How to Calculate Average Monthly Payroll for PPP Loans

Update Feb. 22, 2021: From Feb. 24 to March 9, only businesses with 20 or fewer employees will be allowed to apply for Paycheck Protection Program loans. This move from the Biden administration is an attempt to provide access to businesses that previously struggled to obtain PPP loans. Additionally, some of the eligibility restrictions on who can apply for a PPP loan have been lifted. Read more here.


As part of a larger relief package, Congress has approved $284.5 billion in new Paycheck Protection Program funding. The types of businesses and industries that are eligible for PPP loans have been expanded under the new bill. Additionally, businesses that can demonstrate at least 25% reduction in gross receipts year over year and meet other requirements may be eligible for a second PPP loan.

How to Calculate Average Monthly Payroll for PPP

The average monthly payroll calculation is the most important part of the PPP loan application because it not only determines the size of the loan you can apply for, but it’s also the easiest area to make a mistake. We know this because Fundera has reviewed thousands of PPP applications in the past few days while discussing the final rule published by the SBA and the application itself with our bank partners.

Here is a step-by-step guide as to how to accurately calculate the average payroll number used for the PPP application to ensure that your application is submitted successfully the first time and you get your funding as quickly as possible.

Step 1: Pull the necessary documents.

Although calculating an average monthly payroll number to enter on your application may not be difficult, banks need to see the backup documentation and they will likely prioritize applications that are complete and clearly organized. Payroll registers, tax documents, and even bank statements can be used as documentation for your average monthly payroll calculation.

We recommend that you pull documents that are at the intersection of easiest for you and requested by the bank you’re applying to. Keep in mind that the SBA has confirmed that payroll records are sufficient documentation to establish average monthly payroll and we also recommend reading the FAQs published April 7 by the SBA and the Dept. of the Treasury.

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Payroll Documentation

Generally speaking, you’ll need to pull the annual payroll register by employee, either for 2019 or the last 12 months. The report should show gross wages, tips, vacation and benefits payments, and taxes. If you use a PEO or payroll processing software, many have special PPP reports they created specifically for this program. Additionally, while you’re in your payroll system, we recommend downloading a payroll statement for February as the SBA requires proof of payroll as of 2/15/2020.

Here’s our summary of the PEOs / payroll software providers that have provided tailored reports:

Payroll Provider Link to Special PPP report
ADP
Gusto
Justworks
Patriot Software
Paychex
Paycor
TriNet

Tax Documentation

In lieu of using payroll documents, some businesses have found it easier to use IRS forms 941, 944, 940 and for those self-employed forms 1040, 1099-MISC. Some banks have also been requesting these, especially Form 941. However, Form 941 has two key issues: 1. Many businesses will not have filed their Q1 2020 Form 941 if using the last 12 months period, and 2. if you use a PEO like ADP, Justworks, or TriNet, those organizations file Form 941 for the businesses they serve and those businesses will not have individual forms.

In summary, most businesses will be better served using payroll documentation.

Step 2: Calculate your gross average monthly payroll and loan amount.

Now that you have your documents you’ll need to use them to calculate your average monthly payroll for 2019 or the last 12 months which determines the loan amount you’ll be eligible for.  If you’re lucky enough to work with one of the PEOs that has a PPP-specific report then you’ll either have the answer or all the required inputs ready to. No matter what documents you’re using, we created a calculator with references that you can use to help you find your loan amount.

 

Fundera’s Free PPP Loan Calculator – Google Sheets | MS Excel

Common Mistakes to Avoid

  • Time period used: It is important to ensure you are using the correct timeframe when calculating average monthly payroll. Determine whether your business classifies as a regular, seasonal, or new business, and use the timeframe recommended on the PPP application under the “Instructions for Completing This Form” section to calculate your average monthly payroll. Most businesses will use calendar year 2019 but some will want to use the last 12 months—both are acceptable.
  • Excluded Expenses: The SBA explicitly excludes the following expenses from being factored into average monthly payroll:
    • Any compensation of an employee whose principal place of residence is outside of the United States.
    • The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary. More detail on this to follow.
    • 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 taxes, and income taxes required to be withheld from employees.
    • Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
  • Employees earning over $100,000: The SBA has issued explicit guidance to exclude any wages paid in excess of $100,000 on an annualized basis to any individual employee. This means that for employees earning greater than $100,000 on an annualized basis, only $100,000 annualized pay ($4,167 on a bi-weekly pay period) can be included in the calculation of monthly payroll.
  • The multiplier: The PPP loan is issued to cover ~10 weeks of monthly payroll expenses (hence the multiplier of 2.5x). Ensure you are correctly calculating (monthly payroll expense x 2.5) to arrive at your requested loan amount.
  • Supplemental Documentation: Our recommendation is to submit a brief summary of how you calculated average monthly payroll expense as a supplement to your application. This can be in the form of a simple table in Excel (such as the calculator we provide above). This document should help the bank processing your application to audit your calculation with the goal of expediting the time it takes to approve your loan.

Step 3: Fill in your application and submit.

You can apply through Fundera using our online application and we’ll submit your application to one of our partner banks.  If you have an established relationship with a bank that is accepting applications we encourage you to consider submitting your application through them.

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Meredith Wood
Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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