How to Calculate Your PPP Loan Amount

The Paycheck Protection Program (PPP) was a federal initiative to provide financial relief to businesses. Its goal was to encourage businesses to retain employees on payroll. The program offered forgivable loans, helping maintain employment and support business operations. Understanding the methodology for calculating the eligible loan amount was fundamental.

Defining Eligible Payroll Costs

Defining eligible payroll costs was the initial step in determining a PPP loan amount. These costs encompassed compensation and benefits provided to employees. This included gross wages, salaries, commissions, or similar compensation, though a cap of $100,000 per employee on an annualized basis applied to cash compensation. Cash tips also counted toward eligible payroll.

Eligible payroll costs also extended to payments for leave, such as vacation, parental, family, medical, or sick leave. Allowances for employee dismissal or separation were also included. Employer contributions for group health care benefits (including insurance premiums) and retirement benefits (such as defined-benefit or defined-contribution plans) were considered eligible. State and local taxes assessed on employee compensation, predominantly state unemployment insurance taxes, were also part of the eligible payroll calculation.

Certain costs were excluded from eligible payroll. Qualified sick and family leave wages for which a credit was allowed under the Families First Coronavirus Response Act were not included. Compensation for any employee whose principal place of residence was outside the United States did not qualify as eligible payroll. Employers’ contributions for federal taxes, such as the employer’s share of Federal Insurance Contributions Act (FICA) taxes, were not considered eligible payroll costs.

Determining Average Monthly Payroll

Calculating the average monthly payroll followed the identification of eligible payroll costs. Most businesses summed all eligible payroll costs over a specific look-back period. The standard look-back period was typically 12 months prior to the loan application, or businesses could use calendar year 2019 or 2020. For First Draw loans, borrowers could choose 2019 or 2020 payroll costs.

To arrive at the average monthly payroll, total eligible payroll costs for the chosen look-back period were divided by the number of months, typically 12.

The calculation focused on gross pay; federal taxes (e.g., FICA and income taxes) were not subtracted from payroll costs. Businesses tracked and summed all included payroll components for the chosen period to ensure an accurate average monthly figure.

Applying the Loan Amount Multiplier

After determining average monthly payroll, a multiplier was applied to calculate the potential loan amount. For most First Draw loans, the multiplier was 2.5 times the average monthly payroll costs. The maximum loan amount for First Draw loans was capped at $10 million.

For Second Draw loans, the multiplier was also 2.5 times the average monthly payroll costs. Businesses in the Accommodation and Food Services sector (NAICS code beginning with 72) were eligible for a higher multiplier of 3.5 times their average monthly payroll costs. The maximum loan amount for Second Draw loans was lower, capped at $2 million.

The calculation involved multiplying the average monthly payroll by the applicable multiplier. The resulting amount was subject to the maximum loan amount cap for First or Second Draw loans. For example, if a business’s calculated amount exceeded the $10 million (for First Draw) or $2 million (for Second Draw) limit, the loan amount would be reduced to that maximum cap.

Specific Business Calculation Rules

PPP loan calculations adapted for various business structures and unique situations. Self-employed individuals and independent contractors (Schedule C filers) had a distinct calculation method. They could use net earnings from self-employment (Schedule C, Line 31) or, for loans approved after March 3, 2021, gross income (Schedule C, Line 7) as the basis for owner compensation. The chosen figure was divided by 12 to determine average monthly owner compensation, then multiplied by 2.5.

For partnerships, the calculation included employee payroll costs and owner compensation for general active partners. Partners’ self-employment income (IRS Form 1065 Schedule K-1) was included as a payroll cost, subject to the $100,000 annualized cap per partner. The partnership applied for one loan covering both employee and partner compensation.

Seasonal businesses used alternative look-back periods to reflect peak payroll expenditures. They could choose any consecutive 12-week period between May 1, 2019, and September 15, 2019, or other specified periods, to calculate their average monthly payroll. New businesses not existing for the full standard look-back period could use alternative calculation methods, such as average monthly payroll costs incurred in January and February 2020, or from when the entity began operations through the end of calendar year 2020.

Documentation for Loan Calculation

Specific records and documentation were required to substantiate PPP loan calculations. Businesses provided payroll tax filings, such as IRS Form 941, which reports quarterly federal income tax withheld and Social Security and Medicare taxes. State quarterly wage unemployment insurance tax reporting forms were essential to verify state and local taxes assessed on employee compensation.

Detailed wage reports, payroll processor records, or other documentation showing employee compensation and benefits were necessary. This included records of gross wages, salaries, commissions, tips, and allowances for various types of leave. For self-employed individuals and independent contractors, IRS Form 1040 Schedule C supported their owner compensation figures. Partners in a partnership used IRS Form 1065 K-1s to document their self-employment income.

Evidence of payments for group health care benefits (including insurance premiums) and retirement benefits (employer contributions) was also required. Bank statements or reports from third-party payroll service providers verified the cash compensation disbursed to employees. This documentation allowed lenders and the Small Business Administration to verify the accuracy of the payroll costs used in the loan calculation.