Important PPP update for 2021
On December 22, 2020, Congress passed a bill renewing funding under the CARES Act, including an additional $284 billion earmarked for America’s struggling small businesses. The rules and application process for PPP loans and forgiveness have been modified, with more businesses eligible for PPP loans, more expenses forgivable, and a simplified application process. Also there is provision for “second draw” PPP loans for businesses that received PPP funding in 2020.
In this 3-minute read:
- How to calculate your maximum Paycheck Protection Program loan amount if you are a small business that has employees
- How to calculate your SECOND DRAW PPP loan amount if you’re in NAICS code/category 72 (food or accommodation businesses)
- What if I’m an independent contractor or sole proprietor WITHOUT employees?
As businesses across the United States are applying through eligible SBA lenders for their loans allowed under the Paycheck Protection Program (PPP), there is a frequently asked question as to how much that loan will be.
In order to get your loan approved, we suggest using the calculation outlined below, with the majority of your loan based around your business’s payroll expenses.
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How do I calculate my max PPP loan amount if I have employees?
Small businesses with employees are the most common type of business applying for the PPP loans, because you have heavier payroll expenses to maintain. (And the intent of the Paycheck Protection Program is to help save American jobs and small businesses.)
This is a particular challenge if your business has been forced to close or adhere to any kind of limitations due to statewide shutdowns and other social distancing measures during COVID-19.
Note from the SBA: “Under the PPP, the maximum loan amount for First Draw PPP Loans is the lesser of $10 million or an amount that you will calculate using a payroll-based formula authorized by the Act, PPP loans approved in 2020 used 2019 or the 1-year before the date on which the loan is made to calculate payroll costs for purposes of calculating the maximum loan amount. Borrowers who apply for PPP loans 2021 and who are not self-employed (including sole proprietorships and independent contractors) are also permitted to use the precise 1-year period before the date on which the loan is made to calculate payroll costs if they choose not to use 2019 or 2020. Since most borrowers will use 2019 or 2020 the rule text refers only to 2019 or 2020 for simplicity and readability.”
In order to calculate the maximum PPP loan amount that you can request, use the following steps.
Step 1: Aggregate payroll costs from the last 12 months
For any employees whose principal place of residence in the United States, add up the total payroll costs that you have had for the last twelve months.
Step 2: Subtract any compensation that exceeds $100,000 (per employee)
For each employee (or amounts paid to an independent contractor or sole proprietor), subtract any compensation that exceeds $100,000 over the last twelve months. The maximum PPP loan amount allowed is capped at a $100,000 annual salary per employee, including owners, supervisors, and managers.
Step 3: Calculate your business’s average monthly payroll costs
You’ve added up your total payroll costs for the last year. Now divide that number by 12 to get your average monthly payroll expenses.
Step 4: Multiply the average by 2.5 (NOTE: IN 2021, MULTIPLY THE AVERAGE BY 3.5 FOR BUSINESSES IN NAICS CATEGORY 72, FOR SECOND DRAW PPP LOANS ONLY)
You are allowed to take out 2.5 times your average monthly payroll costs in order to help your business make it through the next 8-24 weeks (from the time you receive your loan). Multiply your average monthly payroll expense amount from Step 3 by 2.5.
IMPORTANT NOTE FOR BUSINESSES IN NAICS CATEGORY 72: For second draw PPP loans only, you may multiply your average monthly payroll by 3.5 in 2021.
Step 5: Add any outstanding EIDL program loan balance
Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, Do not include the amount of any ‘‘advance’’ under an EIDL COVID-19 (because it does not have to be repaid).
Examples of PPP loan calculations for small businesses with and without EIDL loans
Here are some examples showing businesses with various payroll totals, employee compensation levels, and EIDL loan status:
- Example 1 – No employees make more than $100,000
- Annual payroll: $120,000
- Average monthly payroll: $10,000
- Multiply by 2.5 = $25,000
- Maximum loan amount is $25,000
- Example 2 – Some employees make more than $100,000
- Annual payroll: $1,500,000
- Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000
- Average monthly qualifying payroll: $100,000
- Multiply by 2.5 = $250,000
- Maximum loan amount is $250,000
- Example 3 – No employees make more than $100,000, outstanding EIDL loan of $10,000.
- Annual payroll: $120,000
- Average monthly payroll: $10,000
- Multiply by 2.5 = $25,000
- Add EIDL loan of $10,000 = $35,000
- Maximum loan amount is $35,000
- Example 4 – Some employees make more than $100,000, outstanding EIDL loan of $10,000
- Annual payroll: $1,500,000
- Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000
- Average monthly qualifying payroll: $100,000
- Multiply by 2.5 = $250,000
- Add EIDL loan of $10,000 = $260,000
- Maximum loan amount is $260,000
REMEMBER: For second draw PPP loans only, you may multiply your average monthly payroll by 3.5 in 2021 IF YOUR BUSINESS FALLS INTO NAICS CODE 72. Go deeper: how do I find my NAICS code?
What’s the minimum amount I need to make to qualify for a PPP loan if I’m an independent contractor or sole proprietor with no employees?
You need to have reported a minimum of $4800 in revenue in order to qualify for a PPP loan for 2021. The SBA has set a minimum loan amount of $1000. Since the SBA takes your evidence of your average (gross or net, by your choice, if you are a “Schedule C” filer) monthly payroll (or earnings if you’re an independent contractor, sole proprietor, or eligible self-employed individual and pay yourself), and multiplies that number by 2.5 to get your maximum loan amount, $4800 (annual profit) ÷12 (months) X 2.5 = $1000. (Remember that you can multiply your average monthly payroll by 3.5 if you fall into NAICS category 72).
Go deeper: 1040 Schedule C tips for independent contractors, sole proprietors, and self-employed
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