What is the Paycheck Protection Program? (A Simple Guide)

Editor’s note: On Tuesday, May 4th the PPP ran out of general funds and the SBA stopped accepting new PPP loan applications. A reserve of funds is still available for community financial institutions that lend to businesses run by women, minorities, and underserved communities. Additionally, a reserve of funds remains for applications previously submitted but not yet reviewed by the SBA. If you have already submitted your loan application, however, this does not guarantee you funding.



On December 27, 2020 the U.S. federal government signed a new bill into law. Included in this bill is a second stimulus package for businesses with a top up of the Paycheck Protection Program (PPP).

Whether you’re applying for a first draw PPP loan or a second draw PPP loan, here’s everything you need to know.

What is the Paycheck Protection Program?

The Paycheck Protection Program is a loan program that originated from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This was originally a $350-billion program intended to provide American small businesses with eight weeks of cash-flow assistance through 100 percent federally guaranteed loans. The loans are backed by the Small Business Administration (SBA). You can read the bill in its entirety here.

The program was then expanded by the Paycheck Protection Program and Health Care Enhancement Act in late April, adding an additional $310 billion in funding. The Paycheck Protection Program Flexibility Act made important changes to the program allowing for more time to spend the funds, and making it easier to get a loan fully forgiven.

Then on December 27, 2020 a second stimulus package was signed into law topping up the program with an additional $285 billion in funding and updating the eligible expenses. It also opened up a second PPP loan for businesses that used up their first PPP loan and have experienced a 25% or greater decrease in revenue.

PPP loan - highlights

The following is a high-level overview of the PPP loan program, which we’ll cover in more detail in the rest of this article.

  • All small businesses are eligible

  • The loan has a maturity rate of two years and an interest rate of 1%.

  • Loans made after June 5, 2020 have a length of five years.

  • The loan covers expenses for 24 weeks starting from the loan disbursement date

  • No need to make loan payments until either your forgiveness application is processed, or 10 months after your 24-week covered period ends

  • No collateral or personal guarantees required

  • No fees

  • The loan can be forgiven and essentially turn into a non-taxable grant

At Bench, we’re helping businesses navigate stimulus funding by connecting them to lenders and assisting with PPP forgiveness applications.

Am I Eligible for a PPP loan?

Paycheck Protection Program loans are farther reaching than SBA disaster loans. Small businesses, sole proprietorships, independent contractors, and self-employed individuals are all eligible.

  • Sole proprietorships will need to submit a Schedule C from their tax return filed (or to be filed) showing the net profit from the sole proprietorship.

  • Independent contractors will need to submit Form 1099-MISC (now 1099-NEC in 2020) in addition to their Schedule C.

  • Self-employed individuals will need to submit payroll tax filings reported to the Internal Revenue Service.

For second draw PPP loans in 2021, a key qualification was introduced. Businesses looking to apply for their second PPP loan will need to show a 25% or greater reduction in revenue. This will be shown by comparing revenue between any quarter in 2020 with the same quarter in 2019.

For example, say a business recorded $20,000 of sales revenue in the second quarter (Q2) of 2019. They would be eligible for PPP funding if they recorded $15,000 of sales revenue or less in Q2 2020.

Further reading: How to Calculate a 25% Reduction in Revenue for PPP 2

What can a PPP loan be used for?

At least 60 percent of the PPP loan must be used to fund payroll and employee benefits costs.

The remaining 40 percent can be spent on:

  • Mortgage interest payments

  • Rent and lease payments

  • Utilities

  • Operations expenditures such as software and accounting needs (like Bench)

  • Property damage costs due to public disturbances not covered by insurance

  • Supplier costs such as cost of goods sold

  • Worker protection expenditures to be COVID compliant

If you stick to these guidelines, you’ll be able to have 100% of the loan forgiven (effectively turning it into a tax-free grant).

Warning: As part of your application, you’ll be asked to certify that you will spend the funds in the appropriate way. If you don’t spend the funds in the right way, you could be charged with fraud.

What counts as “payroll costs”?

Payroll costs under the PPP program include:

  • Salary, wages, commissions, tips, bonuses and hazard pay (capped at $100,000 on an annualized basis for each employee)

  • Employee benefits including costs for vacation, parental, family, medical, or sick leave allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit

  • State and local taxes assessed on compensation

  • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.

In other words, most payroll costs are covered. However, the following scenarios are not covered:

  • Payments made to independent contractors

  • S corps and C corps owners who aren’t on payroll (shareholders distributions don’t count as payroll under this program)

The $100,000 salary cap

As mentioned above, payroll expenses are capped for individuals earning over $100,000.

