What is the Paycheck Protection Program?

Learn about the Paycheck Protection Program, if you are eligible for a loan, and how to apply

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What is the Paycheck Protection Loan

The Coronavirus Aid, Relief, and Economic Security (CARES Act) is the largest stimulus bill in U.S. history. The $2.2 trillion legislation earmarks $349 billion for the Paycheck Protection Program (PPP), which will provide small business loans to qualified organizations.

The Small Business Administration will administer the loans, but businesses can apply for the loans at SBA-approved banks, credit unions, and financial technology lenders.

Borrowers should be prepared to complete an SBA application and fill out addendums to provide required documentation. The SBA made sample application forms for the PPP available on March 31.

Lenders will look to see if your business was in operation on or before February 15, 2020, paid salaries and payroll taxes for employees or paid independent contractors, and impacted by COVID-19.

Questions and Answers About the Paycheck Protection Program (PPP)

What are Paycheck Protection Program loans used for?

Technically, small businesses can use the funds from the loan for a variety of purposes including paying rent, mortgage payments and utilities. But the main purpose of the program is to help cover the cost of payroll and keep workers employed.

The government has set a threshold of at 75% of the funds being used to meet salaries at a cap of $100,000 per employee in order for the loan to be eligible for forgiveness.

Which businesses are eligible for loans through the PPP?

  • A small business with fewer than 500 employees
  • A small business that otherwise meets the SBA’s size standard
  • A 501(c)(3) with fewer than 500 employees
  • An individual who operates as a sole proprietor
  • An individual who operates as an independent contractor
  • An individual who is self-employed who regularly carries on any trade or business

Special rules that might make you eligible for PPP loans include:

  • A Tribal business concern that meets the SBA size standard
  • A 501(c)(19) Veterans Organization that meets the SBA size standard
  • If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis
  • If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal affiliation rules do not apply

When do loans become available?

Eligible banks began accepting and processing applications from small businesses on April 3, 2020.

You can find a list of eligible lenders on the SBA website.

How much can I borrow?

The maximum amount that can be borrowed per business is $10 million. The formula the SBA provides states that borrowers can claim up to 2.5X their average monthly payroll costs incurred during the year prior to the loan origination date. However, there is a cap on salaries above $100,000 per year.

The following two scenarios explain how a business would estimate their maximum loan amount.

Small Business With No Employee Salaries Above $100,000 Per Year

Annual payroll = $120,000 ÷ 12 months * 2.5 = $25,000

In this example, the maximum amount of the loan would be $25,000.

Small Business With Some Employee Salaries Above $100,000 Per Year

In the case of a business with an employee or multiple employees making more than $100,000 a year, the formula is a little more complex. Essentially, the business needs to subtract any compensation exceeding $100,000 per year before dividing the annual total employee payroll by month and multiplying by 2.5.

In the example where the small business’s total payroll is $1,500,000 but $300,000 of that comes from salaries exceeding the $100,000 per year cap, the business owner should deduct that from the total. That would bring the total covered payroll down to $1,200,000. The formula would then be: $1,200,000 ÷ 12 months * 2.5 = $250,000.

In this example, the maximum amount of the loan would be $250,000.

For businesses not operational in 2019, the amount is determined by the average total monthly payroll costs incurred in January and February 2020.

Loans will be available through December 31, 2020. The covered period begins on February 15, 2020 and ends on December 31, 2020.

What payroll costs are included?

For Employers

The following are the eligible payroll costs covered under the PPP for employers:

  • 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)
  • Payment for vacation, parental, family, medical, or sick leave
  • Allowance for separation or dismissal
  • Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement
  • Payment of state and local taxes assessed on compensation of employees

The following payroll costs that are ineligible for coverage under the PPP:

  • Any compensation of an employee whose principal place of residence is outside of the United States
  • The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary
  • Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes
  • Income taxes required to be withheld from employees
  • Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act
  • Independent contractors since they have the ability to apply for a PPP loan on their own

Are independent contractors or self-employed workers eligible?

Yes. If you operate, under a sole proprietorship or as an independent contractor or eligible self-employed individual, and were in operation on February 15, 2020. Self-employed workers must provide payroll processor records, payroll tax filings, or Form 1099- MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.

What is the interest rate?

The interest rate is set at 1%.

Is there any collateral required?

No collateral is required.

Are there fees involved?

There are no fees levied against the borrower to access the loans through the banks. However, the banks will collect a fee for originating the loan from the Federal government.

When is the first payment due?

The first payment is not due for six months. However, interest will continue to accrue during that six-month deferment.

Will any of these payments be forgiven?

Yes, borrowers are eligible to have portions of the loan forgiven. The loan forgiveness cannot exceed the principal.

A borrower is eligible for loan forgiveness equal to the amount the borrower spent on the following items during the 8-week period beginning on the date of the origination of the loan:

  • Payroll costs (using the same definition of payroll costs used to determine loan eligibility)
  • Interest on the mortgage obligation incurred in the ordinary course of business
  • Rent on a leasing agreement
  • Payments on utilities (electricity, gas, water, transportation, telephone, or internet)
  • For borrowers with tipped employees, additional wages paid to those employees

How could the forgiveness be reduced?

The amount of loan forgiveness will be reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees.

What if I bring back employees?

If you bring back employees and restore wages by June 30, 2020, the amount of your loan forgiveness will not be reduced.

I received a coronavirus relief loan through the SBA EIDL program. Can I take out a PPP loan as well?

Yes. Based on the guidance provided by the Treasury Department and the SBA, small businesses who applied and received these funds can also apply for the PPP loans.

In fact, businesses that receive loans through the PPP can use some of those funds to refinance their previous loan through the coronavirus relief loans. However, if any of the previous loan was used to meet payroll, the amount used will be dedicated from the portions of the loan that can be forgiven.

What do I need to apply for a PPP loan?

Businesses need a completed application as well as payroll documentation to substantiate the monthly average calculations needed to determine the maximum loan amount.

How are PPP loan applications prioritized?

The Payroll Protection Program applications are being reviewed and approved on. a “first come, first served” basis.

Is there a deadline for the program?

Yes. The deadline for applications is June 30, 2020.

Can I use e-signature to sign my loan application?


When are PPP loans due for repayment if they’re not eligible for full forgiveness?

The loans are due for repayment in two years.

Editor’s Note: Neither Workest nor Zenefits is affiliated with the Small Business Administration (SBA) or a lending organization. This article is intended for informational purposes only.

Paycheck Protection Program

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