The Paycheck Protection Program (PPP) is one of the most attractive benefits of the coronavirus CARES Act. This is a nearly $350-billion program intended to provide American small businesses with eight weeks of cash-flow assistance through 100 percent federally guaranteed loans. 

You can read a full summary of the program here.

How PPP loans are calculated

Paycheck Protection Program loans are calculated using the average monthly cost of the salaries of you and your employees.

Your salary as an owner will be defined through the way your business is taxed. If you are taxed as an LLC, your salary is directly linked to your business’ profit, and will be the amount that you paid self-employment tax on in 2019. If you are taxed as a corporation, your salary is dependent on running payroll for yourself—meaning that you must be remitting payroll taxes both federally and to the state.

The calculation itself will require you to use your annual salary, as well as the annual salary of any W2 employees whose primary residence is the United States. The PPP sets a cap on salaries of $100,000—so you should only include a maximum of $100,000 for each individual earning a salary any higher, including yourself. You can also include related payroll expenses, such as health insurance, retirement contributions, paid sick leave, vacation pay, and severance pay.

If your business existed prior to 2019, you should use your total payroll expenses from 2019, and divide the annual total by 12 to arrive at a monthly average. If your business was new in 2019, there are further nuances. If your business existed prior to June 30, 2019, you should also be using your annual payroll expenses and dividing by the 12 months of the year. For a business formed after June 30, 2019, you can choose to do the same and take your annual total divided by the 12 months, or you can instead use January 1, 2020 to February 29, 2020 and divide by those 2 months to find a monthly average.

Calculating your PPP loan by entity type

Calculating your loan amount as an independent contractor

As an independent contractor, your 2019 income is considered to be the sum of all 1099-MISC forms you received, because this is what you pay self-employment tax on each year. If you have already filed your 2019 taxes, this will be added together already on Line 31 of your 2019 Schedule C. If you haven’t, not to worry—you can simply take the 2019 1099-MISC forms you received in January and add them all together. That will give you the income number you need.

If you had started receiving income prior to June 30, 2019, you should divide by 12—even if you did not work the entire year. If you did not receive revenue until after June 30, 2019, you have a choice: you can still use your 2019 annual 1099 income divided by 12, or you can use your income from January to February 2020 divided by 2, whichever is more favorable for you.

You’re eligible for the PPP even if you’re an Uber driver or pick up tasks on TaskRabbit.

Here’s a detailed example

Let’s say you worked as a freelance photographer in 2019. You received 1099-MISC forms from 15 events you worked, and you have not yet filed your 2019 taxes. Here’s what you’d do:

Step One: Add the “Non-Employee Compensation” totals on each 1099-MISC together. Let’s say this equals $16,000.

Step Two: We’re going to divide by 12 months, because you were accepting photography engagements all year long. This gives us $1,333.33. Enter this into the “Average Monthly Payroll” box on your application.

Step Three: Times this amount by 2.5, which gives you $3,333.33. Enter this into the Loan Request box. If you have already been granted an EIDL loan, you should add the value of any amount already granted.

Calculating your loan amount as a sole proprietor

Your 2019 income is the sole proprietorship’s net profit. If you have been taking draws out of the business to serve as regular income, this will not be included in your payroll calculation. This is because you pay Self Employment Tax, which is based on your net profit only—not your member drawing. You will find your 2019 Net Profit listed either on an annual income statement at the very bottom, or on line 31 of your Schedule C if you have a 2019 tax return.

If you do not have any W2 employees, your net profit is the total payroll cost you can include. If you do have W2 employees that you are remitting payroll taxes for, you may also include the annual salaries of any employees whose primary residence is the United States. Keep in mind that your employees, as well as yourself, are all subject to the $100,000 salary cap. If an employee’s salary or your net profit is over $100,000, you may only calculate using $100,000.

