8560 / How are “payroll costs” defined for purposes of the payroll protection loan program?
Taxpayers with fewer than 500 employees were eligible for “paycheck protection loans” administered via the Small Business Administration (see Q ) in 2020 and 2021. The loans were forgiveable (and amounts excluded from income for tax purposes) if used to cover payroll costs. PPP loan forgiveness was determined based on how the small business client spent the loan proceeds. Under the PPPFA, at least 60 percent of the loan had to be used for payroll costs (this 60 percent threshold was reduced from 75 percent under the CARES Act).
Under the CARES Act and subsequent administrative guidance, payroll costs were defined to INCLUDE the sum of:
- payments of any compensation with respect to employees that is:
a. salary, wage, commission, or similar compensation;
b. payment of cash tips or equivalents;
c. payment for vacation, parental, family, medical, or sick leave;
d. allowances for dismissal or separation;
e. payment required for the provisions of group health care benefits, including insurance premiums;
f. payment of any retirement benefit; or
g. payment of state or local tax assessed on the compensation of employees;
AND
- the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation that is not more than $100,000 in one year, as prorated for the covered period.
Payroll costs EXCLUDE:
- compensation of an individual employee over $100,000 per year, as prorated for the covered period;
- taxes imposed or withheld under chapters 21, 22, or 24 of the IRC during the loan forgiveness period;
- any compensation of an employee whose principal place of residence is outside of the U.S.;
- qualified sick leave wages for which a credit is allowed under the FFCRA; and
- qualified family leave wages for which a credit is allowed under the FFCRA.
Wages credited under the employee retention credit program were also excluded from loan forgiveness.
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