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

By Owen Yin on October 7, 2020

Editor’s note: This article has been updated to reflect the changes outlined in the Paycheck Protection Program Flexibility Act from June 4, 2020. We encourage all eligible small businesses to apply now through their financial institution or through an online lender as the funds will quickly run out. If you need 2019 bookkeeping completed for your application, Bench can help.

On March 27, 2020 the U.S. federal government signed the CARES Act into law—a big coronavirus relief bill aimed at supporting small businesses through the current pandemic.

One of the measures in the bill is the Paycheck Protection Program—here’s everything you need to know.

Further reading: The Coronavirus Relief Bill—Every Benefit for Small Businesses

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.

Now, the Paycheck Protection Program Flexibility Act has made important changes to the program, by allowing for more time to spend the funds, and making it easier to get a loan fully forgiven.

Program highlights

  • All small businesses are eligible
  • The loan has a maturity rate of 2 years and an interest rate of 1%. Loans made after June 5 have a length of 5 years.
  • No need to make loan payments until either your forgiveness application is processed, or 10 months after your covered period ends
  • No collateral or personal guarantees required
  • No fees
  • The loan covers expenses for 24 weeks starting from the loan origination date (if the obligations began before February 15, 2020)
  • The loan can be forgiven and essentially turn into a non-taxable grant

Do I qualify for the program?

Likely yes! Paycheck Protection Program loans are more extensive than SBA disaster loans. Small businesses, sole proprietorships, independent contractors, and self-employed individuals can all qualify.

  • 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 in addition to their Schedule C.

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

Further reading: Self-Employment and the Paycheck Protection Program

What can I use the funds 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

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, 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, 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 funding can I receive?

The maximum amount you can receive from your SBA-approved lender is your monthly average payroll cost in 2019, multiplied by 2.5, up to a maximum of $10 million.

If you are a seasonal employer, the monthly average cost will be calculated differently. The lender will use a 12-week period beginning either February 15, 2019 or March 1, 2019, and ending June 30, 2019.

If your business did not exist before June 30, 2019, the lender will look at your costs in January and February 2020.

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

How do I apply?

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.

Sole proprietorships can apply starting April 3. Independent contractors and self-employed individuals can apply starting April 10. You are encouraged to apply early as there is a funding cap for this program. You have until August 8 to submit an application.

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.
  • You have not and will not receive another loan under this program.
  • 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 eight 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.

Here is the Paycheck Protection application form, which shows the information you’ll need to provide.

It doesn’t hurt to apply through more than one lender.

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 (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.

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.

Will there be another round of funding?

While there is bipartisan support for another round of PPP funding, the halt on discussions around COVID relief has made it clear that we will not see a top up of PPP funding soon. Current reporting is that we won’t see stimulus until after the election—and potentially not until January 2021.

How can I get my loan forgiven?

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

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 can help you stay on top of your expenses to ensure you’re maximizing your forgiveness amount.

The lender must make a decision within 60 days of your forgiveness application submission.

What are the conditions for loan forgiveness?

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, as long as you do this by December 31, 2020.

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)

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 this 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 this 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. That being said, when you apply for the SBA disaster loan, you can also request a $10,000 emergency grant, interest-free. You can apply for the loan and grant here.

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

Yes, but only if you do not plan on rehiring them or restoring their pay for their typical work hours. If you can prove by December 31st 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, you will have a strong application.

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

If you’re a sole prop, it will be based on your self-employment income. More specifically, this will be 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


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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