- Here’s What You Can Do Now To Ensure Paycheck Protection Program Loan Forgiveness
- Make Sure Your Business Truly Qualifies for PPP Funding
- Use At Least 75% of the Loan For Payroll Expenses
- Use the Rest for Other Eligible Expenses
- Keep Detailed Records
- What Happens If Your Loan Isn’t Approved for Forgiveness?
- 7 ways small businesses can maximize PPP loan forgiveness
- 1. Don’t short yourself on allowable payroll costs
- 2. But don’t go beyond PPP payroll boundaries.
- 3. Maintain your staffing
- Here's how it works:
- 4. Avoid drastic pay cuts
- 5. Focus most of your PPP loan on payroll
- 6. Stay within allowable expenses for the rest of your PPP loan amount
- 7. If necessary, forge ahead without loan forgiveness
- Losing PPP Loan Forgiveness
- A Quick Paycheck Protection Program Refresher
- Gotcha #1: Headcount Reduction
- Gotcha #2: Pay Rate Reductions
- Gotcha #3: Missing the Rehire Window of Opportunity
- Gotcha #4: Missing the Pay Cut Reversal Window of Opportunity
- Gotcha #5: Bad Documentation
- Gotcha #6: The 25% Non-Payroll-Costs Rule
- Closing Comments
- Ready for a Break from the Covid 19 Topic?
- PPP Rules on Rehiring Employees (FAQ)
- I laid off my employees in March. Can I rehire them with PPP funds?
- What happens if I only hire back some of my employees?
- What happens if I want to hire back all my employees, but some reject the offer?
- My employees are collecting EI. Can I still rehire them?
- My business just uses contractors. Can I hire them onto payroll and pay them with PPP funds?
- Do I have to rehire the same employees? Or can I keep my headcount the same, but with different people?
- Can I restructure compensation in my business? Can I pay myself more and my employees less?
- Can I use PPP funds to give my employees bonuses?
- Once my PPP funds run out, can I make layoffs again?
- More COVID-19 Resources
Here’s What You Can Do Now To Ensure Paycheck Protection Program Loan Forgiveness
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Maybe you scored a piece of the more than $349 billion in Paycheck Protection Program (PPP) funding initially made available as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Or perhaps you’re anxiously waiting to hear if you’re getting a slice of the additional $310 billion PPP pie Congress authorized in the latest relief package. As of May 6, 2020, more than 2.
4 million loans, worth more than $183 billion, have been approved as part of the second round of PPP funding, according to SBA data.
A PPP loan, which can be made in amounts of up to $10 million, can be a lifeline for a business struggling to survive in the COVID-19 era. And for some, the appeal of a PPP loan increases if they believe they’ll have their loan forgiven. But the key is meeting all of the criteria.
When the SBA first announced who was eligible to apply for a PPP loan, the government released general guidelines on how to qualify for forgiveness.
The rules are the same regardless of business size, type or industry.
At least 75% of the loan must be used by the recipient for payroll purposes, and the remaining amount must be used for utility payments, rent and/or mortgage interest payments.
But after reports that many PPP recipients were not the small businesses the program was intended for, U.S. Treasury Secretary Steven T. Mnuchin and U.S. Small Business Administrator Jovita Carranza released a statement on April 28 stating that loans over $2 million would be subject to strict review to ensure they qualify for forgiveness.
Make Sure Your Business Truly Qualifies for PPP Funding
A PPP loan isn’t free money. As an applicant, you must prove that you need the funds to continue operating. U.S. Treasury guidelines, updated on April 24, require borrowers to certify that they have no access to additional sources of capital and that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”
Additional details from the SBA are forthcoming. In the meantime, here’s what you can do now to improve your chances of PPP loan forgiveness.
In the days following the first disbursements of PPP loans, several large companies applied for and accepted PPP funds, even though they ly had access to other ways of raising capital.
Many companies then announced that they were returning their loans.
To encourage other businesses to return funds they may not truly need, the SBA released a safe harbor deadline, which was extended to May 14, allowing a business to return PPP funds without penalty.
“At a minimum a borrower should check to make sure they’re eligible,” says Gregory Fryer, partner at New England-based law firm Verrill Dana LLP. Fryer is also the co-author of several papers on how to interpret the PPP guidelines as they are currently set forth. “We do know that companies will continue to be evaluated.”