If you started your business prior to June 30, 2019, you will divide this amount by 12—even if you did not operate the entire year. If you did not start the business until after June 30, 2019, you have a choice: you can still use your 2019 annual 1099 income divided by 12, or you can use your income from January to February 2020 divided by two, whichever is more favorable for you. If your business is seasonal, meaning that it is not operational for part of the year, you can use a scope of March 2019 to June 2019 divided by four instead.

Remember that single-member LLCs are going to be considered sole proprietors here, in the same way that you are when you file your taxes. It’s also worth noting that if you share a sole proprietorship with a spouse, you cannot include your spouse in this application unless they are a W2 employee. Without W2 employees, you will apply on behalf of the legal owner of the sole proprietorship only.

Here’s a detailed example

You are a sole proprietor that started up in October of 2019, but really only started earning revenue in late 2019 and early 2020. You don’t have any employees, just a few 1099 contractors. You’ve been giving yourself an informal payroll of $1500 a month through member draws. Here’s what you’d do:

Step One: Because you started your business after June 30, 2019, you are able to apply with your 2020 numbers. You’re going to look at your income statement covering January 1, 2020 to February 29, 2020. The net profit on your income statement for that period is $25,000. You will not include any amounts paid out through member draws.

Step Two: You don’t have any employees, so you cannot add any additional costs to this amount. Your 1099 contractors cannot be included because they are eligible to apply on their own.

Step Three: Divide your $25,000 Net Profit by 2, because you used your 2020 numbers. This will give you $12,500. You will report this in the “Average Monthly Payroll” box on your PPP application.

Step Four: Times this amount by 2.5, giving you $31,250. Report this in the “Loan Request” box.

Some important points

  • While your rent and utility payments can be covered by this loan and help qualify you for loan forgiveness, they are not a part of the initial calculation.

  • If your net profit for 2019 is above $100,000, the maximum amount you can include for yourself is $100,000. This would give you an Average Monthly Payroll of $8,333.33, assuming you have no W2 employees.

  • Member draws are not going to factor into this calculation at all.

  • If your net profit for 2019 was negative, meaning that you took a loss in your business last year, PPP will not be a great option for you. If your business took a loss prior to COVID-19, you will not have been considered to have a salary, and it will be more difficult for you to represent that COVID-19 has had a negative impact on your business. You may be better suited to applying for the EIDL program instead, or registering for Unemployment Benefits through your state.

Calculating your loan amount as a partnership

If you run an LLC with one or more other people, and have a formal operating agreement where you’ve outlined ownership percentages, you will apply for the PPP as a partnership. Finding your 2019 salary as an owner of this business will be very closely related to the net profit of the business, and you should not try to make this calculation using your member draws.

Your 2019 salary will be most easily determined through your 2019 tax return, which is your Form 1065. If you haven’t filed your 2019 taxes yet, remember that your March 15 deadline was not delayed! If you simply filed an extension instead, you may want to return to your tax preparer at this time and work on finalizing your Schedule K-1s. This will help you tremendously—especially if your partnership is not owned equally by each member. For each partner, you will use line 14, Self-Employment Income, on their Schedule K-1 as their individual salary. Remember to cap at $100,000 for each member if necessary.

If you also have W2 employees, you can include the cost of their salaries, state payroll taxes, health insurance benefits, sick pay, vacation pay, and severance. Keep in mind that all salaries are subject to the cap of $100,000 and you cannot include any 1099 contractors, as well as any remote workers whose primary residence is outside of the United States. You will also need to provide a number of employees, and this should be reflective of your monthly average as well.

If you started your business prior to June 30, 2019, you will divide this amount by 12—even if you did not operate the entire year. If you did not start the business until after June 30, 2019, you have a choice: you can still use your 2019 annual 1099 income divided by 12, or you can use your income from January to February 2020 divided by two, whichever is more favourable for you. If your business is seasonal (not operational for part of the year), you can use a scope of March 2019 to June 2019 divided by four.

