What is the Paycheck Protection Program?

The Paycheck Protection Program (PPP) is a new loan program under the Small Business Association (SBA). It will allow certain businesses such as banks and current SBA lenders, in addition to new or nontraditional lenders approved by the Treasury Department, to provide PPP loans on behalf of the SBA to small businesses affected by COVID-19. These loans can be used for:

  • Payroll costs1,2 
  • Interest on debt, mainly mortgages
  • Rent
  • Utilities
  • Group health insurance premiums

The loans will be available to all businesses with fewer than 500 employees (i.e., full-time, part-time, or seasonal), and includes sole proprietors, independent contractors, and folks who are self-employed. Businesses with more than 500 employees are eligible in certain industries.



These loans can be made from February 15, 2020 through June 30, 2020, which is known as the “covered period.”


What are the terms of the loans?

Loan maximums

For starters, there will be limits to what a business can borrow.

For the Paycheck Protection Program, the maximum amount that can be borrowed is the lesser of:

  • 2.5 times the average monthly payroll costs3; or
  • $10 million

Example: If Widgets, Inc. has an average monthly payroll cost of $1 million, the most they could borrow would be the lesser of: $2.5 million ($1,000,000 x 2.5) or $10 million. Ergo, Widgets, Inc. could borrow $2.5 million under the Paycheck Protection Program.

If a business has an outstanding SBA loan from January 31, 2020 through the origination of this new loan, that balance will be added to the 2.5x average monthly payroll costs, and refinanced through the new loan.

Using the same example: If Widgets, Inc. has an outstanding SBA loan of $1 million, and an average monthly payroll of $1 million, the most they could borrow would be the lesser of: $3.5 million [$1,000,000 + ($1,000,000 x 2.5)] or $10 million. Ergo, Widgets could borrow $3.5 million under the program.

It’s important to note that there are certain things that cannot be included when calculating the loan maximum. Those things include:

  • Salaries of non-residents
  • Salaries that are greater than $100,000
  • Federal payroll taxes (i.e., Social Security, Medicare, etc.)
  • Credits received as a result of the Families First Act for sick leave or FMLA

Going back to our original example: Let’s say Widgets, Inc’s $1 million average monthly payroll costs consisted of two employees who earned $150,000 each. The most Widgets could borrow would be the lesser of: $2,479,167 [($1,000,000 – [$100,000/12]) x 2.5] or $10 million. Ergo, Widget’s maximum loan amount would be $2,479,167.

And slightly different scenario: If Widgets, Inc. has an average monthly payroll of $1 million, including $120,000 in FICA tax, the most Widgets could borrow would be the lesser of: $2.2 million [($1,000,000 – $120,000) x 2.5] or $10 million. Ergo, Widgets, Inc. could borrow $2.2 million under the Paycheck Protection Program.

One final item about amounts: if a business wants to borrow funds under the SBA’s Express Loan terms, that maximum has been increased from $350,000 to $1 million.


Payment terms

Payment terms for Paycheck Protection Program loans are as follows:

  • Interest rates for these loans will have a fixed rate interest of .5%
  • The lender cannot charge a
    • guarantee fee,
    • a yearly fee,
    • a prepayment penalty, or
    • request a personal guarantee or collateral for the loan.
  • Also, the requirement that the business cannot obtain credit from another lender doesn’t apply.

Finally, the lender has to provide payment deferment for at least six months (but not more than one year) for borrowers who were:

  • in operation as of Feb 15, 2020,
  • approved or pending approval for a SBA loan, and
  • adversely affected by COVID-19 (which is presumed).


Loan forgiveness for PPP

Under the CARES Act, Paycheck Protection loans are eligible for “forgiveness”—which means that the lender can release the borrower from the obligation of repaying the balance. The amount that can be forgiven is limited to the amount the lender reasonably expects the borrower to spend during the covered period4 on:

  • Payroll costs (capped at $100,000 on an annualized basis per employee)
  • Interest for mortgages signed prior to February 15, 2020
  • Rent obligations from a lease agreement signed prior to February 15, 2020
  • Utility payments
  • Additional wages to account for the reduction in tips for tipped employees


A couple other things:

  • The amount forgiven cannot be greater than the loan principal;
  • It will be proportionately reduced by a decrease in headcount or wages compared to an earlier lookback period5, unless the employer reverses that reduction of headcount or wages by June 30, 2020.
  • The Treasury Department has said that it anticipates non-payroll costs will make up less than 25% of the forgiven amount.


