Payroll Costs That Qualify for SBA Paycheck Protection Program

April 9, 2020

Any business that was in operation before Feb. 15, 2020 with 500 or less employees OR $12 million or less in gross revenue for title companies ($41.5 million for title underwriters) are eligible to apply for financial assistance provided through the Small Business Administration’s new Paycheck Protection Program (PPP). The CARES Act provided nearly $350 billion for forgivable loans to help small businesses with payroll costs and avoid layoffs during the COVID-19 pandemic.

This program is available to sole proprietors, independent contractors, self-employed individuals and any type of business structures. For more on the SBA PPP, check out this webinar or go to ALTA’s website.

Here’s a primer on the payroll costs that qualify:

  • Compensation to employees (whose principal place of residence is the United States) in the form of:
    • salary, wages, commissions, cash tips
    • payment for vacation, parental, family, medical, or sick leave;
    • Payment for group health insurance coverage
    • Payments for retirement benefits (401k match, pensions)
    • Payment of state and local taxes assessed on compensation
  • For owners: self-employment or similar compensation

Costs you can’t include:

  • Any compensation for non-U.S. based employees: Some title companies may utilize staff that’s overseas, such as an outsourced title data provider. This can’t be included in the calculation.
  • The compensation of an individual employee in excess of an annual salary of $100,000: If you have a couple of very highly compensated individuals on staff, you can only apply for the cap of $100,000.
  • Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act
  • Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127)
  • Payments to independent contractors: These types of workers must apply for their own loan

Q&A Regarding Payroll Expenses

  • What expenses can be considered utilities? The term “covered utility payment” means payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
  • Can PPP loan money be applied retroactively to payroll costs incurred prior to loan origination date? Example, money drawn from line of credit to cover payroll before loan origination date. Yes, however, your forgiveness is based only on the amount of payroll costs you spend after the loan origination date.
  • Can sales commissions be included in the payroll cost total? Payroll costs that can be covered by a PPP includes all cash compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips).
  • If a company did not layoff any employees, but lost some staff because they left on their own volition, would the company still be entitled to forgiveness or would they need to show a concerted effort was made to hire a replacement? The CARES Act and SBA rule condition forgiveness on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease. To determine its baseline headcounts, an employer can use either (a) the average number of full-time equivalents (FTEs) it employed from January 1, 2020 to February 29, 2020, or (b) the average number of FTEs it employed from February 15, 2019 to June 30, 2019. Whichever average the employer chooses, it must maintain that number for at least the eight weeks after receiving a loan to be eligible for the maximum forgiveness. The Small Business Administrator and the Secretary of the Treasury may prescribe regulations granting de minimis exemptions from the requirements for forgiveness.
  • If a company hires part-time staff in May/June can the loan funds still be used for their payroll expense even though they were not considered in the head count at the time of application? You do not need to use the funds for specific employees’ payroll but just general payroll expense you incur based on your current workforce. For determining forgiveness, you compare the average level of FTE staffing before Feb 15 with the level at the time of the request for forgiveness. Adding part time staff may result in a partial FTE based on the number of hours they work.
  • In addition to a paycheck, if you take draws in supplement to a paycheck, is that acceptable to include as "payroll" to an owner? Maybe, but talk your bank. Sole proprietors are eligible to include their income in the payroll costs. This typically based on either their paid salary or a proportional amount of the income reported on Schedule C in your personal tax return. No matter what, the salary/draw you include in the loan calculation is capped at an equivalent of $100,000 per annum.
  • As it relates to payroll expenses for owners, are guaranteed payments to managing owners of partnerships viewed differently than owner W-2 income? Managing owners are eligible to have their income included. It can be in the form of W-2 income or a proportional amount of the income reported on Schedule C in your personal tax return. No matter what, the salary/draw you include in the loan calculation is capped at an equivalent of $100,000 per annum. Payments to passive investors, dividends, etc. are not includable in payroll costs for purpose of loan eligibility.
  • Can employee pay increase? Annual hourly pay increases usually happen at the end of the first quarter. Would it be permissible to still increase hourly pay rates or should increases be delayed? Nothing the PPP prevents you from hiring more employees or increasing pay. IF you decrease FTE count or reduce pay you may not be eligible for the full level of forgiveness.
  • What if we are leased employees, such as a PEO (Professional Employment Organization)? You only include amounts in payrolls costs for employees paid via a W-2. Salaries for contractors you retained that are paid by a PEO or via 1099 are not eligible for inclusion in determining loan amount.
  • Can IRA employer contributions be added to the $100,000 cap for an employee for figuring payroll costs, or is it $100,000 total including benefits (including health care, etc.) The $100,000 cap is only on cash income via salary, tips, bonus or commission. Other forms of payment health insurance costs, paid time off and retirement benefits can be included to determine loan eligibility but do not count against the $100,000 cap.
  • Can shareholder draws be used as payroll income? Only if they are involved in the day-to-day operation of the business such that they would be counted as a partial or full FTE.
  • I am single member LLC—solo law office—I don't specifically pay myself a "salary," would my income just be 1/12th of my net business income as reported on my taxes? Yes, but check with your bank. A sole proprietor is eligible for a PPP based on the income the report and pay taxes on a Schedule C in your personal tax return. However, if you are a business that is structured as a C or S corporation, you must use payroll to pay yourself, because the corporation is taxed separately from the individual. If you own a corporation and have not been paying yourself a salary through payroll, you will not have a salary covered through the PPP. This is because distributions or dividends from a corporation are not considered to be a salary or self-employment income.

Contact ALTA at 202-296-3671 or