The Paycheck Protection Program was launched to facilitate businesses amid the Coronavirus pandemic, mainly to help them bounce back from the financial repercussion faced during this period. This loan program effectively covered employee salaries and some other important expenses and was meant to support businesses by offering them an alternate and sustainable way to raise important funds that kept their business afloat.

PPP loans received high recognition from the business owners as it allowed a forgivable loan of up to a maximum of $10 million.

This article will essentially focus on the exact way in which you can calculate the loan amount you are entitled to as per this program. Calculating the loan amount has been a point of contention among many businesses since most don’t understand it leading to ambiguity, so if you are among those, this is going to be an immensely important read for you.

Methods Of Calculating PPP Loan Amount

Technically, there are two methods by which PPP loan calculation can be conducted. These are:

If you’re the sole proprietor of your business with no employees working for you, the calculation of the PPP loan amount will be very much dependent upon your business’s net profit. However, in the case of partnerships, each member of the partnership and employees’ average monthly payroll will be considered for loan amount calculation.

In both ways, the average monthly payroll is the main component required to calculate the PPP loan amount. You have to determine your employees’ salaries and your salary as an owner depending upon whether your business is taxed as an LLC (Limited Liability Company) or a corporation.

It is worth noting that in any case, if you’re paying yourself through owner draws; you’re not applicable for a PPP loan. This is because PPP loans heavily depend upon the payroll taxes.

PPP loan amount calculation would require you first to calculate the average monthly payroll. You can do this easily by leveraging your W2 Employees’ (Regular employees with salaries and employee benefits) annual salaries and calculating their average monthly salaries.

One thing to remember here is that if any employee has a salary above $100,000. They have to be capped at this amount because you can’t write any amount bigger than $100,000 as salary in the PPP loan application.

Slight leverage here is that you can record any expenses incurred on entities like employees’ health insurance, paid leaves, retirement contributions, etc., regardless of whether or not the amount goes above $100,000.

HowTo Calculate Average Monthly Payroll

For Businesses Existing Prior 2019

To calculate the average monthly Payroll of a business existing before 2019, you have to divide the annual payroll paid from 2019 by 12.

Average Monthly Payroll = Annual Payroll (2019) ÷ 12 (Months In A Year)

For Businesses Existing Prior July 2019

Suppose your business existed before July 2019. The same formula will be applied to calculate the average monthly Payroll.

Average Monthly Payroll = Annual Payroll (2019) ÷ 12 (Months In A Year)

For Businesses Formed Post June 30, 2019

For businesses formed post-June 30, 2019, Calculation of average monthly Payroll could be done using either of these two Approaches.

You can divide the annual payroll by 12 regardless of whenever you started to earn income.

Average Monthly Payroll = Annual Payroll (2019) ÷ 12 (Months In A Year)

OR

You can also divide the sum of two months (January 1, 2020, to February 29, 2020) by 2

Average Monthly Payroll = Sum of Two Months (January 1, 2020, to February 29, 2020)÷ 2

You can go through your annual payroll reports to find the average monthly payroll. You can also hire online payroll services providers like Overdraw to handle your payroll services and provide you an extensive report regarding the “PPP” to help you file your loan application.

Calculation Of PPP For Different Bodies

Here are the examples of PPP loan amount calculations for all five entities.

PPP Loan CalculationFor1099 Contractors (Independent Contractors)

When calculating the PPP loan amount as an independent contractor, you’ll have to consider the sum of all 1099-MISC forms you received as your income for the year 2019. You’ll find the income in your Schedule C if you’ve filed your tax returns for the year 2019. However, if you haven’t filed your tax returns yet, there’s nothing to worry about. You can leverage your 1099-MISC forms and add their amount to get your annual income and calculate average monthly income.

In case you’ve started to receive income before July 2019, you can divide this amount by 12 regardless of whether you’ve worked or not in the other half of the year.

Average Monthly Income= Annual Income (2019) ÷ 12 (Months In A Year)

For those who started to receive income after June 2019, you can either use the same formula to calculate average income from the formula mentioned above or leverage the sum of income made in January and February 2020 and divide it by 2.