If you or any employees had an annual salary over $100,000 in 2019 or 2020, you can only claim $100,000 (and nothing above it). So if an employee makes $120,000, you would subtract $20,000 from their salary for the purpose of the PPP. This would give you $8,333.33 as a monthly average payroll ($100,000 divided by 12).

If you are a sole proprietor or independent contractor without payroll and your net profit was over $100,000 in 2019 or 2020, this will also be capped at $100,000. You would divide this by 12 to get $8,333.33 as your monthly average payroll.

How much PPP funding can I receive?

The maximum amount you can receive from your SBA-approved lender is your monthly average payroll cost in 2019, 2020, or the one year period before the application. Multiply it by 2.5, up to a maximum of $2 million.

For businesses in the food and accommodation industries, you are eligible for 3.5 times your average payroll costs, also with a maximum of $2 million.

If you are a seasonal employer, the monthly average payroll cost will be calculated differently. You can use any 12-week period between February 15, 2019 and February 15, 2020.

Here’s a full rundown on how to calculate your PPP loan amount.

How do I apply for a PPP loan?

The SBA itself doesn’t lend you the money, they just “back” the loan that the lender provides. You can check out the SBA’s Lender Match tool to find an eligible SBA 7(a) lender.

As part of your application, you’ll be asked to verify:

  • Current economic uncertainty makes the loan necessary to support your ongoing operations.

  • The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.

  • Documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the 24 weeks after getting this loan.

  • You acknowledge that the lender will calculate the eligible loan amount using the tax documents you submitted. You affirm that the tax documents are identical to those you submitted to the IRS.

  • If you are applying for your second draw PPP loan, you have already used up the funds from your first draw PPP loan.

Financial documentation you’ll need

You’ll need to provide payroll/bookkeeping records to prove your payroll expenses.

That could include:

  • Payroll processor records

  • Payroll tax filings

  • Payroll tax forms from 2019 or 2020 (Forms 941, 940 and W-3)

  • Form 1099-MISC records

  • Schedule C for a sole proprietorship

If you have employees (and you’re paying yourself through payroll too), the easiest way to get the financial information you’ll need is by downloading a payroll report through your payroll provider.

If you’re self-employed and don’t yet have a completed Schedule C to submit, you will likely need to get retroactive bookkeeping to calculate your net profit for your Schedule C. Apart from bookkeeping, it will be very difficult to accurately show your net profit, which is the number your PPP loan amount will hinge on. If you don’t have a reliable bookkeeping solution in place, Bench can do your bookkeeping for you. Learn more about our catch up bookkeeping services.

If you own more than one business

We are hearing reports that entrepreneurs who own more than one business are having difficulty getting relief funding when their businesses don’t have cleanly separated finances. If you own more than one business, it’s important to get separate bookkeeping done for each business. This will become doubly important when it comes time to prove your expenses for loan forgiveness.

How to apply for PPP loan forgiveness

In the 24 weeks following your loan signing date, all expenses related to the following can be forgiven:

  • Payroll—salary, wage, vacation, parental, family, medical, or sick leave, health benefits, bonuses, hazard pay. Individual compensation is capped at $100,000 annualized.

  • Mortgage interest—as long as the mortgage was signed before February 15, 2020

  • Rent—as long as the lease agreement was in effect before February 15, 2020

  • Utilities—as long as service began before February 15, 2020

  • Operations expenditures—any software, cloud computing, or other human resources and accounting needs (like Bench).

  • Property damage costs—any costs from damages due to public disturbances occurring in 2020 and not covered by insurance.

  • Supplier costs—any purchase order or order of goods made prior to receiving a PPP loan essential to operations.

  • Worker protection expenditures—any personal protection equipment or property improvements to remain COVID compliant from March 1, 2020 onwards.

You’ll need to keep your records and have accurate bookkeeping to prove your expenses during the loan period. You will also need to have spent 60% of the loan on payroll in order to qualify for forgiveness on the entire loan. Bench’s bookkeeping services can help you stay on top of your expenses to ensure you’re maximizing your forgiveness amount.

When your covered period is up (or your PPP funds are spent), you will apply for forgiveness through your lender. Typically, this is being handled through online portals. Check your lender’s website to see if one is available.

Once your lender has received your application, they must make a decision within 60 days.

Use our guide below to figure out which PPP forgiveness application form you should use.

