About the Paycheck Protection Program
As part of the CARES Act, Congress allocated $359 billion for small business relief. One of the federal aid programs managed by the Small Business Administration (SBA) is the Paycheck Protection Program (PPP). The PPP's purpose is to help small businesses maintain their payroll costs for eight weeks, retain their employees, and rehire those that were laid off due to the COVID-19 pandemic. Congress later approved a new bill called the Paycheck Protection Program and Health Care Enhancement Act. This added an additional $310 billion to PPP when funding had depleted from the first round of legislation. The SBA is expected to resume loan applications April 27,2020.
How Does The Paycheck Protection Program Work?
The program consists of cash grants and low interest loans and payments for businesses that are struggling to keep their employees on payroll, as well as rehiring those they had let go. Through PPP, businesses can get loans 2.5 times their average annual payroll costs. The SBA will forgive the loans as long as the money is used for payroll, rent, mortgage, or utilities, and all employees are kept on payroll for eight weeks. Also, the SBA has waived their usual requirements for these loans, so no collateral is required. .
The loans are given through banks and other lenders.
PPP covers a wide variety of small business types, which are shown in the table below.
Eligible Businesses for Paycheck Protection
Small Business With 500 Employees Or Less
Non Profits With 500 Employees Or Less
|Sole Proprietors (self employed)|
|*Small Businesses in the hotel and food service industry that are franchises (according to SBA guidelines) with 500 plus employees may be eligible.|
What Costs Are Covered Under The PPP?
The main purpose of this loan is to keep workers employed and paid during the COVID-19 pandemic. It's very important to know your payroll costs so you can accurately calculate what to borrow from a bank or a lender. A small business can have their loan forgiven if they use it for the PPP-covered costs that are shown in the table below.
Costs Covered Under the PPP
Wages, Salary, commissions, tips (capped at $100,000 per employee)
Benefits costs such as vacation,parental, medical, family and sick leave
|Separation or dismissal allowance|
Retirement Benefits Payments
Taxes either by state or locally on compensation
Mortgage interest, utility payments and rent are eligible, but only 25% of the loan can be used on these costs.
How Does Loan Forgiveness Work?
Loan forgiveness can be both full or partial. It's basically taking a loan and turning it into a grant. Requirements for loan forgiveness are based on a 40 hour work week. If the following requirements are met, the loan can be forgiven.
Requirements For Loan Forgiveness:
- Businesses must maintain what is considered their full time head count.
- Wages must be maintained for all employees for eight weeks once the loan is dispersed.
- Businesses can be forgiven for only the first $100,000 in payroll for each employee.
- No more than 25% of the loan can be used for nonpayroll costs such as rent.
- Businesses that reduce their staff or cut wages of employees who make less than $100,000 a year by more than 25% will not see their loans fully forgiven.
- If you are currently covering payroll costs through the Economic Injury Disaster Loan Emergency Advance (EIDLEA), you can refinance through the PPP and be eligible for forgiveness on their loan.
Small business owners have until June 30, 2020 to reestablish full-time employment and wages that were reduced or dropped altogether between February 15, 2020 and April 26, 2020. You'll have to submit a request with your lender or bank that services the loan in order to receive forgiveness. According to the U.S. Treasury Department, you must include documentation that verifies your employees, their pay rates and what the loan was used for.
How Much Can I Borrow?
Businesses can borrow up to $10 million, or 2.5 times their payroll costs. This is determined by their average monthly (up to two months) payroll costs for the previous calendar year with an additional 25%. These payroll costs can only apply to annual salaries up to $100,000. Businesses will have to subtract the excess salary amount that exceeds the cap.
For Example: If an employee earns $150,000 a year, only $100,000 of their salary can be included in your calculation.
Payroll Costs For Part-Time Workers, Independent Contractors, And Self Employed
According to the CARES Act, up to $100,000 a year can be claimed. This includes wages, income, commission or net earnings. Based on the employees pre-pandemic average hours and earnings, businesses can use the PPP loan to cover their part-time employees.
While, independent contractors and gig workers aren't eligible to be included in your payroll costs. They can, however, apply for their own PPP loan to cover their own income, wages, net earnings or commissions from being self employed, which is up to $100,000 per year.
What If I Have Laid Off Workers?
Businesses can still have their loans forgiven if they rehire their workers before their loan is dispersed. If they need more time to rehire their employees, they can choose a date between now and June 30, 2020 for their loan to be dispersed.
How Do I Apply?
You can apply through a U.S. Small Business Administration lender, and also any federally insured deposit institution. The SBA provides a list on their website. All you have to do is type your zip code into the search bar.
Since many banks are overwhelmed by loan requests, some have stopped taking new loans such as Wells Fargo. However, the Federal Reserve is trying to make it easier for banks to lend out money, in order to support the PPP.
Small Businesses should apply as soon as possible. It takes time to process loans, and some banks are making it a requirement for applicants to be previous loan customers. However, some banks have dropped that requirement.
If you are in need of further assistance, we have an ongoing list of programs for those affected by the COVID-19 pandemic.