Average Monthly Income= Sum of Two Months (January 1, 2020, to February 29, 2020)÷ 2

To calculate the PPP loan amount for 1099 contractors, you’ll have to multiply the Average Monthly Payroll by 2.5.

PPP Loan Amount = Average Monthly Income x 2.5

Example

To calculate the PPP loan amount as an independent contractor, we’ll take an example of a freelance writer. Let’s say you worked on 30 content writing projects in the year 2019 and haven’t filed your tax returns yet. First, you’ll calculate the sum of all 1099-MISC forms. Let us assume the sum is $30,000.

Annual Income (2019) = $30,000

Since you’ve received the projects all year long, we’ll divide this amount by 12 (months in a year) to calculate the average monthly payroll.

$30,000 ÷ 12= $2,500 (Average Monthly Income)

Now that you’ve got the average monthly payroll, you can easily calculate your PPP loan amount by multiplying this amount by 2.5. Here’s how you can do that.

$2,500 x 2.5 = $6,250

$6,250 here is your PPP loan amount. You can enter this number in the “loan request” section in your PPP loan application. Note that you must add the amount of EIDL Loan in the form as well if granted.

PPP Loan Calculation For Sole Proprietors

When calculating the PPP loan amount as a sole proprietor, your income in the year 2019 shall be taken to calculate the average monthly payroll. Since your net profit in 2019 is directly linked with your self-employment tax, you can only include that amount in your PPP payroll calculation. Any other amount you draw out of your business shall not be considered for calculation, even if you used it as your regular income.

You can find your net profit for 2019 in either your income statement or Schedule C.Here’s the formula. You can divide this value by 12 to calculate the average monthly payroll.

Average Monthly Payroll = Annual Income (2019) ÷ 12 (Months In A Year)

However, suppose your business started operating post in June 2019. In that case, you’ll have to file a Schedule C for January and February 2020 and attach the bank statement for both months in the application for authentication. The Net Profit of these two months will then be divided by 2 to get the average monthly payroll.

Average Monthly Payroll = Sum of Two Months (January 1, 2020, to February 29, 2020)÷ 2

Note that the single owner LLC’s are considered here as sole proprietors as well. Since with the sole proprietor’s case, you can only apply on behalf of single owners; you can’t include your spouse in the application unless they are a W2 employee in your company. Here’s an example.

Example

Let’s say your business started operations post-June, 2019 and started earning profit in early 2020 without any W2 employees. You’ll file a Schedule C for January and February 2020. Let’s say the profit for both months sums up at $40,000 (no number of member draws are included). You’ll divide this amount by 2 to get your average monthly payroll.

$40,000 ÷ 2 = $20,000 (Average Monthly Payroll)

Now that you’ve got the average monthly payroll, you can quickly calculate your PPP loan amount by multiplying this amount by 2.5.

$20,000 x 2.5 =$50,000

$50,000 here is the amount that you can request as PPP loan.

Things To remember

• The maximum amount you can include in the application is $100,000. If your net profit is more than that, you’ll have to include $100,000 as of the net profit.
• You can’t include member draws in the calculation, even if they’re your regular self-employment wages.
• You can’t include any 1099 contractor in the application as they’ll apply on their own.
• If your business suffered a loss before the Covid19 Pandemic and shows a negative net profit, we’d recommend applying for an EIDL loan. This is because the loss will represent that Covid19 didn’t have negative effects on your business.

PPP Loan Calculation For Partnerships

Like the sole proprietorship, you can’t include member draws in calculating average monthly payroll even if it is for your regular income. The average monthly payroll of each member is linked with the net profit in 2019 as well.By looking at each partner’s Form 1065, you can quickly determine their net income for the year, and from that, their average monthly payroll.

However, if you haven’t filed your 2019 tax returns yet, we’d recommend you to consult your tax preparers to check any tax liabilities and finalize each partner’s Schedule K-1s.

The amount in the self-employment income in each partner’s Schedule K-1s will determine their salary. However, it is worth noting that each partner should be capped at $100,000 if their salary goes above that. This amount will then be multiplied by 0.9235 to remove the self-employment tax paid by each individual.

