07
April
2020

How to calculate “Payroll Costs” for your Paycheck Protection Program loan

In order to support small businesses during this unprecedented time, we are working diligently to address the needs of our customers as quickly as we can. We are experiencing higher than normal call times and appreciate your ongoing patience.

This resource will work to explain how to calculate your “payroll costs” for the Paycheck Protection Program which is what determines your maximum loan amount. If you have any additional questions not answered here or on our FAQ page, please add them to our chatbot in the lower right corner and we will work to update them as possible.

Why do I need to know my payroll costs?

You will need to calculate your payroll costs in order to determine how much you can borrow through the CARES Act Paycheck Protection Program. You can find more information here.

As a reminder, your Maximum Loan Amount = Average Monthly Payroll Costs x 2.5.

What is the definition of “Payroll Costs”?

Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of:

  • Salary, wages, commissions, or similar compensation, and cash tips 
  • Payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal
  • Payment for the provision of employee benefits (including group health care coverage and retirement benefits)
  • Payment of state and local taxes assessed on compensation of employees

The following must be excluded from the calculation above:

  • 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 $100,000, prorated as necessary
  • Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, and 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

If you are an independent contractor or sole proprietor, payroll costs include wage, commissions, income, or net earnings from self-employment or similar compensation.

How do I calculate my annual and monthly average payroll costs?

  • Step 1: Aggregate payroll costs (see above) from the last twelve months (or use the full year 2019) for employees whose principal place of residence is the United States.
  • Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
  • Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).

What documents should I use in coming up with the totals for my payroll costs?

Many payroll processing companies have created reports specifically for the PPP program which calculate the total and average monthly payroll cost calculations (as defined above) for you.  If your payroll processing company provides a PPP payroll costs report, this should give you most or all of what you need to calculate the average payroll costs.

Refer to this document we prepared which lists the payroll processing companies we have identified that offer these reports. If your business pays any employee benefits (such as health care or retirement) that are not included in your payroll processing report, be sure to add these in the calculation.

If your payroll processing company does not offer a specific PPP payroll costs report, there are several other ways you can aggregate the numbers:

  • Option 1: Pull a standard payroll report for the prior 12 months (or full year), detailed by each employee. You can include any employer paid benefits like retirement and healthcare, and state taxes. You must exclude employer paid Federal Taxes on Compensation. If your payments for any health benefits or retirement benefits are not included in your payroll processing reports, be sure to provide invoices of those expenses. 
    • For each employee, you can include the amount up to $100,000. We recommend you:
      • Calculate the total figure
      • Sum the amount over $100,000 for each employee
      • Then take the total compensation amount less the total amount over $100,000 paid to employees.
  • Option 2: Obtain your W-3 and W-2 Reports, and any invoices for any retirement or health care benefits, and proof of payments of any state payroll taxes paid.  The W-3 reports the total compensation paid, and then you can refer to the W-2’s to obtain the total amount paid over $100,000 to individual employees.

The CARES Act excludes payroll costs for employee compensation in excess of an annual salary of $100,000. Does that apply to all employee benefits of monetary value?

No. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:

  • employer contributions to defined-benefit or defined-contribution retirement plans
  • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums
  • payment of state and local taxes assessed on compensation of employees.

Do PPP loans cover paid sick leave?

Yes. PPP loans cover payroll costs, including costs for employee vacation, parental, family, medical, and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127).

Learn more about the Paid Sick Leave Refundable Credit here.

Are seasonal businesses that were not fully ramped up on February 15, 2020 still eligible?

Eligibility for seasonal businesses may be determined based on whether a seasonal borrower was in operation on February 15, 2020, or for an 8-week period between February 15, 2019 and June 30, 2019.

How do I determine the time period for calculating the number of employees and payroll costs for my maximum loan amount?

There are a number of considerations here based on different business circumstances:

  • In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019.
  • For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019.
  • An applicant that was not in business from February 15, 2019 to June 30, 2019 may use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020.
  • Borrowers may use their average employment over the same time periods to determine their number of employees, for the purposes of applying an employee-based size standard.
  • Alternatively, borrowers may elect to use SBA’s usual calculation:
    • The average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational if it has not been operational for 12 months).

Do Payroll costs include payments made to an independent contractor or sole proprietor?

No. Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll costs.

However, an independent contractor or sole proprietor will itself be eligible for a loan under the PPP, if it satisfies the applicable requirements.

How do I account for federal taxes when determining my payroll costs?

Under the Act, payroll costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld.

As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs also do not include the employer’s share of payroll tax.

For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.

I do not use a payroll processing company. Instead, I make bank transfers to each employee for their pay. Can I still qualify?

As long as you report these wages via W-3s and W-2s each year, and file and pay your quarterly 941s, these payments do qualify. Please keep in mind any wages you paid for which you did not collect and pay any income taxes do not qualify.

Content for this page has been pulled directly from the U.S. Treasury FAQ resource here. We will work to keep this content updated as information is received.

The information shared is intended to be used for informational purposes only and you should independently research and verify.

Note: Prior to January 23, 2020, Mulligan Funding operated solely as a direct lender, originating all of its own loans and Merchant Cash Advance contracts. From that date onwards, the majority of funding offered by Mulligan Funding will be by Loans originated by FinWise Bank, a Utah-chartered Bank, pursuant to a Loan Program conducted jointly by Mulligan Funding and FinWise Bank.