Here’s a detailed example

You and a partner run a business together, and this business has existed for a few years now. You have W2 employees. Neither you nor your partner are paid through payroll, and instead take draws from the company. Here’s what you’d do:

Step One: You’ll need your 2019 Form 1065 on hand. Take a look at line 14 (Self-Employment Income) on both partner’s Schedule K-1s. Let’s say that Line 14 on your Schedule K-1 is $130,000, and your partner’s is $115,000. Because of the $100,000 cap, you can only include $100,000 for each of you. That gives us $200,000 so far. Your draws will not factor in here, just your Self-Employment Income as reported on your tax return.

Step Two: Pull an annual 2019 report from your payroll provider. None of your employees have a salary over $100,000, so they don’t need to be capped. You can also include your state payroll taxes, health insurance expenses, retirement contributions, sick and vacation pay, as well as severance pay. Let’s say that all together, this adds up to $120,000. Add these amounts together and you’ve got $320,000.

Step Three: Divide by 12, since you were operational for all of 2019. This gives you $26,666.67. Enter this into the “Average Monthly Payroll” box in your PPP application.

Step Four: Times by 2.5 to get $66,666.67. Enter this into the “Loan Request” box.

Step Five: Let’s say your business is busiest for three months in the summer, when you have six employees on staff. The rest of the year you only have three. You can choose to use an average number here which spans all twelve months, which in this case will round to four. Enter this in the “Number of Employees” box.

Some important points

  • While your rent and utility payments can be covered by this loan and help qualify you for loan forgiveness, they are not a part of the initial calculation.

  • If your self-employment income for 2019 is above $100,000, the maximum amount you can include for yourself is $100,000. This would give you an Average Monthly Payroll of $8,333.33, assuming you have no W2 employees.

  • Member draws are not going to factor into this calculation at all.

  • If your self-employment earnings for 2019 were negative, meaning that you reported a loss in your business last year, PPP will not be a great option for you. If your business took a loss prior to COVID-19, you will not have been considered to have a salary, and it will be more difficult for you to claim that COVID-19 has had a negative impact on your business. You may be best suited by applying for the EIDL program instead, or registering for Unemployment Benefits through your state.

Calculating your loan amount as an S corp

As an S corp, it is important to note that your shareholder distributions will not be considered to be a salary. If you own an S corporation and have not been paying yourself a salary through payroll, meaning you have not been remitting payroll taxes on your wages, you will not be eligible to have a salary covered through the PPP. Why? Well, it comes down to how you are taxed. Eligible payroll costs for the PPP are wages where the employer is remitting payroll taxes. As an S corp, your only way to remit payroll taxes is through payroll itself; you don’t pay any payroll taxes or self-employment taxes on your distributions.

If you have been using a payroll service to pay out your salary, you can include yourself as an employee in your calculations. Remember that no single employee is allowed to have a salary higher than $100,000 for the purposes of this calculation, so you must cap any employees over this amount at $100,000 exactly, including yourself. From there, you can include your related payroll expenses, such as group health insurance premiums, retirement contributions, vacation pay, paid sick leave, and severance.

If you started your business prior to June 30, 2019, you will divide this amount by 12 - even if you did not operate the entire year. If you did not start the business until after June 30, 2019, you have a choice: you can still use your 2019 annual 1099 income divided by 12, or you can use your income from January to February 2020 divided by two, whichever is more favourable for you. If your business is seasonal, meaning that it is not operational for part of the year, you can use a scope of March 2019 to June 2019 divided by four.

Here’s a detailed example

You are the sole owner of an S corp and you have been operational throughout 2019. You only had one employee at first, yourself, but you grew to add on an additional three employees in 2019. Here’s what you’ll do:

Step One: Pull an annual 2019 report from your payroll provider. Since none of your employees have a salary over $100,000, they don’t need to have their salaries capped. You can also include your state payroll taxes, health insurance expenses, retirement contributions, sick and vacation pay, as well as severance pay. Let’s say that your total 2019 payroll costs, including your salary, comes to $150,000.