For example, if a partner is capped at $100,000. We’ll multiply to $100,000 by 0.9235. This gives us $92,350. The remaining $7,650 will be counted out as the self-employment tax. Now you can calculate the average monthly payroll for each member easily. Here’s how to do that.

Suppose you have W2 employees working for your company. You can include their salaries and expenses like payroll taxes, contributions to Health insurance, paid leaves, retirement contributions and vacation pays, etc., in the application. Note that each employee is capped at $100,000, and you cannot include remote workers with primary residence outside the USA. You can calculate the average monthly payroll by this formula.

Average Monthly Payroll = Annual Payroll (2019) ÷ 12 (Months In A Year)

However, suppose your business started to earn income post in June 2019. In that case, you can also divide the sum of your income in January and February 2020 by 2, depending upon which method is feasible for you.

Average Monthly Payroll = Sum of Two Months (January 1, 2020, to February 29, 2020)÷ 2

Here’s an example.

Example

As an example, we can say that you and your partner started a business back in 2017. To calculate the average monthly payroll, you first have to check each partner’s income from Schedule K-1s. Suppose that each partner’s income is $150,000 and $104,000 respectively, you’ll have to cap each partner at $100,000, which will give us a total of $200,000.

Now, add this amount to the sum of your employees’ salary and other expenses. Lets’ say that the expenses all together were $130,000; you’ll get a total of $330,000. Now divide this amount by 12 to calculate the average monthly payroll.

$330,000 ÷ 12 = $27,500 (Average Monthly Payroll)

Now, multiply this amount by 2.5 to calculate the PPP loan amount.

$27,500 x 2.5 = $68,750

$68,750 here is the amount that you can request in your PPP loan application.

Now add the number of employees each month of the year and divide it by 12 to find the “Average number of employees.”

Things To Remember

• You can leverage Schedule F instead of Schedule C to calculate if your occupation is related to farming.
• You can’t include rental expenses and utility payments as a part of the calculation.
• You can’t include member draws in the calculation, even if they’re your regular self-employment wages.
• The maximum amount you can include in the application is $100,000 for each member.
• If your business suffered a loss before the Covid19 Pandemic and shows a negative net profit, we’d recommend applying for an EIDL loan. This is because the loss will represent that Covid19 didn’t have negative effects on your business.
• You can’t include any independent contractors in the application.

PPP Loan Calculation For An S Corporation

Since the S corporations usually pass income to the shareholders directly to avoid payroll taxations, you won’t be eligible to claim any salary through PPP loans unless you pay yourself through a payroll service. Also, here you are not allowed to include a salary higher than $100,000. If it goes higher than that, you have to cap it at a maximum of $100,000. Note that you can’t add shareholder’s distributions in the calculation as they are not considered salaries. It is also worth noting that expenses like health insurance premiums, payroll taxes, and retirement contributions, etc., can be added further in the calculations.

You can calculate your monthly average income by dividing your net profit from the year 2019 by 12.

Average Monthly Payroll = Annual Payroll (2019) ÷ 12 (Months In A Year)

However, suppose your corporation started its operations post in June 2019. Here, you can use the formula mentioned above by replacing net income with 1099 income, or you can divide the sum of your income in January and February 2020 by 2.

Average Monthly Payroll = Sum of Two Months (January 1, 2020, to February 29, 2020)÷ 2

You can decide which method works fine for you. Here’s an example of this calculation.

Example

For example, we’d assume that you own an S corporation where you are a single owner. As your business grew, you hired four more employees to look after the operations.

Let’s say that your annual salary is $105,000. You’ll cap it at $100,000 and add the payroll taxes and other expenses, including your employees’ salaries, which is $75,000. Add both of these amounts, and you’ll get a total of $175,000. Now, to calculate the average monthly payroll, we’ll divide this amount by 12.

$175,000 ÷ 12 = $14,583 (Average Monthly Payroll)

Now multiply this amount by 2.5 to calculate the PPP loan amount you can receive.