Although it’s not yet clear what the penalties might be for a company that is found to have fraudulently accepted PPP funds, the best thing to do is make sure that you can use the funds in the spirit in which they were intended. If not, make arrangements to return your PPP loan through your lender as soon as possible.
Use At Least 75% of the Loan For Payroll Expenses
The CARES Act specifies that starting on the date a business receives PPP loan funding, it has the next 56 days to use at least 75% of the money for payroll expenses.
For employers, this means you must:
- Pay your employees at current salary levels without any reductions in wages or headcount, or
- Rehire any employees you may have furloughed or laid off as a result of the pandemic-related economic downturn and pay them the same amount they were earning during the weeks prior.
- If you pay yourself, that amount must be limited to eight weeks’ worth of the amount you made in 2019. For independent contractors, this means you have to be prepared to show proof that you were in operation as of February 15, 2020, and provide documentation of how you earned wages.
Not sure what counts as eligible compensation? The SBA says eligible payroll costs can include salary, wages and tips, up to $100,000 of annual pay per employee (for eight weeks, a maximum of $15,385 per individual); and covered benefits for employees (but not owners), including health care expenses, retirement contributions and state taxes on employee payroll paid by the employer (including unemployment insurance premiums.)
If you use less than 75% of your funds for qualified payroll expenses, then the difference will be subject to loan repayment terms. In other words, if you use 70% of your loan for payroll, 25% for rent and 5% to order supplies, you’ll have to pay back that 5% at an interest rate of 1%.
One wrinkle that the U.S. Treasury addresses in its online FAQ—last updated May 1—is what happens when an employer offers a laid-off employee their job back and the employee declines. In this case, as long as the employer has made a “good faith” effort to rehire that former employee and has documentation of the rejected offer, loan forgiveness should not be affected.
Use the Rest for Other Eligible Expenses
PPP loan forgiveness rules also dictate that you can use any remaining funds, after what you’ve spent on payroll, on any combination of the following:
- Payments of interest on mortgage obligations incurred before Feb. 15, 2020
- Rent payments on lease agreements in force before Feb. 15, 2020
- Utility payments under service agreements dated before Feb. 15, 2020
You can also use the proceeds from a PPP loan to refinance an SBA Economic Injury Disaster Loan made between Jan. 31, 2020 and April 3, 2020. But at least 75% of the PPP loan amount must be used for eligible payroll costs.
There’s still a lot of grey area surrounding what is considered an eligible nonpayroll expense. For example, if you paid business rent on May 1, but you received your loan funds on May 4, it’s still unclear if you can count that May rent payment as an eligible expense, or if you have to prorate it from May 4 through the end of the month.
“Until we get further guidance, we figure the rent is incurred the day it’s due. This is an attempt to be as conservative as possible,” says Fryer. In other words, the safest thing to do might be to not count any payments made prior to the day your funds were received, even if they cover expenses that fall within the eligible eight-week period.
Keep Detailed Records
The only way to prove you used your loan in a manner that qualifies for forgiveness is to have the paper trail to back up your claim.
“All small businesses should hold onto their PPP documentation for the foreseeable future, because the SBA hasn’t announced when the audit period is,” says Travis Miskowitz, manager of the CFO advisory group at accounting and business advisory firm Wiss & Company, LLP, based in Florham Park, New Jersey. “It could be anywhere from three to six years after the loan is forgiven.”
The lender has to make a decision on your forgiveness application within 60 days, so the more complete an application you submit, the better. You’ll have to supply the following as part of your loan forgiveness application:
- Documentation verifying the number of full-time equivalent employees on payroll, and their pay rates
- Payment verification for covered mortgage obligations, lease obligations and utility payments
- Certification that the documentation presented is true and correct, and that the amount for which forgiveness is requested was used for eligible expenses
- Any other related paperwork the lender requests
Be aware this may only be a portion of what the SBA ultimately asks for from borrowers hoping to qualify for forgiveness.
“We are still waiting for guidance on the forgiveness process and it’s a concern of ours because… businesses are not sure what they should do,” a spokesperson for the American Banking Association wrote in an email to Forbes.
The spokesperson shared a letter with Forbes that the American Bankers Association sent to Secretary Mnuchin and Administrator Carranza on May 7, stressing the need for more details.
The association urged the government to “release clear, bright-line guidance on loan forgiveness as soon as possible.