Which PPP forgiveness form do I use? (horizontal flow chart)

PPP forgiveness requirements

The purpose of the Paycheck Protection Program is to, well, protect paychecks. You must commit to maintaining an average monthly number of full-time equivalent employees equal or above the average monthly number of full-time equivalent employees during the previous 1-year period. And you must spend 60% of the loan funds on payroll.

The amount that can be forgiven will be reduced…

  • In proportion to any reduction in the number of employees retained.

  • If any wages were reduced by more than 25%.

If you rehire employees that were previously laid off at the beginning of the period, or restore any decreases in wage or salary that were made at the beginning of the period, you will not be penalized for having a reduction in employees or wages. For loans received in 2020, the deadline to do so was December 31, 2020. For loans received in 2021, the deadline is the end of your covered period.

A new exemption on re-hiring employees

Employees who were laid off or put on furlough may not wish to be rehired onto payroll. If the employee rejects your re-employment offer, you may be allowed to exclude this employee when calculating forgiveness. To qualify for this exemption:

  • You must have made an written offer to rehire in good faith

  • 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

Note that employees who reject offers for re-employment may no longer be eligible for continued unemployment benefits.

Further reading: PPP Rules on Rehiring (FAQ)

How will PPP loan forgiveness affect my taxes?

The new bill has confirmed how a PPP loan will affect tax filing. Any forgiven PPP loan amount will not be considered taxable income. Additionally, any expenses covered by a PPP loan will still be tax deductible.

Simply put, a PPP loan will not affect your tax filing process.

Paycheck Protection FAQs

Can I apply to the PPP through more than one lender?

Yes! There is no harm in applying through more than one lender. Whoever processes your application first will receive an SBA approval number for your business (if you qualify for the loan). This number is called a PLP. The SBA will only issue one PLP for each Tax ID, meaning there is no chance you will accidentally get approved for two PPP loans.

If you are approved for a PPP loan, your application with the other lenders will eventually be rejected, so it’s best to withdraw your application from the other lenders once you’ve been approved.

So far, there has been no guidance issued by the Treasury or SBA stating that you can only apply through one lender at a time. In fact, lenders are encouraging businesses to apply through multiple lenders, to increase their chances of getting processed in time.

How does the PPP differ from the SBA disaster loan?

The SBA also offers an Economic Injury Disaster Loan (EIDL)—often shortened to just SBA disaster loan. This is a separate, but similar, initiative. Here’s how they differ:

  • No personal or business collateral is required. The SBA disaster loan may require collateral for loan amounts over $25,000.

  • It’s ok if you also have access to credit elsewhere. To receive a SBA disaster loan you generally need to have no other source of credit.

  • The funding covers a more restrictive set of purposes (details below). The SBA disaster loan can cover most operating expenses.

  • Your loan can be forgiven if you follow the terms. The SBA disaster loan requires repayment.

How is the PPP similar to the SBA disaster loan?

  • You need to declare (in good faith) that the uncertainty of current economic conditions makes the loan necessary for your business.

  • It’s free to apply.

  • You have an extended deferment period (6-12 months, depending on your lender) before you begin repayment.

  • There is no prepayment penalty.

Can I apply for PPP and an SBA disaster loan?

Yes, you can. However, you can’t apply for an SBA disaster loan for the same purpose as the Paycheck Protection Program.

I reduced my workforce. Will this affect my PPP application?

It will affect your PPP forgiveness application, but only if you do not plan on rehiring them or restoring their pay for their typical work hours. You must prove that you’ve maintained the salary and wages of your employees, and that their pay hasn’t dropped below 25% of the stated monthly average for your forgiveness application.

I’m a sole prop. How do I show my salary if I use owner draws?

If you’re a sole prop, average monthly payroll expense is based on your self-employment income. More specifically, this is the net profit reported on your Schedule C. That is the number you pay tax on therefore it is treated as your salary. You can define your monthly average payroll expenses as that net profit number for the year divided by 12. Payroll expenses are capped for individuals earning over $100,000 so if you have greater than $100,000 in net profit, use $100,000 as your total income and thus $8,333.33 as the monthly average.

Further reading: Owner Draws and the PPP

Other PPP resources

What’s Bench?

We’re an online bookkeeping service powered by real humans. With Bench, you get a dedicated bookkeeper and powerful reporting software for a crystal clear view of your financial health. All of our services are eligible expenses for PPP forgiveness, and we’ll even provide support in applying for the PPP (or getting that loan forgiven). Whatever happens next, we’re right there with you. Get started on a free trial today.


This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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