By Daniel Lewis,
/ Advertising Disclosure

The PPP has been one of the most popular relief programs and you need to know about its implications (if you took one out) for tax and accounting purposes.

While it is no longer available, people still need to understand its consequences and how to calculate future payroll costs. For instance, you need to know how to calculate it for filing tax returns for the year-end 2020. Otherwise, you get a fine from the IRS for incorrect tax filing.

The accounting methodology for calculating payroll costs for the PPP loan is actually very straightforward, though there are certain intricacies with the reporting requirements afterward. 

PPP Qualifying Criteria

In order to qualify for PPP loan forgiveness, you must basically be able to demonstrate that you could not otherwise have gotten by during the COVID disaster. There is nothing really ‘concrete’ about the guidelines.

Hedge funds and large businesses are exempt from PPP applications, as they have the capital reserves at hand to survive. There is one main requirement, governed under section 1102 of the CARES Act that brought the PPP into effect. This section stated that:

“Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

The other main criteria is that you accurately calculated the PPP amount you were entitled to, which is a function of how many employees you have, of what type, and how much they were paid.

If you did qualify for a PPP loan, you are required to keep documentation for a minimum of 6 years. The SBA is reviewing individual applications on a case-by-case basis. If it is determined that you do not qualify for PPP forgiveness, then you can appeal the decision.

The 3 Steps to Calculating Payroll Costs

The SBA has released a list of scenarios as to how to calculate payroll costs in relation to the PPP. However, it is still a little complicated as there are so many permutations and it is hard to figure out what the terms really mean.

Which is why we have broken it down into 4 simple steps for you to easily handle. However, you still have to understand that it depends on your legal entity type and your unique situation.

The relevant forms to keep in mind for the legal entity types include the schedule C for a Sole Proprietorship, a Schedule K for an LLC or Partnership, a Form 1099 for an independent contractor/freelancer, or a  Form 1120 for a C-Corp or S-Corp. If you are unfamiliar with these forms, then it is best to get familiar with them, as they are essential for tax purposes and basic accounting.

It is actually more straightforward than you might think, despite all of the jargon. Calculate your monthly payroll costs and multiply the amount by 2.5 to determine your maximum PPP loan eligibility. 

Because there are so many permutations, we have given the following example based on a partnership with employees (keep in mind that LLCs can choose to be taxed as an LLC, Partnership, or Sole Proprietorship).

Step 1 – Compute Yearly Total Payroll

The first step can be broken into a series of steps you need to take to compute your payroll costs.

  • Find the total net earnings per partner (Schedule K-1 i.e. IRS Form 1065) and multiply this by 0.9235.
  • Calculate the gross earnings of your employees. You can find this information on the IRS Form 941 in tandem with your payroll software. Include pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips.
  • Include 2019 employer contributions for employee health insurance, if any (IRS Form 1065).
  • Include 2019 employer contributions to employee retirement plans, if any (IRS Form 1065).
  • Include 2019 employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax (from state quarterly wage reporting forms), if any.

Step 2

Calculate the average monthly payroll costs (divide the amount from Step 1 by 12).

Step 3

Multiply the average monthly payroll costs from Step 2 by 2.5. This is your maximum PPP loan amount.


If you are a Sole Proprietorship without employees, then it becomes a whole lot easier to compute. You merely calculate your monthly net profit from your IRS Form 1040/Schedule C (not your earnings). Multiply the monthly profit by 2.5 and this is your total PPP eligibility. If you are a Sole Proprietorship with employees, then you need to do the same as the steps above, by calculating the wages and tips paid to all employees, including benefits.

S-Corp and C-Corps will follow a similar process to partnerships. Though there are some technical differences, you mainly just have to calculate the wages and employee contributions, (from the relevant forms), divide it by 12, and multiply it by 2.5 to get your total PPP eligibility.

Obviously, there is no need to include any partner earnings, there being no partners involved in this shareholder-owned legal entity.

Calculating Your PPP Loan by Entity Type

Many people struggle with all of the forms and legal entity types and IRS accounting terms. This is why we have broken it down for you with this helpful table below. Just scroll to the relevant legal entity type to see what you need to do.

Entity Type Description  Other Potential Payroll Costs To Include
1099 Contractor The sum of your income earned through freelance work, as reported on the 2019 1099-MISC forms you received (to a  max of $100,000). N/A
Sole Proprietorship Your 2019 net profit (max $100,000 per employee) as reported on your Schedule C. U.S. annual employee salaries, including wages, commissions, tips, and state and local payroll taxes.
LLC or Partnership Your 2019 self-employment earnings reported on your Schedule K-1 (line 14), then multiplied by 0.9235. You may include K-1 earnings as salary for each partner, up to $100,000. U.S. annual employee salaries, including wages, commissions, tips, and state and local payroll taxes. Each employee is capped at $100,000 annually.
S-Corp Your salary reported through a payroll service (not above $100,000). Your salary may only be considered if it was paid through payroll while remitting payroll tax. U.S. annual employee salaries, including wages, commissions, tips, and state and local payroll taxes.
C-Corp Your salary reported through a payroll service (max $100,000 per employee). As a C corp, your salary may only be considered if it was paid through payroll while remitting payroll tax. U.S. annual employee salaries, including wages, commissions, tips, and state and local payroll taxes.

