Update April 5, 2020:  SBA Guidance
As expected, a program roll out like this was bound for some procedural problems.  Some of the bigger banks were not ready to start processing, there was no single set of guidelines, and banks were only working with their current existing relationships.  This would obviously leave some business owners with nowhere to go. Although, I do think that this program will get smoothed out in the coming weeks and those seeking participating banks will be able to find them. It is also my feeling that Congress will likely appropriate more funds to cover those unfortunate circumstances caused by any delays.

The SBA, late Thursday night, issued guidance that seems contradictory to what was stated in paragraph bb Section 1102 (See here)  of H.R. 748 – CARES Act.  Where the law indicates that an employer would be able to add independent contractors (1099-MISC) to their payroll costs, the Interim Final Rule (click here PDF) – see page 11. Said this: Amounts paid to independent contractors do not count for the Paycheck Protection Program payroll because these independent contractors can apply for their own PPP Loans.

Additionally, independent contractors don’t count for PPP loan forgiveness purposes.
Reading  paragraph bb and the main section above it, you might start to realize that this paragraph is defining the payroll costs of recipient of the payments, not the business paying the independent contractor. The SBA also clarified this in their instructions in the PPP application form it says: “For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.”

There was also widespread confusion on the actual computation.  Some payroll companies offered to provide a detailed computation of the average payroll costs.  I did not see one computation that was consistently applied across the board.  One payroll company took Gross Pay and deducted federal withholding and social security withholding tax to arrive at total payroll costs.

Quite simply, we believe that the calculation should be as follows:

Take the sum of:

  • Gross wages and salary paid to employees — independent contractors NOT included — for all of 2019. This is the only step, we believe, where the $100,000 cap per employee should pertain to;
  • payment of cash tips or equivalent;
  • payment for vacation, parental, family, medical, or sick leave;
  • allowance for dismissal or separation;
  • payment required for the provisions of group health care benefits, including insurance premiums;
  • payment of any retirement benefits like matching 401K; and
  • payment of State or local tax assessed on the compensation of employees.

Deduct from this sum any amount paid to any employee whose principal place of residence is outside the U.S. Take this net amount, divide it by 12, and multiply it by 2.5.

Should any of you require assistance with this computation or just want someone to check the banks calculation, please give us a call.

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