What to Know about Employee Compensation with the Paycheck Protection Program Loan Forgiveness

by | Apr 16, 2020 | Cracking the Tax Code with Christy | 0 comments

One of the appealing features of the Paycheck Protection Program is that the loans from the program can be forgiven if certain requirements are followed.  As discussed earlier, those requirements include maintaining the same number of full-time equivalent employees in the 8 weeks following the loan as you had in a look-back period and using the funds for qualified expenses.  An additional requirement, discussed in more detail below, has to do with compensation.  In order to qualify for forgiveness, you cannot cut employee compensation below certain levels.   

  1. Can I lower my employee’s salary or hourly rate after receiving Paycheck Protection Program Loan Funds?  During this unprecedented time, many businesses are considering reducing wages in an effort to keep staff on payroll rather than furloughed.  However, if you do, it will affect the forgiveness of your Paycheck Protection Program loan.
  2. How much can I reduce wages without penalty?  Forgiveness will be reduced if you lower your employee’s compensation by more than 25%.  This applies to any employee who made less than $100,000 in 2019. 
  3. How much will the loan forgiveness be reduced if I lower an employee’s compensation by more than 25%?  It will be reduced by the amount of reduction that exceeds 25%.  For example, if your employee’s salary over the 8 weeks would have been $10,000, but you cut their salary by 30% to $7,000, your loan forgiveness is reduced by $500.  There do not appear to be restrictions on salary reduction above the $100,000 threshold.  For example, if you cut your employee’s salary from $200,000 to $100,000, it should not affect the forgiveness of your loan. 
  4. Are there any exceptions to this rule?  Yes.  If you reinstate the reduced salary or compensation amount by June 30, 2020, you can still be eligible for forgiveness of your entire Paycheck Protection Program loan. 
  5. Can I pay “old” payroll with funds received from the Paycheck Protection Program? Most likely you won’t receive your loan on the day you cut payroll.  So can you just run payroll on your normal schedule and expect it to be forgiven?  For example, if you have payroll incurred for time worked April 1-14, can you use the loan funds received on April 15 to cover it?  This is the subject of much debate regarding what the terms “costs incurred and payments made” mean in the statute.  To be careful and err on the side of forgiveness, do not use the funds for “old” payroll incurred prior to the date the funds were received.  Pay any payroll incurred prior to the day you receive your loan with other funds.  You may need to run payroll for a shortened period at the end of the 8-week period as well. 

We know that each business has unique questions and needs during this unprecedented time.  With careful monitoring of how your Paycheck Protection Program funds are spent, you can set yourself up to have that loan forgiven by your lender.  Call Law Offices of Christy Lee, PC, if you need help!