$14,583 x 2.5 = $36,457

The PPP loan amount that you can receive here is $36,457.

Now add the number of employees each month of the year and divide it by 12 to find the “Average number of employees.”

Things To Remember

• You can’t include rental expenses and utility payments as a part of the calculation.
• You can only add the salaries paid through payroll services, and no amount paid out as shareholder distribution should be added to the calculation.
• If you didn’t pay yourself and your employees the salary through payroll services, you can’t apply for the PPP loan. Instead, we’d recommend you to apply for EIDL Loans.

PPP Loan Calculation For C Corporations

The entire idea of PPP loans revolves around the payroll taxes. Therefore, as a C corporation owner, you’re only eligible for a PPP loan if you’re paying out your income through payroll services. Any amount taken out as member draws shall not be included in the calculation. It is also important to know that both owners and the business are taxed separately in a C corporation, creating a double taxation situation. Like the S corporations, distributions to the shareholders in any form such as dividends shall not be considered salaries.

If you’re paying out your income through payroll services, you can add your salary to the PPP loan calculation. However, you are not allowed to include a salary higher than $100,000. If it goes higher than that, you have to cap it at $100,000. Expenses like health insurance premiums, vacation pays, payroll taxes and retirement contributions, etc., can be added further in the calculations. You can calculate your monthly average income by dividing your net profit from the year 2019 by 12 regardless of whether you worked the whole year or not.

Average Monthly Payroll = Annual Payroll (2019) ÷ 12 (Months In A Year)

However, suppose your corporation started its operations post in June 2019. In that case, you can either use the formula mentioned above by replacing net income with 1099 income, or you can divide the sum of your income in January and February 2020 by 2.

Average Monthly Payroll = Sum of Two Months (January 1, 2020, to February 29, 2020)÷ 2

You can decide whichever method is more feasible for you. Here’s an example.

Example

For example, we’d take you as the sole owner of a C corporation, and it started operations post-June, 2019. We’ll assume that you’ve already been issued $75,000 as an EDIL loan and received $7000 from it as an advance.You’ll take the sum of income earned in January and February of the year 2020, which we’ll assume is $90,000. Here’s how you’ll calculate the average monthly payroll.

$90,000 ÷ 2 = $45,000 (Average Monthly Payroll)

Now multiply this amount by 2.5.

$45,000x 2.5 = $112,500

Add the amount you’ve been issued as an EIDL loan and subtract the amount you’ve already received as an advance.

                                                           $45,000 + $75,000 – $7000 = $113,000

Your final loan request here is $113,000.

Things To Remember

• You can’t include rental expenses and utility payments as a part of the calculation.
• You can only add the salaries paid through payroll services, and no amount paid out as shareholder distribution should be added to the calculation.
• If you didn’t pay yourself the salary through payroll services, you can’t apply for the PPP loan. Instead, we’d recommend you to apply for EIDL Loans.

PPP Calculation For Seasonal Businesses

Seasonal businesses do not conduct business activities throughout the year but only for certain periods. When calculating the average monthly payroll for such businesses, there’s fair flexibility to choose periods. If you own such a business, you can leverage any time between 12 weeks from February 15, 12 weeks from March 1, and any 12-weeks time ranging from May 1 till September 15 of 2019. Here’s an example of PPP loan amount calculation for seasonal businesses.

Example

Suppose that your income from the 12 weeks is $45,000. You’ll divide this amount by 3 to get the average monthly payroll.

$45,000 ÷ 3 = $15,000 (Average Monthly Payroll)

Now multiply this amount by 2.5 to get the PPP loan amount calculation.

$15,000 x 2.5 = $37,500

$37,500 here is your expected PPP loan amount.

Wrapping It Up

Leverage the techniques mentioned above to calculate your expected PPP loan amount. It is also worth noting that once you receive the loan, it is essential to spend at least 60% on payrolls while 40% for expenses like rent and utilities to get it forgiven. It is important for those who own more than one business to get their bookkeeping done separately for all businesses. This is to ensure that you do not face any difficulties while applying for the PPP loan.