So You Got Your PPP Loan. What’s Next?

So You Got Your PPP Loan. What’s Next? You just got the email that your Paycheck Protection Program (PPP) loan was approved—congrats! Getting this far is a major accomplishment and warrants some serious celebration (homemade frosé anyone?).

But being approved for a loan is just the start of your PPP journey. Now, it’s time to strategize how you’ll use the funds to keep your business going while ensuring that you qualify for loan forgiveness. Below, we’ve put together a step-by-step guide for how to budget your loan funds and keep your expenses organized so your loan forgiveness application is a breeze.

A quick recap: To qualify for PPP loan forgiveness, you must use the funds within eight weeks after your initial loan disbursement and only for approved costs. At least 75% of the money needs to go towards payroll expenses. If you want the full loan forgiven, the other 25% can only be spent on:

• Business rent
• Business utility payments
• Interest on existing debt, including mortgage interest

You must also maintain an average number of full-time equivalent employees (FTEs) and their wages. If you reduce your employees’ wages more than 25% or reduce the amount of FTEs, then you may not qualify for total loan forgiveness.

So, to qualify for loan forgiveness, you need to know three numbers:

• 75% of your total loan amount (this is the portion that you’ll need to spend on payroll costs)
• Your average full-time equivalent employees (FTEs)
• Each employee’s average salary or wage

Step 1: Calculate how much of your loan you must spend on payroll costs.

The easiest math of all! Simply multiply your total loan amount by 75%, or 0.75.

For example, if you received a loan for $45,000, then $33,750 must be spent on payroll costs.

$45,000 x 0.75 = $33,750

Keep in mind that payroll costs don’t just include employee wages, commissions, and tips. They also include:

• Employee benefits like health care expenses and retirement contributions
• Employee vacation, sick, medical, or parental leave
• State and local taxes on employee wages

Also good to know: Spending more than 75% of the loan on payroll costs is a-okay. You can even spend the entire loan on payroll costs; 75% is just the minimum.

Step 2: Calculate your average FTEs.

The average number of full-time equivalent employees (FTEs) that you must maintain during the eight-week forgiveness window is based on your FTE count during one of these two baseline periods:

Baseline Period	Number of weeks in the period
February 15, 2019 to June 30, 2019	19 weeks
January 20, 2020 to February 29, 2020	6 weeks

If you’re a seasonal business, you also have the option of using the baseline period of March 1, 2019 to June 30, 2019.

Choose the period where you had the fewest number of FTEs. Just make sure you’re using the same period consistently throughout your calculations.

If your full-time employee situation is pretty straight forward (say you had three full-time employees during all of 2019), you can skip the complicated math. Your FTE is three.

But if you have a mixture of full- and part-time employees, or if your employees’ hours fluctuate, you’re going to do some number crunching.

You’ll need to calculate your FTEs for the baseline period. The easiest way to figure this out is to:

1. Add up your total regular employee hours for the baseline period (note: don’t include employee hours that are in excess of 40 hours per week).
2. Divide that total by the number of weeks in the period.
3. Divide that total by 40.

Note: There’s no official Small Business Administration (SBA) formula for this yet, but this is a simple calculation you can use while waiting for more exact guidance to be issued.

Let’s do an example:

You use the period of January 20, 2020 through February 29, 2020. You add up your total employee hours for that period, and you have 1,000 employee hours.

Next, you’ll divide those hours by the number of weeks in the period, which is six.

1,000 / 6 = 166.7 hours per week

Finally, divide the hours per week by 40.

166 / 40 = 4.17

You’ll need to maintain an average of 4.17 FTEs to be eligible for total loan forgiveness.

Employees who work 40 hours per week are generally considered 1 FTE. Employees who work 20 hours per week are 0.5 FTE.

And some good news: Did you reduce your employee headcount between February 15, 2020 and April 26, 2020? If you rehire all those employees (or an equivalent number) by June 30, 2020, then the rehired employees will be included in your FTE count for the eight-week forgiveness window.

Just make sure you run a payroll with any rehired employees during that eight-week window. Also, should you make an offer to rehire an employee for the same wages and number of hours as they previously worked and they reject it, they won’t count against your FTE average, and your forgiveness amount will not be reduced. More on this in Step 5.

Step 3: Calculate how much you must pay each employee.

To qualify for loan forgiveness, you cannot reduce the average wage of any employee by more than 25%. Employees who earned an annual salary of $100,000 cash compensation or more (that breaks down to $8,333.33 per month) in 2019 are exempt from this rule.

You’ll base your employees’ average salary on their gross wages in the first quarter of 2020. Your payroll history will show this.

Finding your employees’ average wage is pretty straightforward for salaried employees. But what about employees paid hourly (and whose hours fluctuate), or those paid through commission? This is where it’s helpful to understand how much you should pay each employee during the eight weeks of your loan term, based on their average weekly wage.

First, find your employee’s average weekly wage by:

1. Totaling the gross wages you paid the employee in Q1 2020 (again, your payroll history will have this information).
2. Divide that total by the number of weeks in the quarter.

