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Gathering information to apply for the PPP loan. What date range for the information should you be using? These specifically come from the PPP loan application instructions. For most businesses, you’ll use the calendar year 2019 to get your information. If you’re a seasonal business, you may elect to use February 15th of 2019 through June 30th of 2019 as your period for collecting data. If your business was not active for the entire calendar year of 2019 you’d be considered a new business and can use the period of January 1st, 2020 to February 29th, 2020 as the period of time for all of the following calculations. First, let’s discuss payroll costs. This is not just the hourly wage that you pay somebody, so it’s worth taking a moment to dive into each of the areas that is considered to be a payroll cost under the law. Concerning the PPP loan first the normal that you would consider as gross wages. Those include salary, wages, commissions, or similar compensation. Also if you have cash tips that your employees take that are then added to their payroll for taxation, you can add those payments for vacation or medical leave are includable as well as dismissal or separation pay like severance.
Here’s where some of the odd things come in that you may not assume in payroll costs. Group health care benefits like insurance, retirement benefits paid by the employer, so this is not the employee deferral into their 401k or a different type of plan. It is the portion that is paid by the employer, like the employer match or profit-sharing contribution. Also, state or local taxes assessed on compensation like state unemployment are includable. You may not include federal payroll taxes in this calculation. Next up, so proprietor net earnings are also included. Basically, if you don’t have yourself on payroll because sole proprietors are not supposed to, you would use the net earnings from the schedule C on your last tax return from 2019 if you’ve not filed that tax return yet, you should mock up what your income and expenses were for the prior year because that’s what would be looked at. To compare those numbers for verification.
Next step, independent contractor or 1099 payments. Typically there’s a very solid line between payroll and independent contractor, but in the definition of the PPP law, it does not separate this out as clearly as it usually is. The independent contractor payments in the law. This is a quote, shows the sum of payments or any compensation to or from income to have a sole proprietor, independent contractor that is a wage commission. Income. Earnings from self-employment or similar compensation. I’ll talk about the $100,000 in just a moment, but it appears that they mean that any payments that would be subject to self-employment taxes should be included in the payroll costs. So that would also include things like guaranteed payments. It would include any, sole proprietor net earnings that are subject to self-employment. Now the sole proprietor, net earnings are not the same as draws. Draws are just taking money out of the checking account. You would want to use the difference between income and expenses, whether you look left it in the business or took it out as your net earnings. So partnerships would also include their payments as long as they’re subject to self-employment taxes as well.
What not to include. First off, if there’s compensation that’s paid to anyone whose principal place of what residents is outside of the US or I’m sorry, principal place of business is outside the U1S that should not be included. Also, any payments to one person of over $100,000 should not be included, so in the case of both the W2 or 1099 there’s an example there. If the payment is over $100,000 you may only include $100,000 for that person. And lastly, if you’re using the family’s first Coronavirus response act to get a credit for taxes on the sick and family leave, pay or credit on the wages from the sick family leave pay. Those should not be double dipped and included yet again.
Next on the application, you will see that they asked for the number of jobs. There is no clear instruction for this field on that application. Our best guess at this point is that we believe that it’s going to use the number of jobs like it is trying to use it for the forgiveness that we’ll talk about later. The basis of the law is on full-time equivalent jobs. It’s up to the employer to decide how many hours is a full-time equivalent. So for this calculation, I would expect that you would use how many people are actually working. You should not include independent contractors in this calculation.
Also don’t forget to include the owner of the business, especially if you’re a sole proprietor. They should be included in that calculation as their wages are included.
Next, use the same period that you would use to calculate the payroll costs. So we talked about using seasonal numbers or if you were a new business using a smaller period of time in 2020 I would suggest that you use the same period of time when you’re counting up the number of jobs. Lastly, because there are real no clear instructions on this field. We don’t believe this number is going to be an official number that used in any point later. I think it’s more of a guesstimation on the number of jobs because the focus of this bill is putting people back to work.
Donna Bordeaux, CPA with Calculated Moves
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