When the Small Business Administration announced the launch of the Paycheck Protection Program in response to the coronavirus, the biggest draw for small businesses? Not only would the funds help them keep their staff employed, but the loan was up to 100 percent forgivable if used for approved expenses (including payroll, rent, mortgage interest, and utilities).
The first round of PPP funds went out April 3, 2020—and the small businesses that received funding in early April are coming to the end of the eight-week period following loan origination and having to navigate forgiveness options and fill out the PPP Loan Forgiveness Application.
If your business received a Paycheck Protection Payment loan, you’ll need to calculate the loan forgiveness amount you’re eligible for. And a big part of the equation? Full-time employee (FTE) calculations.
Here’s everything you need to know about how to calculate full-time employees for PPP loan forgiveness:
Requirements for PPP loan forgiveness
Before we jump into loan forgiveness calculations, let’s review the requirements for Paycheck Protection Loan forgiveness.
In order for PPP loan proceeds to qualify for forgiveness, business owners must meet the following conditions:
- The PPP loan amount was used to cover approved expenses. Again, this includes payroll costs (including sick leave, retirement plans, and health insurance and insurance premiums), utility payments, rent, and mortgage interest payments.
- The PPP loan proceeds were used to cover expenses during the eight-week covered period following loan origination. Only expenses that businesses incur during the eight-week time frame after they receive their PPP funds are eligible for forgiveness. (Certain businesses with more irregular payroll costs or payroll schedules, including seasonal employers or businesses that employ part-time workers whose hours vary between pay periods, may qualify for an Alternative Payroll Covered Period, which would begin the first payday following loan disbursement)
- 75 percent was used for payroll costs. In order to qualify for full loan forgiveness, at least 75 percent of the total Paycheck Protection Program loan must be used to cover eligible payroll costs, while the other 25 percent can be used to cover non-payroll costs, like utilities, business rent, or mortgage obligations.
- The business maintained employee headcount, average FTE, and wages. Businesses only qualify for full loan forgiveness if they maintain their number of full-time equivalent employees and pre-coronavirus wages. If the company reduced the number of full-time equivalent employees on payroll or passed salary/hourly wage reduction to their staff, their amount of loan forgiveness will be reduced proportionately.
While determining the non-payroll cost requirements is fairly straightforward, calculating loan eligibility for full-time equivalent employees is a bit more involved.
So what, exactly, are the forgiveness calculations for full-time employees?
How to calculate loan forgiveness for FTE
The first step to calculating loan forgiveness for your employees is to determine their full-time equivalency, as you’ll need to prove that you maintained the same number of full-time equivalents during the eight-week time period following loan origination as you maintained before the COVID-19 crisis hit. (If your company employs independent contractors, it’s important to note that any payments made to independent contractors are not eligible for loan forgiveness and should not be included in your calculations.)
There are two ways to calculate FTE to prove you maintained FTE employee levels (the SBA allows PPP loan recipients to use either calculation on their loan forgiveness application, as long as the calculation remains consistent).
FTE loan forgiveness calculation #1
The first way to calculate FTE is to take the average number of hours paid each week, divide by 40, and round to the nearest tenth.
Hours paid each week / 40 = FTE
The Treasury defines a full-time employee as an employee who works 40 or more hours per week, so FTE is calculated on a scale of 1.0, with 1.0 being the equivalent of 40 hours per week. So, if you have a full-time employee that works 40 hours per week, they would have an FTE of 1.0 (40 hours paid each week / 40 = 1.0).
If you employ part time or hourly workers, they may have an FTE of less than 1.0. For example, if you have a part-time worker who is paid for 20 hours per week, their FTE would be 0.5 (20 hours paid each week / 40 = 0.5).
On the other hand, recognition of FTE caps out at 1.0. So, even if you have salaried employees that work 60 hours a week, they wouldn’t equal 1.5 FTE (60 hours paid each week / 40 = 1.5) because FTE can’t exceed 1.0.
So, in this scenario, your FTE calculations might look like this:
Employee #1, 40 hours per week: 1.0
Employee #2, 55 hours per week: 1.0
Employee #3, 35 hours per week: 0.9
Employee #4, 32 hours per week: 0.8
Employee #5: 20 hours per week: 0.5
FTE loan forgiveness calculation #2
If you wanted an easier way to calculate FTE, you could also assign an FTE of 1.0 to all employees that work 40 hours or more per week and an FTE of 0.5 to employees who work less than 40 hours per week.
So, in that scenario, your FTE calculations might look like this:
Employee #1, 40 hours per week: 1.0
Employee #2: 55 hours per week: 1.0
Employee #3: 35 hours per week: 0.5
Employee #4, 32 hours per week: 0.5
Employee #5: 20 hours per week: 0.5
Other factors that play into loan forgiveness
In addition to calculating FTE and showing that you maintained headcount after receiving your PPP loan, there are a few other factors that play into your eligibility for loan forgiveness, including:
- Wage caps. There is a limit to how much of an employee’s pay qualifies for loan forgiveness. Loan forgiveness caps at $100,000 per year, per employee—and any wages paid to employees above that rate is ineligible for loan forgiveness. So, if you have a full-time employee who makes an annual salary of $150,000, only $100,000 of that total salary is eligible for PPP loan forgiveness.
- Salary/wage reduction. In order to qualify for loan forgiveness, you must maintain 75 percent of your employee’s pay before COVID-19. If the employee’s wages over the eight-week reference period following loan origination is less than 75 percent of their pay over the previous quarter, loan forgiveness will be reduced proportionately.
- FTE Reduction Safe Harbor. If you had to reduce FTE employee levels, under the FTE Reduction Safe Harbor, you have until June 30, 2020 to rehire your laid-off or furloughed employees before facing reduced loan forgiveness.
- Loan forgiveness reduction exemptions. There are certain conditions that allow you to exclude an employee from your forgiveness application, including employees rejecting a rehire offer, employees resigning or choosing to work fewer hours, or employees being fired with just cause. If your business experiences these conditions, those lost hours will not count against your business when calculating loan forgiveness.