Without this critical guidance, small businesses cannot take the necessary steps to best utilize their Paycheck Protection Program (PPP) loans.”
What Happens If Your Loan Isn’t Approved for Forgiveness?
The good news is that PPP loan forgiveness is not all or nothing. It’s possible to have the portion of your loan that fit the criteria forgiven, and that the remaining funds must be paid back.
If you do have to pay back some of your loan, know that payments are deferred for six months, and you’ll have two years from then to pay it off.
The interest rate on PPP loans is 1%, making it one of the lowest-cost loans you can get for your business.
7 ways small businesses can maximize PPP loan forgiveness
Updated March 17, 2021
As a business owner, you may have already taken advantage of the Paycheck Protection Program (PPP) created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
If you haven’t, the deadline to apply is March 31, 2021.
Sole proprietors and independent contractors filing a Schedule C who haven’t yet applied can now receive a higher loan than before—using gross income, rather than (generally lower) net income, to calculate the loan amount.
In addition, a second loan is available for smaller, harder-hit businesses until March 31, 2021. “Second draw” PPP loans of up to $2 million are targeted for businesses that have fewer than 300 employees and suffered economic harm.
If you’ve secured a loan, you ly used the funds to keep your employees working and business open—all while trying to understand how the “forgiveness” part of the loan works.
There are a number of forgiveness applications depending on the loan size and other requirements, including a detailed forgiveness application (Form 3503) and two simplified versions—Form 3508EZ and Form 3508S (for loans $150,000 or less). To use these simplified forms, you must meet certain requirements outlined in this PPP overview (PDF).
Use our PPP expense tracker (Excel) to document your expenses along the way.
To help you navigate the ever-changing landscape, we’ve compiled seven strategies to maximize loan forgiveness business owners’ top concerns.
1. Don’t short yourself on allowable payroll costs
In addition to making many business expenses eligible for forgiveness, the PPP loan is primarily intended to help business owners keep employees on payroll. And, what qualifies as payroll during the forgiveness period following the loan is broader than you might think.
First, select the forgiveness period you will use (any length between 8 and 24 weeks from when you received your loan). Then, consider what you pay for all the following expenses during that time. The forgiveness amount is not limited to salary, wages, commissions, and tips.
It also includes:
- payments for leave (vacation, parental, family, medical, and sick leave),
- employer contributions to group health care benefits (including group life, disability, dental, and vision insurance premiums) for employees,
- employer contributions to defined benefit or defined contribution qualified retirement plans for employees, and
- employer -paid state and local taxes assessed on compensation.
2. But don’t go beyond PPP payroll boundaries.
The most employee payroll expense you can count toward forgiveness is $100,000 annually per employee or:
- $8,333 monthly,
- $1,923 weekly.
However, owner compensation is limited to a prorated portion of the owner's 2019 or 2020 compensation, or $100,000—whichever is less, up to $20,833. For details, see Frequently Asked Questions, A-15 (PDF).
Employer contributions for group health, life, disability, dental and vision insurance, retirement, and other benefits for employees are in addition to this cap. For details about group health and retirement benefits for owners, see Frequently Asked Questions A-17 and A-18 (PDF).
PPP payroll excludes:
- employees living outside the United States,
- the employer portion of Social Security payroll taxes,
- wages where the company receives a Families First Coronavirus Response Act payroll tax credit, and
- independent contractors who’ve worked for your business.
3. Maintain your staffing
Maximize your PPP loan forgiveness by retaining your full-time and full-time equivalent employees.*
“It’s not the entrepreneur protection program,” says Kimberly Weisul, editor-at-large for Inc.com and Inc. Magazine.
“If you’re an entrepreneur and don’t want to bring your employees back until right before you think you’ll reopen, that makes sense from a financial point of view. But that’s not what this program is for.
It's to take employees back earlier than that, even if you don’t have anything for them to do, so they remain employed.”
Here's how it works:
Your staffing level during the forgiveness period following the loan will be compared to one of two prior periods (you can choose which):
- February 15–June 30, 2019, or
- January 1–February 29, 2020.
To maximize forgiveness, the deadline to rehire or replace employees who were let go between February 15 and April 26, 2020, is December 31, 2020 for loans made before December 27, 2020, or the end of the selected forgiveness period for loans made after that date.