The Paycheck Protection Program Explained

The PPP was implemented by the Small Business Administration (‘SBA’) in tandem with the Department of the Treasury. Funds were made available to those affected by the Corona Virus. Like all SBA loans, they were carried out by online lenders and large institutions.

Essentially, the PPP is a loan that may be completely forgiven once the funds were spent in the correct way – which means on the payroll. To be more precise, this means 60% on payroll and 40% on other considerations such as rent, utilities, and mortgages. Bear in mind that the PPP was essentially a rush program designed at a time when there was a medical and economic pandemic running rampant throughout the country.

The PPP loan forgiveness program is essentially free money, which is why it is hard to understand why small business owners are so negative about the economy in an environment where there are so many grants and small business loans available!

However, there is an issue with the PPP loan. The exact terms surrounding ‘forgiveness’ are simply not clear. On June 1st, 2020, the SBA and Department of the Treasury stated that:

“If SBA determines that a borrower is ineligible for the PPP loan, SBA will direct the lender to deny the loan forgiveness application. Further, if SBA determines that the borrower is ineligible for the loan amount or loan forgiveness amount claimed by the borrower, SBA will direct the lender to deny the loan forgiveness application in whole or in part, as appropriate. SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.”

So, many business owners could be on thin ice when it comes to PPPP forgiveness, especially if they have been lacking in the accounting department. It was mainly used as a measure to keep business owners running amidst COVID. Now that the economy is starting to run strong again, the SBA seems to be tightening up its conditions.

Essential Points to Keep in Mind

There were a number of PPP elements that were (at the time) overlooked by many people who applied for the loan at the time of availability. Some of these points include:

  1. While your rent and utility payments can be covered by this loan and help qualify you for loan forgiveness, they are not a part of the initial calculation. This could harm you if the SBA does a revision and you have miscalculated your PPP amount.
  2. If your net profit for 2019 is above $100,000, the maximum amount you can include for yourself is $100,000. This would give you an Average Monthly Payroll of $8,333 (provided you have no W2 employees on your payroll).
  3. If your net profit for 2019 was negative, meaning that you took a loss in your business last year, PPP will not be a great option for you. If your business took a loss prior to COVID-19, you will not have been considered to have a salary, and it will be more difficult for you to represent that COVID-19 has had a negative impact on your business.
  4. The Economic Injury Disaster Loan (“EIDL”) was a viable alternative to the PPP. This was a grant available up to $10,000. COVID 19 EIDL advances were also available, as were many other commercial grant programs. In fact, the Finimpact Squad dedicated an entire article to the huge list of resources that were available during COVID and were surprised that so few business owners knew of their available options.
  5. As an S-Corp, shareholder distributions do not count towards your salary. Your only way to remit payroll taxes is through payroll itself; you don’t pay any payroll taxes or self-employment taxes on your distributions.

PPP Caveats – Was It Really Worth It?

Believe it or not, there are many reasons why you may not wish to take out a PPP loan (when it was available). First off (as mentioned above), is that most businesses will not actually qualify for forgiveness! This was something of a slight of hand perpetuated by the SBA. Still, a loan at 1% is extremely competitive, though not quite the free offering as was advertised.

The second consideration is that you are likely to lose many employees anyway, for a myriad of different reasons. The entire purpose of PPP is to pay employees so they can come back to work when the virus has ended. But many simply do not wish to go back to work, as they are afraid of catching the virus or because they can simply make more through Pandemic Unemployment Assistance, which is another method of relief.

Finally, there were many other options available to the small business owner when the PPP program was in operation. The CARES Act also created the Employee Payroll Retention Tax Credit. This allowed up to $5,000 per employee as a tax credit against Social Security wages. An update to the Act (“PPP Flexibility Act”) allowed the PPP and Employee Payroll Retention Tax credit to both be permissible simultaneously.

Other than this, you might not wish to take out the PPP loan if you are not confident that your business will survive or because you simply have no real need for the funds. Either way, the question is a little redundant right now, given that the PPP program is no longer in operation.

What Qualified as a Payroll Cost for the PPP?

A payroll cost is essentially what a business owner pays to employees and associated benefits. The CARES Act was quite generous in its scope in terms of what could qualify for a payroll cost. It includes:

  1. Salaries, tips, and commissions.
  2. State and local employer payroll taxes.
  3. Health insurance premiums.
  4. Employee retirement plans.
  5. Net profit (for the self-employed only).

Again, the main qualification is that you really need the loan itself and are not just “playing the system”. You have to be able to justify the expense. According to Treasury.Gov:

“Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith”

What Is “Loan Forgiveness”?

Loan forgiveness is as it sounds. The entire amount of the loan was forgiven. Many people were confused about the process. It could have been called a disaster fund or similar that was allocated to applicants to help them through the crisis. Instead, it was marketed as a loan that was to be forgiven in the future, which was kind of a strange way to implement the whole thing.