Applying for loan forgiveness

In its application for loan forgiveness, a borrower must document:

  • The number of full-time employees and pay rates for the lookback period including
    • Payroll tax filings with the IRS,
    • State income, payroll, and unemployment insurance filings,
  • Proof of payment, including cancelled checks, receipts, and other documentation that verifies payments for mortgage and lease obligations, as well as utility payments.
  • A certification by the borrower that all the above information is accurate and that the amounts were used to retain employees, make rent, mortgage, or utility payments.

All lenders have 60 days to decide on the loan forgiveness, and any portion that is not forgiven must be repaid within two years. Any forgiven loans will be excluded from gross income for tax purposes.


Adjustments to the amount of loan forgiveness

If a borrower lays people off between February 15, 2020, and April 26, 2020, the amount of the loan forgiveness will be reduced by:

(Avg. monthly FTE during covered period / Avg. monthly FTE during the lookback period) x Total amount of loan forgiveness = New loan forgiveness

Using the same example: Widgets, Inc. wants $1 million in loan forgiveness under the Paycheck Protection Program. During the covered period, Widgets has 25 average monthly full-time employees. During the lookback period, Widgets had 50 average monthly full-time employees. Widgets is eligible for $500,000 in loan forgiveness [(25 / 50) x $1,000,000].

If a borrower cuts its employees’ wages between February 15, 2020, and April 26, 2020, the amount of loan forgiveness will be reduced by:

  • The amount of any salary or wage reduction of employees whose annualized rate of pay during any pay period in 2019 was less than $100,000; and
  • Whose salary or wage reduction was in excess of 25% of the total salary or wages they received during the most recent full quarter before the covered period.


Example: Widgets, Inc. wants $2.5 million in loan forgiveness under the Paycheck Protection Program. During the covered period, Widgets cut its employees’ wages from $2 million in the previous quarter to $1 million. None of their employees earned more than $100,000. Widgets would be eligible for $1.5 million in loan forgiveness ($2,500,000 – $1,000,000).


How to apply for the Paycheck Protection Program

The SBA allows lenders to start accepting applications from most entities on April 3, and has made an application form available. Contractors and self-employed individuals can apply starting April 10.

A prospective borrower can apply directly with any current SBA lender, federally insured depository institution, federally insured credit union, Farm Credit System institution, or any other non-traditional lender that is participating in the program. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program.

For quick reference, you can refer to the Treasury Department’s overview and information sheet on the program.

If you’re a Gusto customer, know that our team is hard at work to build a direct pipeline for PPP funds. We’ll share more information as soon as it’s available.



[1] Under the CARES Act, “payroll costs” are: salary, wages, cash tips or equivalents, payment for regular leaves of absence, dismissal or separation compensation, group health insurance payments, retirement benefits payments, and some state/local payroll taxes. Whew.

[2] For a sole proprietor or independent contractor, “payroll costs” are: wages, commissions, or similar compensation that is less than $100,000 in 1 year, as prorated for the “covered period,” which is Feb. 15, 2020 through June 30, 2020. Double whew.

[3] “Average monthly payroll” means the average monthly payroll in the 12 months prior to the loan, excluding seasonal employers. Seasonal employers use the 12 weeks prior to the covered period, or the amount between March 1, 2019 and June 30, 2019, or, if they were not in business from Feb 15, 2019 through June 30, 2019, the average monthly payments from Jan 1, 2020 to Feb 29, 2020.

[4] Eight weeks from the origination of the loan.

[5] A lookback period, in this context, is used to compare the expenses in the covered period to what is normal for a typical business, and determine if it is a reasonable amount. Under the CARES Act, employers can choose between two lookback periods: either February 15, 2019 to June 30, 2019; or January 1, 2020 to February 29, 2020. For seasonal employers, the lookback period is February 15, 2019 to June 30, 2019.



Prepared by Gusto