The Paycheck Protection Program - All the major questions “unofficially” answered with practicality and our interpretation of intent. (It is expected that future guidance will clarify the issues noted below.)

KLR has been at the forefront of assisting clients impacted by the economic effects of the Covid-19 virus spread, by committing countless hours of reading and re-reading every official rule and paragraphs of guidance that the US government has issued. We have consistently taken a practical approach with our interpretation of the rules when consulting with our clients. We have stressed intent as opposed to the text of the bill. Below are answers to some of the most confusing questions regarding determining the amount of loan you are eligible for and rationale for our positions.

What Months of Payroll to Include in the Calculation for Average Monthly Payroll?:

From the Interim Final Rules:

Aggregate payroll costs from the last twelve months for employees whose principal place of residence is the United States.

From the Borrower Application Form:

For purposes of calculating “Average Monthly Payroll,” most Applicants will use the average monthly payroll for 2019, excluding costs over $100,000 on an annualized basis for each employee. For seasonal businesses, the Applicant may elect to instead use average monthly payroll for the time period between February 15, 2019 and June 30, 2019, excluding costs over $100,000 on an annualized basis for each employee. For new businesses, average monthly payroll may be calculated using the time period from January 1, 2020 to February 29, 2020, excluding costs over $100,000 on an annualized basis for each employee.

Our interpretation: Use the 2019 annual payroll amounts. Keep in mind this law was written in the last weeks of March and the first quarter of 2020 had not yet ended. It would be very difficult for all applicants to track the last twelve months of payroll up to the date of filing the borrower application. Banks and the US Government would need to look at official payroll reporting already on file when approving applicants and the first quarter of 2020 Form 941 would not be ready as of the date of borrowers filing application forms. Additionally, reading the instructions of the Borrower Application Form, it says “most” applicants will use the average payroll for 2019. The next two sentences discuss seasonal borrowers and those that were new businesses. Grammar was not my strong point, but is one to assume when they say “most” businesses, they mean all businesses except for the two exceptions discussed in the next two lines – Seasonal and New Businesses?

What is included in Average Monthly Payroll?

From the Interim Final Rules:

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; 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; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.

Is there anything that is expressly excluded from the definition of payroll costs?

The Act expressly excludes the following: 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, and income taxes required to be withheld from employees; and 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).

Do independent contractors count as employees for purposes of PPP loan calculations?

No, independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation.

Our interpretation: Because we interpret that you should use the 2019 annual “gross” payroll amounts, many of these items do not apply. Keep in mind that the definition of payroll costs in the interim rules also applies to the forgiveness formula which we will cover in another blog as there appears to be a major “Gross Payroll” vs. “Net Payroll” issue brewing.

We have advised our clients to take their 2019 Form W-3/W-2 package and start with the Medicare wages as listed in Box 5 of the Form W-3. Then go through the package of W2s and note every W2 where box 5 is in excess of $100,000 and keep a spreadsheet of the person and the Box 5 amount. Once you have the entire list, add up the count of W2s where box 5 is in excess of $100,000 and the actual aggregate amount listed for these employees in Box 5. Take the dollar value of these employees’ aggregate box 5 totals and subtract it from the amount listed in Box 5 of the W-3. Then take the count of the number of W2s that were in excess of $100,000 and multiply this number by $100,000 and add to the W3 number that was previously reduced by the dollar value of the employee’s Box 5 amounts that were in excess of $100,000. This is your “compensation” amount. Note – Certain Section 125 amounts may be able to be added to this Box 5 W3 amount.

You must then add in the amount of benefit costs (health insurance, etc.) that the Company paid along with any state or local employment taxes that the company paid in 2019 (look to quarterly unemployment forms to find this information). Lastly locate any retirement plan matching or profit sharing amounts that the company remitted to their plans in 2019 and add that amount as well.

Take your aggregate total of these inputs and divide it by 12 to get “average monthly payroll”. Then multiply this amount by 2.5 for purposes of completing the application form.

Note that ‘compensation” is separate from salary/wages. Therefore the $100,000 cap on employee compensation does not include benefits for these high earning employees. Benefits (such as health insurance) is listed separately as an input for the formula so the total benefit costs incurred by the employer should be included in the calculation.

Important to note, do not include any 1099 subcontractor payments in this calculation as subcontractors in their individual capacity are eligible to apply under this program.

Navigating through all of the information and programs available to impacted businesses may be overwhelming. KLR advisors are available to assist you navigate the best path forward during this unprecedented crisis. With a completely remote workforce our advisors are always available.

Read the Paycheck Protection Program: Your Loan Forgiveness Questions Answered

Visit our Coronavirus Resource Center for more information.