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Updated: April 9, 2020

How to calculate monthly payroll costs for PPP loans

Published By:

Jon Davis

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2021 Updates

Please note that a new round of PPP loans and additional small business relief rolled out in January 2021. See all the details here.

The CARES Act’s Paycheck Protection Program provides funds to certain small businesses to cover payroll costs and benefits, among other specific expenses. As a result of new legislation in late 2020, an second round of PPP loans will be available through March 31, 2021. And any businesses didn’t receive a loan a first draw loan also have another opportunity to apply.


This money is intended to help business owners continue to pay their employees, but knowing how to correctly calculate average monthly payroll costs for the PPP — and employee counts — is essential to a successful application. Here’s where to start:

What counts as payroll costs for PPP loans?

Payroll costs for PPP loans include:

  • Any salary, wages, commissions, or tips — up to $100,000 per employee on an annualized basis
  • The cost of employee benefits, including costs for group health care benefits like insurance premiums; payment of any retirement benefits; and vacation, parental, family, medical, or sick leave; allowance for separation or dismissal;
  • State and local taxes assessed on employee compensation
  • 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 worker.

Are you an OnPay client?

If you use OnPay to run payroll, you can quickly pull an average cost report inside our app. See complete directions here.

Do I use gross pay or net pay when determining its payroll costs?

Under the Act, the Small Business Administration and the Treasury Department have said that payroll costs are based on gross pay and do not include withholdings such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes.


For example, an employee who earned $4,000 per month in gross wages and had $500 in federal taxes withheld would count as $4,000 in payroll costs. The employee received $3,500, and $500 from their wages were paid to the Federal government. All those gross wages can be used when calculating your average costs. However, as an employer, you also paid employer-side Federal payroll taxes for that employee. That additional cost to you was not part of their gross wages and is not included in the calculation under the statute.

What time period should borrowers use to determine their number of employees and payroll costs? 

In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from the 2020 or 2019 calendar years. Borrowers can use their average employee count over the same time periods to determine their number of employees.


Note that some banks may have more specific requirements in their PPP loan applications. Additionally, there may be some small exceptions for seasonal businesses or businesses that were closed for a portion of 2019 or 2020. Check with a tax professional if you’re uncertain about what dates to use.

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How do you calculate the number of employees for PPP loans? 

For purposes of loan eligibility, the CARES Act defines “employee” to include “individuals employed on a full-time, part-time, or other basis.”


So, you will need to calculate your total number of employees, including part-time employees, when determining your employee headcount for purposes of the eligibility threshold. For example, if you have 200 full-time employees and 50 part-time employees each working 10 hours per week, the SBA considers that to be a total of 250 employees for your PPP loan application.


Note that this differs from how the SBA will have you calculate employee headcount for PPP loan forgiveness. There, you’ll need to determine the number of full-time equivalent (FTE) employees you have, so part-time workers may be counted differently. We’ve laid out all the details in this article for calculating your headcount as well as complying with and documenting the details needed for your PPP loan forgiveness application.

How do I apply for a PPP loan?

Applications for PPP loans closed on August 8, 2020. Click here for the application form or contact an SBA-approved lender for more information. Remember that providing an accurate calculation of payroll costs is the responsibility of the borrower, so by completing the form, you are attesting to the accuracy of your calculations.


For more details about the CARES Act and how it helps small businesses or the Payroll Protection Program, please visit our COVID-19 resource center.


If you have questions about how the CARES Act or FFCRA impacts your business, please consult your legal advisor or tax professional, or review detailed guidance about PPP payroll cost reports from the Treasury Department and from the SBA.

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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.