For example, say you paid an employee $9,000 in the first quarter. There are 13 weeks in that quarter. The math would look like this:

$9,000 / 13 = $692

Your employee’s average weekly wage is $692.

Now, multiply their average weekly wage by eight, which is the number of weeks in the forgiveness window.

$692 x 8 = $5,536

Finally, find the minimum you must pay this employee during the forgiveness window. To do this, you’ll calculate 75% of their average wage.

$5,536 x 0.75 = $4,152

If you pay your employee less than $4,152 during the forgiveness window, then you may not qualify for full loan forgiveness.

More happy news: If by June 30, 2020, you restore an employee’s pay to the same wage that they earned as of February 15, 2020, then wage reductions made during the eight-week forgiveness period will not impact your loan forgiveness.

Step 4: Determine how you’ll allocate the funds.

All right, we just did a lot of math. But these numbers are crucial to planning how you’ll allocate your PPP funds for maximum loan forgiveness.

Now it’s time to make a plan. Don’t skip this step or decide to “just wing it.” You’ll be using this plan throughout the forgiveness window to make sure you’re on track.

In Step 1, you calculated the minimum amount you must spend on payroll costs, so you know how much you have to allocate towards payroll. Now it’s time to make all the numbers work together.

1. Project your eight-week FTEs.

Make a list of all your employees and the number of hours a week they currently work or will work after you rehire them in the 8-week forgiveness window. Once all your employees are listed, total your employees’ weekly hours and divide that number by 40. This is your FTE number. Is it the same or higher than the number you calculated in Step 2? If it’s lower than your average FTEs in Step 2, increase your employee hours.

2. Project how much you’ll pay each employee during the forgiveness period.

This will either be their regular salary or the number you calculated in Step 3. You can use their average pay or minimum pay. Then, add it all up to calculate your total employee wages for the forgiveness period.

3. Add your additional payroll costs. 

This includes things like your employees’ health insurance premiums, state and local taxes, etc.

4. Check and adjust your numbers.

If your projected costs are less than your minimum payroll allocation (aka your calculation from Step 1), you’ll need to increase your employees’ pay or hours (if they work hourly). If it’s more, you can reduce your employees’ pay (but not below their minimum pay!) or leave it and allocate more than 75% of the loan to payroll.

5. Allocate the remaining loan.

List all of your other approved expenses and project their cost during the forgiveness window. Since you’re only allowed to use 25% of the loan for these costs, you may need to use other sources of capital to cover the difference.

If you’re confident in a plan to restore your employee headcount or wages by June 30, 2020, you can take more liberties with your FTE number and employee pay. But you still need to spend 75% of the loan on payroll costs in order to have the whole thing forgiven.

Finances and Taxes

Step 5: Notify your employees and rehire them.

Now it’s time to let your employees know what’s happening. Start by telling them that you were approved for a PPP loan (yay!) and then explain any changes that affect them.

Besides changes to hours and pay, let them know if there are changes to their work duties. For example, if your employees can’t physically go to work due to government restrictions, will you ask them to perform tasks remotely? Will they be working on a special project instead of their regular duties? Be clear with them about your expectations.

Here’s what to include when you notify your employees:

• Changes to the number of hours they work
• Increases or decreases to their wages
• Changes to the work they perform
• The date these changes will take effect
• How long you anticipate these changes to last. It’s okay if you’re not 100% sure yourself, but do try to be honest with your employees about what you’re anticipating so they can also make plans.

For employees who have been laid off, you’ll also need to let them know:

• That you’re rehiring them and the date of their rehire
• That they’ll need to stop collecting unemployment insurance benefits

So what happens if an employee refuses to be rehired?

First, keep records of communication with the employee and their refusal. You’ll submit these later with your loan forgiveness application. You must offer to rehire the employee at the same hours and wages they originally had before being laid off.

If the SBA finds that you acted in good faith to rehire the employee and they refused, their hours won’t be included in your FTE averages, and you may still qualify for  loan forgiveness. The employee should note, though, that they will likely forfeit their right to unemployment benefits should they refuse the offer.

Immediately after your loan is disbursed

Step 6: Deposit or transfer funds to a separate bank account (optional but recommended).

While the SBA doesn’t require that you use a separate bank account to hold PPP loan funds, it’ll make tracking the use of the funds more manageable. It’ll also reduce the temptation to use PPP funds for other, non-approved expenses.

If you plan to keep detailed and meticulous records of how you use your PPP funds, you can skip this step. But if you know that your business finances tend to be a little… er… chaotic, then keeping the funds separate will make your loan forgiveness application less of a headache.

Step 7: Switch your payroll withdrawal account to the PPP bank account.

If you do decide to keep your PPP funds in a separate bank account, then you’ll also need to switch your payroll withdrawal account to your dedicated PPP account.

Step 8: Mark on your calendar when the covered period for loan forgiveness ends.

Your eight-week forgiveness window starts the date of your first loan disbursement. Typically, your first loan disbursement will happen no more than 10 days after your loan is approved.

The day your loan is disbursed is also the day that you should calculate when your forgiveness window ends. Count out eight weeks from the disbursement date and mark that on your calendar.