For the forgiveness calculation, if you offer to rehire an employee for the same hours and wages, your head count will not be reduced, even if they decline. The percentage of your loan forgiveness may decline by the same amount as any staff reduction.
For additional clarification, see frequently asked questions A-19 (PDF).
If your loan amount is $50,000 or less, you are exempt from having your forgiveness reduced any reductions in head count and/or salary and wages under the de minimis exemption. For more information about this and other exceptions, see this PPP overview (PDF).
4. Avoid drastic pay cuts
For employees earning less than $100,000, loan forgiveness is reduced dollar for dollar for any amount of employee salary cut more than 25%, unless an exception applies.
For additional clarification, see frequently asked questions A-20 (PDF).
However, if your loan amount is $50,000 or less, you are exempt from having your forgiveness reduced any reductions in head count and/or salary and wages under the de minimis exemption.
5. Focus most of your PPP loan on payroll
Payroll expenses must make up at least 60% of your PPP spending to maximize loan forgiveness. For additional clarification, see frequently asked questions A-22 (PDF).
6. Stay within allowable expenses for the rest of your PPP loan amount
Paychecks are the main concern of PPP loan forgiveness, but up to 40% can be spent on rent or lease payments, mortgage interest, and utilities, covered operations expenses and supplier costs, worker protection expenditures, and certain property damage costs resulting from public disturbances. (PPP funds also can be used for interest on other debt but can’t be included in forgiveness.)
The guidance on allowable “utilities” expense includes what’s necessary to keep the business operational, such as gas and electric, water, transportation, phone, and internet access.
Keep in mind that all lease or utility service agreements must have been in place before February 15, 2020.
7. If necessary, forge ahead without loan forgiveness
“Ultimately don’t run your business based solely on loan forgiveness,” says Mark West, national vice president of business solutions for Principal.
The long-term stability of your business should be your guiding light and might require you to repay some or all of the PPP at its very favorable 1% rate.
And for loans taken prior to June 5, 2020, you have up to two years to repay any portion not forgiven. For those taken on or after that date, you have even longer—up to five years.
“Having to pay back that loan understandably may make many business owners nervous,” West says. But your first loan payment can be deferred, potentially for a year or more.
Losing PPP Loan Forgiveness
A disturbing possibility: Surely many small business owners risk losing PPP loan forgiveness.
Hopefully, most firms will only lose a bit. Some will lose a lot. Unfortunately, a few may lose out completely.
Let me therefore point out the risk areas you need to stay alert to. Hopefully the fog surrounding PPP forgiveness clears up.
One note as we start: I wrote the original version of this article before the Small Business Administration published the Interim Final Rule on PPP loan forgiveness on May 22. I have updated the article for this guidance. But reader comments and my responses aren’t updated.
A Quick Paycheck Protection Program Refresher
So first, just to bring everyone up to speed, a quick refresher.
If your small business was slammed by the Covid 19 crisis, you theoretically could obtain a “paycheck protection program” loan—a PPP loan—equal to 2.5 times your monthly payroll.
If your monthly payroll runs $40,000, for example, your PPP loan amount might be $100,000.
Payroll by the way included not just wages but employee benefits, state payroll taxes, and the business owner “compensation replacement.”
And the other part of this: If you spend the loan proceeds on payroll, rent, interest and utilities over the eight weeks that followed you receiving the loan? Bingo. The Small Business Administration forgives the loan. Free money, in other words. Maybe…
But some gotchas exist. And these gotchas may limit or eliminate forgiveness.
Gotcha #1: Headcount Reduction
The PPP loan forgiveness formula makes a small business eligible for total forgiveness. You just need to spend the loan proceeds on payroll costs, interest, rent and utilities over the eight weeks that follow you receiving the money.
However, the Section 1106 statute makes two adjustments to the initial “eligible for forgiveness” amount.
The first adjustment appears in Section 1106(d)(2)(A). It says that if you reduce the headcount of full-time equivalent employees, that percentage reduction reduces the initial “eligible for forgiveness” amount.
This adjustment works pretty simply. Say you employed five full time employees and ten half-time employees last year. Converted to full-time equivalent employees, the formula says you employed 10 workers.
But say that you terminate a couple of full-time employees. Those terminations drop your full-time equivalent employees count from 10 to 8 workers.
Dropping from 10 employees to 8 employees represents a 20% cut in headcount.
