkeeper or Bank or Lender tells you something other than what is above – LISTEN TO THEM! They are the ones getting and giving you the money. Remember too this is based on current guidance. It may change in an hour.
Look, all of the things above do not fit into a sound bite (or even a long video). I wish I could simplify it. Really, though, read the above, look at your records (or payroll provider, or bookkeeper, or CPA) and you can get there. Problems? Email us at legal@asmp.org. We can’t answer everything (we are not CPA’s or tax attorney’s remember?) but we can help point you in the right direction.
Great Links and Resources
ASMP COVID-19 Hub Page
Treasury PPP FAQ
Treasury Rules Specific to Sole Proprietors and Self-Employed
Current Application
Main Page from the Treasury Department
List of Participating Lenders
Overview of Program
Borrower Basic Info
SBA Payroll Protection Program Page.
SBE Council CARES Act Overview
U.S. Chamber of Commerce Coronavirus Emergency Loans PDF