Don’t panic! Taking the guesswork out of PPP loans

After a rocky rollout, the Paycheck Protection Program (PPP) went live on Friday, April 3. The loan program was established by the CARES Act to distribute $349 billion in loans to small businesses that have been hit hard by coronavirus shutdowns.

SMBs can now apply for a PPP loan of up to 2.5 times their average monthly payroll, and the loan will be forgiven (read: you don’t need to pay it back) as long as the funds are used to keep employees on the payroll and for other qualifying expenses over an eight-week period.

National banks and other lending institutions are expected to begin accepting PPP loan applications via their online portals this coming week. The Treasury Department encouraged businesses “to apply as quickly as you can because there is a funding cap.”

To learn more about the details of the program, the U.S. Chamber of Commerce put out this excellent PPP loan guide. Below we cover everything else you need to know to get a PPP application ready to go ASAP.

Please note that we’ve updated this post and our methodology to account for new SBA and Treasury FAQ guidance released late Monday, April 6. If you’ve already submitted a PPP loan application, you do not need to make any changes. If you haven’t submitted yet, these updates will apply.

What materials do I need to apply?

Businesses need to do two things to prepare their PPP loan applications:

• Calculate your average monthly payroll number
• Provide documentation for your payroll calculation

Sounds simple enough, but the devil's in the details. Let's dive in:

How to calculate average monthly payroll

There are quite a few calculators out there, but we hear confusion from our customers when they try to use them: Do they include FICA? What about employer 401k contributions? What precisely is capped at $100,000?

Because the official guidance is still evolving, many businesses, lenders, and payroll companies have been struggling with these issues all week.

Businesses need answers to these nitty gritty questions, so we’re providing a detailed view of how we calculate average monthly payroll.

There’s still debate about what the right methodology is. Ours is based on the Treasury Department interim guidance issued on April 2, Rippling’s participation in the AICPA-led coalition of payroll processors, and the latest SBA and Treasury guidance issued on April 6. Please note that you should follow your lender or counsel’s guidance, even if it differs from our own.

Step 1: Select the applicable time period. 

• For most companies, use (i) your last 12 months of payroll, or (ii) your full year 2019 payroll. We recommend that you prepare both calculations and decide which time frame provides a more accurate depiction of your average monthly payroll. As of April 6, the Treasury Department and SBA have clarified that either time period is acceptable. You can disregard earlier materials that indicated otherwise
• For seasonal businesses, use a 12-week period between February 15, 2019, and June 30, 2019*
• For new companies, use January 1, 2020, to February 29, 2020*

Step 2: Calculate aggregate payroll costs.

• Include employee compensation in the United States, cash tips, paid leave, employee portion of health insurance and retirement, and employee portion of all federal, state, and local taxes

Step 3: Check for and remove any exclusions, such as:

• Compensation for employees outside the United States
• Compensation for independent contractors (1099s)
• Employer portion of federal employment taxes, including FICA, Railroad Retirement Act taxes, and income taxes
• Any sick and family leave wages that are eligible for tax credits under the Families First Coronavirus Response Act (FFCRA)*

Step 4: Apply the $100,000 cap per employee.

• Aggregate payroll cost per employee should be capped at $100,000 on an annualized basis

Step 5: Add employer portion of state and local taxes as well as benefits.

• Include health insurance premiums and employer contributions to health FSAs and retirement funds
• Include the employer portion of state and local taxes

Step 6: Divide by 12, unless you are using a seasonal or new business time period. This is your average monthly payroll.

If you are a Rippling customer, please read on for how we can help you calculate your average monthly payroll amount and locate supporting tax documentation. Note that we do not include any of the starred (*) items above in our pre-built PPP average monthly payroll report tool.

If you are not a Rippling customer or you would like to run your own calculations, we recommend the AICPA’s publicly available PPP loan calculators. (Please ensure that it’s been updated to reflect the latest guidance from April 6 before using.

How to document your payroll calculation

Ok, so now you have your average monthly payroll. Next, you need to provide your lender with documentation to back it up.

• We’re aware that some lenders have been requesting the Q120 Form 941. Please note that this filing is not available until mid-April, and is not a required document. Industry groups are actively clarifying this with lenders
• Also, some businesses — like those that use a PEO for payroll — will not have access to IRS Forms 940 and 941s. Fret not!

If you do not have the forms above, you can provide other supporting documentation

• The Treasury Department has clarified that IRS Forms 940 and 941s are not required documents, and companies must be allowed to provide alternative documentation, like your payroll provider’s Form 941 or a statement from them documenting the amount of wages and payroll taxes, to demonstrate your qualifying payroll amount.

For VC-backed startups, we recommend an extra step.

• Include some supporting evidence of your good faith certification that these funds are necessary to continue business operations.
• For example, documentation that you have lowered your business forecasts, experienced a reduction in revenue, have considered or implemented layoffs, and/or experienced difficulty in raising additional capital.

Can I use Rippling to make this easy?

Why, yes you can! We know it has been difficult to get clear information on the PPP program — what documents to gather, how to calculate average monthly payroll — so we’ve been working hard behind the scenes to sort out these details.

If you’re a customer, here’s how we can help.

We calculate average monthly payroll for you

Here’s how to use our new customized payroll report for PPP loans:

• Navigate to Reports on the left hand side panel
• Select the Built-in Reports tab
• Select the COVID-19 Payroll PPP Report
• Under Dates, toggle to “Last 12 Months” or “Previous Calendar Year” 
  • Please note that Rippling built two reports: (1) a full-year 2019 report and (2) a last twelve-months report, which will start calculations for the preceding 12 months. We recommend that you consult with your lender to determine their preferred time period for calculation. 
• Click Run Report
• The “Monthly PPP-eligible costs” will be your “Average Monthly Payroll Cost.” Multiply this number by 2.5 to determine your max PPP loan eligibility. The total loan amount cannot exceed $10 million.

Check out the bottom of this post for the fine print on this tool, including detailed methodology, notes and disclaimers.

We provide supporting documentation 

Simply create a Payroll Journal report:

• From the Rippling Dashboard, open the Payroll app
• Click on the Reports tab and select Journal Report
• For Period select Custom, and select the From and To date range that you are running the report for
• Click Apply
• After the report has generated, you can click Download to the top right-hand corner to download the report as a CSV file.

We can also provide any available IRS Form 940 and 941 documents:

• Navigate to your Payroll app
• Click on the Docs tab
• Click on Previous Filings (Docs) on the left hand side

Voilà. You’re ready to apply.

With those materials in hand, you're ready to apply for a PPP loan. Contact your bank or participating Section 7(a) lender directly to learn about their application process. While most national banks will issue their own version of the loan application online, the Treasury Department posted a sample application that will give you a good overview of what to expect.

Good luck!