That would reduce the initial “eligible for forgiveness” loan amount by 20%.
For example, say your firm had spent a total of $100,000 on payroll, interest, rent and utilities. But say you had reduced your headcount by 20 percent. In this scenario the “adjusted for headcount reduction” loan amount drops by 20 percent to $80,000.
One other thing to note: The headcount adjustment lets a business choose which period of employment it looks back at to calculate a reduction in workers. A firm can compare its current employment to employment from February 15, 2019 through June 30, 2019 or to employment from January 1, 2020 through February 29, 2020.
Gotcha #2: Pay Rate Reductions
The PPP loan forgiveness formula includes another adjustment, too, from Section 1106(d)(3)(A).
After the formula adjusts the initial “eligible for forgiveness” amount for any reductions in headcount, it looks for any reductions in employee pay rates in excess of 25%.
Note that the formula ignores pay rate reductions for employees who earned more than $100,000 (on an annualized basis) in 2019.
But for everyone else, a pay rate reduction in excess of 25% further reduces the amount actually available for forgiveness.
Suppose a firm reduces the pay rate for one employee from $8,000 to $2,000. Perhaps this employee earns a sales commission, for example. And the bad economy just destroys sales for a few months.
That 75% decrease in payroll (from $8,000 to $2,000) equals $6,000. A 25% decrease in payroll equals $2,000. So, the reduction in pay rate in excess of 25% equals $4,000.
That $4,000 further reduces the loan forgiveness.
If a small business started out with an initial “eligible for forgiveness” amount equal to $100,000, a 20% reduction in headcount might reduce that $100,000 to $80,000.
And then a pay rate reduction that described in these paragraphs would decrease the loan forgiveness amount by another $4,000 to $76,000.
Gotcha #3: Missing the Rehire Window of Opportunity
The Section 1106 statute includes a couple of mulligans.
The first mulligan? Per the statute and a forthcoming interim final rule, if a firm either rehires or attempts to rehire employees it laid off sometime after February 15, 2020 and before April 27, 2020, it avoids a reduction in the initial “eligible for forgiveness” amount due to an earlier reduction in your headcount.
To avoid the reduction in forgiveness by rehiring, a firm needs to rehire the employee by June 30.
To avoid the reduction in forgiveness by attempting to rehire, a firm needs to make “a good faith, written offer” to rehire the same employee by June 30 at the same pay rate and for the same number of hours and then document the employee’s rejection.
Note, too, that if even a firm can avoid reducing the initial “eligible for forgiveness” amount by rehiring or attempting to rehire, such a firm calculates a smaller initial “eligible for forgiveness” amount.
For example, say a firm averages $40,000 a month in payroll during 2019. As a result, it receives a $100,000 loan. Assume, however, that the firm laid off its entire workforce before receiving the PPP loan and can’t rehire them until June 30.
Because the firm rehires employees by June 30, it avoids the headcount reduction adjustment. But without employees on the payroll during April, May and June, it lacks payroll costs to plug into the initial “eligible for forgiveness” amount.
Gotcha #4: Missing the Pay Cut Reversal Window of Opportunity
The statute includes another similar mulligan for pay rate cuts.
If a firm reverses a reduction in salaries or wages by June 30, that reversal eliminates the requirement to reduce the initial “eligible for forgiveness” loan amount for pay rate cuts in April, May and June.
Again, though, note that the pay rate cuts themselves should reduce the payroll costs that plug into the formula.
For example, suppose a firm with ten employees making $1,000 a week cuts people’s wages to $500 a week. If the employer reverses the wage cuts by June 30, the wage cut adjustment doesn’t need to be calculated.
The firm doesn’t need to calculate that a $500 per worker reduction is $250 more than a 25% decrease, for example.
And then it doesn’t need to tally up these excess wage reductions and subtract the total from the initial “eligible for forgiveness” amount.
But the 50 percent cut in wages means the firm pays 50 percent less payroll.
Gotcha #5: Bad Documentation
Tax accountants will tell you that taxpayers often lose audits only because they lack good documentation.
Something similar, surely, will happen with the PPP loans. The statute requires a borrower to provide rich, detailed, high quality documentation. Here’s the actual list from the law:
…payroll tax filings reported to the Internal Revenue Service; state income, payroll, and unemployment insurance filings; documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments… and any other documentation the Administrator determines is necessary.