The criteria for loan forgiveness is that essentially the business really needs the money in order to maintain employees. The loan is forgiven as small business owners can pay for essential employees. This helps both employees and business owners, which can keep the engine of the economy running. The SBA is reviewing certain applications and may decide that certain businesses do not meet minimum eligibility criteria.

The Easiest Way to Get Payroll Information

The most direct way to get payroll information is through a high-quality payment processor such as Intuit QuickBooks or FreshBooks. These applications help you to swiftly calculate all costs per employee and are often integrated with accounting and/or timekeeping software.

The result is that you can get payroll information at the click of a button, quite easily.  You can observe and update IRS forms through these platforms, and some systems will even automatically file taxes and other key forms automatically for you. Other advantages include:

  • Capability to work out payroll calculations/deductions quicker.
  • Capability to generate accurate payslips.
  • Capability to calculate bonuses, expenses, holiday pay, etc with minimum effort.
  • Capability to send returns to HMRC and print P45, P60, and other forms for employees.
  • Capability to automate certain tasks, including year-end reporting.
  • Reduces the complexity of compliance.
  • Removes the need to understand complex tax legislation.

While you can calculate PPP and other payroll costs manually, it makes a lot more sense to invest in a high-quality accounting or payroll software that does it for you. Many of them integrated PPP compliant applications to assist in easy payroll calculation specifically for this exact loan.


Calculating payroll costs for the PPP is a lot easier than it sounds at the outset. You simply calculate all monthly wages (and contribution) for employees, divide by 12, and multiply by 2.5 to get your total PPP Payroll eligibility. 

For a Sole Proprietorship without employees, leave out the employees, and just calculate your yearly net profit, divide by 12, and multiply by 2.5 for PPP payroll eligibility. The process is similar for all legal entity types. Consult the table above for more details.

The PPP process is now over. But you can still feel free to contact a reputable online lender for a swift online loan. We recommend OnDeck, Kabbage, PayPal LoanBuilder, Lending Club, and SmartBiz as the best means of online finance for small businesses.


Are There Viable Alternatives to the PPP?

The PPP program is now over. Pandemic Employment Assistance and the Employee Payroll Tax Retention program. Online lenders provide a variety of term loans, business lines of credit, invoice factoring, and even SBA (7)(a) processing. There was also a huge number of grant programs available to the PPP at the time, which were not taken up by as many business owners as was potentially possible.

Can’t I Just Use an Online PPP Loan Calculator?

Yes, there are many online PPP calculators. But they do not really cut down on the time to calculate payroll all that much. You simply need to calculate your total net wages of employees (or profit) for the self-employed with no employees, divide by 12, and multiply by 2.5. It is actually an easy calculation once you have the yearly totals. You still need to calculate these figures yourself with the right forms or using the right payroll platform.

What Are the Essential Requirements for the PPP?

In essence, you need to have a need for the PPP. Aside from this, the most important point is that you spend at least 60% on the payroll. The other 40% must be spent on rent, mortgage, utilities, and the like. To accurately keep track of all of these funds, it is best to have high-quality payroll and or/accounting software. All of your records will be stored online for easy retrieval. In this way, you can show the documents so you will qualify for loan forgiveness in the future. It’s also good to keep in mind that entrepreneurs with two businesses are having difficulty in obtaining loan forgiveness, as it can sometimes be hard to separate the finances of the two companies.

What Happens if I Applied for a Smaller PPP Amount That I Could Have?

Once the loan documents are signed off, there is nothing you can do. You could have returned the funds before May the 18th, but this option is no longer available. You will receive the funds and cannot apply for another PPP loan. What you can do is contact your lender for further details on how to return the loan. It is likely going to be far more hassle to try to return the loans in full and get another one. What you can do is get additional funding outside of the PPP to make up the shortfall.

What Are the Required Documents for Net Profit if You Are Self-Employed?

Self-employed individuals without any employees and file IRS Form 1040-C will need to calculate their payroll expenses differently. Use net profit for the business from 2019 as reported on line 31 of the Schedule C. You can use up to $100,000 of net profit, divided by 12 to get the average monthly net profit. Then multiply that number by 2.5 to get the maximum loan amount.

If you haven’t filed your 2019 taxes yet, that is OK. You will need to have them prepared though to submit your application.

How Do I Accurately Document PPP Funds?

Many people have a separate bank account for PPP funds. This is definitely a good idea, though it might be a little overkill. All you have to do is develop a system where you can account for the funds. There are many means to do this. Once you are recording and tracking your expenditure, then you will be covered. You can simply find the documents as needed once the system is in place. As usual, good payroll processing and accounting software will make your job a whole lot easier, especially when it comes to things like employee expense tracking.

Can I Still Apply for a PPP Loan?

No, the deadline for the PPP loan was the 8th of August 2020. This was after a number of PPP extensions. Which was a great move as it increased liquidity for business owners at a time when people did not understand all of the terminology associated with such programs.

Daniel Lewis
Daniel Lewis
Daniel Lewis is an MBA accredited investment professional who wants to assist small business owners to gain access to finance. After going through many channels for funding, Lewis has found that getting the first loan right is vitally important for future success.

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