Step Two: Divide this by 12, since you were an existing business throughout 2019. This will give you $12,500, which you should input into the “Average Monthly Payroll” box on your PPP application.

Step Three: Times by 2.5 to find your “Loan Request” amount. In this case, that would be $31,250.

Step Four: To find your number of employees, you should apply with the average number of employees you held during 2019. The easiest way to find an average is to add the total number of employees you had during each month of the year together, and divide by 12. Let’s say in this case that works out to 2.75—you should round to a whole number, three, and include this on your PPP application.

Some important points

  • While your rent and utility payments can be covered by this loan and help qualify you for loan forgiveness, they are not a part of the initial calculation.

  • Shareholder Distributions should not be included in this calculation at all.

  • If you own an S corp and did not pay yourself a salary with payroll tax remitted, you will not have been considered to have a salary. If you don’t have W2 employees either, you will not be eligible to apply for the PPP. You may be better suited to applying for the EIDL program.

Calculating your loan amount as a C corp

A C corp owner will only be considered to have a salary if you have payroll tax remitted on your wages. Dividends, Loans to Shareholder, or other owner draws will not be applicable as salary. Why? Because the PPP is relying heavily on payroll taxes to define payroll costs. As a C corp, there is separation between the owner and the business. The business is taxed on its profit as an entity, and the owners are then taxed based on their dividends, which reflect their share of those profits. Neither of these taxes are payroll taxes. If you’re a C corp owner, you are required by the IRS to pay yourself a reasonable salary through payroll.

If you have been using a payroll service to pay out your salary, you can include yourself as an employee in your calculations. No single employee is allowed to have a salary higher than $100,000 for the purposes of this calculation, so you must cap any employees over this amount at $100,000, including yourself. From there, you can include your related payroll expenses, such as group health insurance premiums, retirement contributions, vacation pay, paid sick leave, and severance.

If you started your business prior to June 30, 2019, you will divide this amount by 12 - even if you did not operate the entire year. If you did not start the business until after June 30, 2019, you have a choice: you can still use your 2019 annual 1099 income divided by 12, or you can use your income from January to February 2020 divided by two, whichever is more favourable for you. If your business is seasonal, meaning that it is not operational for part of the year, you can use a scope of March 2019 to June 2019 divided by four.

Here’s a Detailed Example:

You own a C corp, and you are the only employee. Your business started in September 2019. Let’s say you were also already issued a $75,000 loan through the SBA EIDL application process, and received $10,000 of that as an emergency advance.

Step One: Let’s start by looking at the date range you should use. Because your business formed after June 30, 2019, you are able to use 2020 numbers. Take a look at your payroll reports for January and February 2020 - you should be able to download a cumulative report for both months.

Step Two: As the only employee, you just have your salary to include. Let’s say your salary in these two months was $120,000. You’ll need to cap this salary to $100,000 only. Because you just used 2020 numbers, you will divide this by two, giving you an “Average Monthly Payroll” of $50,000 to input into your PPP application.

Step Three: Multiply by 2.5 to find your “Loan Request” amount, which will be $125,000. Because you’ve already received $75,000 through the EIDL, you should add this amount to your total - however, you can subtract the amount issued as an advance, as that does not need to be repaid. This will make your Loan Request total $190,000.

Some important points

  • While your rent and utility payments can be covered by this loan and help qualify you for loan forgiveness, they are not a part of the initial calculation.

  • Dividends, Loans to Shareholder, or other owner draws should not be included in this calculation at all.

  • If you own a C corp and did not pay yourself a salary with payroll tax remitted, you will not have been considered to have a salary. If you don’t have W2 employees either, you will not be eligible to apply for the PPP. You should consider applying for the EIDL program.


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