I added the boldfacing to that last little bit.
But mark my words, many small business owners won’t be able to provide this detail. And in that case? The statute says they lose forgiveness. To quote the actual text of the law, “no recipient shall receive forgiveness without submitting the documentation required.”
One other thing to consider about documentation, too. The Section 1102 statute–the main law that creates the paycheck protection program–requires you to use the PPP funds for the approved purposes.
Very possibly some small businesses will spend enough money on the appropriate expenses (payroll, rent, interest and utilities).
But then lack the ability to prove the PPP loan funds provided the money that got spent.
I would worry about a situation, for example, where a borrower deposits the PPP loan funds into a savings account–and then spends money from a checking account on payroll, rent, interest and utilities.
Note: I have another blog post that talks about how to not goof up the bookkeeping: PPP Loan Accounting Tips.
Gotcha #6: The 25% Non-Payroll-Costs Rule
The statutes passed by Congress say you can receive forgiveness if you spend the money on payroll, rent, interest and utilities.
The Treasury and the Small Business Administration refined this however and say in the Interim Final Rule that non-payroll costs can’t represent more than 25% of the loan forgiveness amount.
People read this rule in a couple of ways. But the right way to read this rule goes this…
You received a $100,000 loan. Due to state mandated closures, you could only spend $60,000 on payroll during the eight weeks the PPP loan forgiveness formula considers.
You also spent $40,000 on rent, interest and utilities. You might think you’re okay in this situation.
But you won’t get forgiveness for the entire $100,000. Even though your spending all counts as valid use of the PPP loan funds.
Rather, you will get limited to only forgiveness for half of the $40,000 you spent on rent, interest and utilities. Why? Because then, with $80,000 of forgiveness, only 25%, or $20,000, of the forgiven amount goes to rent, interest and utilities.
One other wrinkle to mention: Congress is working on an updated version of the Paycheck Protection Program which allows borrowers to spend more than 25% of the PPP loan on non-payroll-costs.
A comment about how I think you process this “losing forgiveness” risk: You maybe want to unbundle the PPP loan thing from the forgiveness formula thing.
Think about the loan as a loan, pure and simple. And if you need a loan, the PPP loan works great. Well, except for the goat rodeo element to applying. But other than that, the PPP loan may provide inexpensive flexible financing that helps you get through an almost unimaginably rough patch.
The forgiveness thing? Consider that icing on the cake. If you get some or a bunch of forgiveness? Great. Count yourself fortunate. But don’t bank on forgiveness.
And a final closing comment. You probably want to read our Maximizing PPP Forgiveness blog post for a longer discussion of that forgiveness rule the Small Business Administration published on May 22. Also, you may want to read our discussion of the actual PPP loan forgiveness application.
Ready for a Break from the Covid 19 Topic?
Let me point you to a couple of lighter, uplifting blog posts…
In Defending Millionaire Next Door: What Thomas Stanley’s Critics Got Wrong, I describe why small business ownership makes sense. Maybe the post will make you feel a little less bummed out. Maybe the post will help you rekindle enthusiasm regarding small business ownership.
In Lifetime Earnings of the Top One Percent, I explain why I think you’re doing way, way better than you imagine.
PPP Rules on Rehiring Employees (FAQ)
If you’re applying for the Paycheck Protection Program—and you want to have your loan forgiven—you will need to maintain your previous employee headcount and salary levels.
That’s easier said than done, since lots of businesses have complicated employee situations. Here are some of the most common questions we’ve heard around PPP and employee rehiring.
I laid off my employees in March. Can I rehire them with PPP funds?
Yes! If you had previously laid off your employees, you can go ahead and rehire them using PPP funds. That is actually the intended purpose of the PPP.
If you reinstate your FTE count by December 31, you qualify for full forgiveness on your payroll costs. Otherwise, you will need to pay back a portion of costs.
What happens if I only hire back some of my employees?
If by December 31, you only hire back some but not all of your employees using PPP funds, you won’t be able to have your full PPP loan amount forgiven. The forgivable amount will decrease in proportion to the ratio between your headcount, or full-time equivalents (FTE), during the forgivable period and your pre-pandemic FTE.
Let’s say you have three full-time employees and they each made $3,000 per month, meaning your PPP loan amount was $22,500 (3000 x 3 x 2.5). You had to lay them off in February due to COVID-19.