30 days after you receive your first loan disbursement

Step 9: Review your PPP-related expenses.

You’re halfway through your forgiveness window and it’s time to review your PPP expenses to make sure that you’re using the money appropriately.

Remember that plan you made way back when? Well, it’s time to whip that bad boy out. You’ll also need records of how you’ve spent the money so far and your payroll totals for the past month. Then, you’ll compare how you planned to spend your PPP funds to how you actually spent them.

Here’s what you want to ask yourself as you review your PPP spending so far:

• Have you spent at least 75% of your PPP funds on payroll costs?
• Maintained your FTE averages?
• Reduced any employee’s wages by more than 25%?
• How else have you spent the money? Are these PPP-approved expenses?
• How much of the PPP funds do you have left? How will you use these funds?
• Do you need to make adjustments in the next month to meet the 75% threshold?

Step 10: Make adjustments to your payroll expenses.

In a perfect world, you’ll review your PPP spending and discover that you’re right on track for total loan forgiveness. But in real life, random, unexpected stuff happens and you’ll probably need to adjust.

If you’re not on track for loan forgiveness, use your initial plan to calculate what adjustments you need to make. Remember, you only have four weeks left of your forgiveness window, so you’ll need to implement changes right away.

Step 11: Organize your PPP expense records.

Wait—can’t I do this after my eight weeks are up? You could, but getting a head start on organizing your expense records will make your loan forgiveness application a little easier.

Here’s what records you need:

• Payroll reports verifying the number of employees on payroll, their pay rates, and the total amount you paid them during the forgiveness window
• Verifying the number of employees on payroll, their pay rates, and the total amount you paid them during the baseline period
• Payroll tax filing for the IRS
• State income, payroll, and unemployment insurance filing
• Documents verifying how much you paid for employee benefits
• Records of payments for other PPP approved expenses, including receipts, invoices, and ACH drafts
• Statements for interest paid for debt obligations incurred before February 15, 2020

60 days after you receive your first loan disbursement

Step 12: See if you qualify for loan forgiveness.

It’s the moment of truth: Will all (or some) of your PPP loan be forgiven? To find out, you’ll need to check three things:

• Did you use at least 75% of the total loan on payroll costs? To figure this out, divide your total payroll costs during the forgiveness window by the total loan.
• Did you maintain your monthly average FTEs? Use the calculation method from Step 2 to calculate your FTE for the forgiveness window. Then compare your average FTE to your eight-week FTE.
• Did you pay each of your employees at least 75% of their average wage? Refer back to each employee’s minimum wage (you did this in Step 3) and then look at the total you paid them during the forgiveness window. Did you pay them more than their minimum wage?

If you answered yes to all these questions, then you’ll likely qualify for full loan forgiveness. If you answered no to one or more of these questions, then your loan forgiveness will be reduced. The reduction is proportional to:

• The percentage of funds you used for non-payroll costs over the 25% threshold. For example, if you used 35% of the funds for non-payroll costs, your loan forgiveness will be reduced by 10%.
• The percentage of employees you reduced from your FTE-based averages. For example, if your baseline FTE average is 4.17 and your FTE average during the forgiveness window is 3.75, that’s a 10% reduction. Your loan forgiveness will be reduced by 10%.
• The dollar amount that you reduced any employee’s salary. For example, if you should have paid an employee a minimum of $4,200 during the forgiveness window and you only paid them $3,500, your loan forgiveness will be reduced by $700.

Keep in mind that the loan forgiveness reduction is compounded—in other words, it’s based on all of these factors combined. Let’s say you received a $45,000 loan. Here’s how the loan forgiveness reduction would work using the examples above.

	Reduction percentage	Amount
Initial Loan		$45,000
Percentage used on payroll costs	-10%	-$ 4,500
Reduction of FTEs	-10%	-$ 4,500
Reduction of salary		– $  700
Forgivable total		$ 35,300
Non-forgivable amount		$  9,700

In the above example, you would need to pay back $9,700 of the loan.

Step 13: Organize your remaining PPP expense records.

It’s time to compile the rest of your PPP documents (see Step 11 for what you need). Aren’t you glad that you already got a head start?

Step 14: Complete your application for loan forgiveness.

After your eight-week forgiveness window is up, it’s time to submit your forgiveness application to your lender.

If you plan to restore your employee headcount or wages by June 30, 2020, wait until after you do this restoration to apply for loan forgiveness. Then include documentation, like your payroll report, that verifies you’ve completed this restoration.

After you submit your loan forgiveness application

Step 15: If you haven’t received a determination, check with your lender.

Your lender is required to give you a forgiveness determination within 60 days of receiving your loan forgiveness application. If you don’t hear from them after 60 days, reach out and request a determination.

Real talk time: This is a lot, we know. Unlike a traditional business loan, a PPP loan requires an extra level of planning, tracking, and organization. The payoff? If done right, a PPP loan can amount to “free” government money to keep your business afloat and your employees paid. But a bigger payoff means a longer to-do list.

Ultimately, we still think the extra work is worth it to give your business a few extra months of relief while keeping your awesome team paid.

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