If you only hire back two the three employees, your workforce is 67% (two thirds) of your original headcount.
Over the 24 weeks of the PPP period, you spend $36,000 on your employees, more than your PPP loan amount. You claim the full $22,500 of your loan for forgiveness.
If we assume you do not qualify for any rehiring exemptions, when it comes to calculating your forgivable amount, because your workforce is smaller, your forgivable amount will be multiplied by 0.67. You would be able to have $15,075 forgiven.
What happens if I want to hire back all my employees, but some reject the offer?
Short answer: that’s okay—it won’t affect your forgiveness levels.
But you have to meet the following qualifications:
You must have made an written offer to rehire in good faith (either through email or a physical offer on paper)
You must have offered to rehire for the same salary/wage and number of hours as before they were laid off
You must have documentation of the employee’s rejection of the offer (again, email proof is fine, or even better, a written document with the employee’s signature showing they reject the offer)
You can also qualify for an exemption if any of these conditions apply to one of your employees:
- They were were fired for cause
- They voluntarily resigned
- They voluntarily requested and received a reduction of their hours
Note that employees who reject offers for re-employment may no longer be eligible for continued unemployment benefits. Generally, unemployment agencies require you to regularly check in with them on your job application status. If you report that you rejected a “suitable” job offer while on unemployment benefits, your benefits may be taken away.
The SBA also requires you to report the rejection of rehire to your state’s labor or unemployment office within 30 days of the rejection. Processes on how to do so will vary by state.
My employees are collecting EI. Can I still rehire them?
Yes, the PPP funds are meant to encourage you, the employer, to rehire any staff that you may have had to lay off due to the initial impacts of COVID-19.
The U.S. Department of Labor notes that employees should not refuse work simply because their unemployment benefits are higher than the amount they would earn from employment.
However, if an employee refuses to return to work after your good-faith offer to rehire, your forgiveness amount will not be negatively impacted, provided that documentation is kept.
Employers can report suspected EI fraud online.
Once an employee receives pay, they should report their income to the state’s Department of Labor. If unemployment benefits and payroll are being received in the same period of time, the unemployment office will make the appropriate calculations and the employee may be asked to return a portion or all of the unemployment benefits.
We recommend the Massachusetts Department of Unemployment Assistance’s FAQ guide for a general overview of common EI situations an employer might have.
My business just uses contractors. Can I hire them onto payroll and pay them with PPP funds?
Your PPP loan amount is determined by your 2019 payroll numbers (or net profit numbers if you’re self-employed). So if you had three employees in 2019 who made $3,000 each month, you will need to keep those three employees on payroll at the same salary.
You are welcome to hire your contractors as employees, but as they were not on your payroll records pre-COVID, you might not have much funds left over to pay your new employees. But the current forgiveness guidance does not prohibit hiring new employees.
Do I have to rehire the same employees? Or can I keep my headcount the same, but with different people?
From the guidance released so far, it appears you don’t have to rehire the same employees. The SBA’s forgiveness application does not make a distinction between new and existing employees.
Note that if you’re having a hard time getting your former employees back to work, you’re not required to bring on new employees just to meet your headcount numbers—the SBA has provided some leniency in that case.
Can I restructure compensation in my business? Can I pay myself more and my employees less?
This situation isn’t specifically covered by the official U.S. Treasury guidance. However, it does seem to go against the spirit of the program, which involves keeping headcount and salary levels at the same pre-COVID levels. You would be safer leaving all compensation the way it was before.
If you have employees who are being paid less than 75% of their base salary or wage between January 1 and March 31, 2020, you will see a reduction in your forgiveness amount, unless you qualify for an exemption.
Can I use PPP funds to give my employees bonuses?
Yes! The SBA has finally clarified that bonuses paid to employees, including hazard pay and commissions, are eligible for forgiveness.
However, bonus pay is considered one part of total compensation, which cannot exceed an annualized rate of $100,000 (or $15,385 for an eight-week period, $46,154 for a 24-week period). In other words, if you were already paying your employee $100,000 per year, you can’t add a bonus on top of that and get it forgiven.
Once my PPP funds run out, can I make layoffs again?
Yes. If after the 24 weeks the PPP covers, your business’s financial situation has not improved, or the PPP funds have run out, you are able to put employees on furlough or lay them off if necessary. The employees would be eligible to claim unemployment benefits.
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