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Updated: April 26, 2024

The CARES Act and the Paycheck Protection Program

Published By:

Erin Ellison

More from our experts

January 2021 Updates

Please note that a new round of PPP loans and small business relief rolled out in January 2020. See all the details here.

Through March 2021, many small business employers will be able to receive loans of up to $10 million through the Paycheck Protection Program (PPP) authorized by the CARES Act. An update to the SBA’s existing 7(a) loan program, these loans are intended to be easy for small businesses to obtain. This article has been updated to reflect the changes outlined in the Consolidated Appropriations Act of 2021.

What does the new coronavirus relief bill funding include?

The recent legislation re-opens the PPP loan program to businesses that have not received a PPP loan, and it makes a second PPP loan available to businesses that meet certain criteria. PPP loan forgiveness has also been simplified and a broader list of expenses may now be forgiven.

What do PPP loans look like?

The PPP provides certain small businesses with funds to cover payroll costs, including benefits. Funds can also be used to pay interest on mortgages, rent, utilities, software, HR and accounting costs, and several other business expenses. Funds under PPP loans are provided as loans that can be fully forgiven when used for these purposes.


Payroll costs covered by these loans will be capped at an annual salary of $100,000 for each employee. And at least 60% of the forgiven amount must be used for payroll — or the loan may only be eligible for partial forgiveness.


No collateral or personal guarantees are required for these loans.


Loan payments and forgiveness

Loan payments may be deferred for up to ten months. Neither the government nor lenders will charge small businesses any fees.


Forgiveness is based on spending the loan on payroll (or other authorized expenses) over a period of 8 to 24 weeks. Find additional details about this and other SBA loan programs at the SBA’s COVID-19 Loan site or the Department of Treasury PPP Fact Sheet.

Which small businesses qualify for PPP loans?

There are slightly different rules for businesses that apply for their first and second PPP loans. For first-time loan recipients, PPP loans of up to $10 million are available to any business that:

  • Does not have more than 500 employees
  • Was in operation before February 15, 2020


Note that both for-profit and 501(c)(3) nonprofits are eligible, as well as:

  • Partnerships, the self-employed, and sole proprietors
  • 501(c)(6) organizations
  • Destination marketing organizations
  • Housing cooperatives
  • Newspapers, broadcasters, and radio stations
  • Businesses in bankruptcy


The maximum amount of the loan is set by formula (average monthly payroll cost prior to the COVID-19 pandemic times 2.5), subject to a maximum of $10 million. Some restaurants, hotels, and hospitality businesses are now eligible to receive loans up to 3.5 times their average payroll costs.


A second PPP loan

Any business that already received a PPP loan is eligible for a second forgivable loan if it has repaid its first loan, has less than 300 employees, and experienced a 25% drop in revenue in any quarter of 2020 (compared to 2019).


The value of the second loan can be up to $2 million.


Other key provisions:

  • Fixed interest rate of 1.00% per annum.
  • Loans are made by approved lenders that have delegated authority to make the loans without approval from the SBA.
  • In reviewing the application, a lender has to evaluate whether the borrower was in business on February 15, 2020, and had employees and/or independent contractors.
  • Guarantee fees are waived.
  • Loans are non-recourse to the borrower.
  • No collateral requirement.
  • No prepayment penalties.
  • Payments are deferred for six (6) months; however, interest will continue to accrue over this period.


The applicant is required to certify:

  • Current uncertain economic times make the loan request necessary to support ongoing operations; and
  • Funds will be used to keep workers and make payroll, mortgage payments, lease payments, and utility payments
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How does the SBA determine eligibility for a PPP loan?

Although the CARES Act does suspend the ordinary requirement that borrowers must be unable to obtain credit elsewhere, you’ll still need to certify “in good faith” that the PPP loan request is necessary for you to maintain ongoing operations — or get back up and running. This means that small business owners must confirm their need for the loan by certifying that the lack of funds would be “significantly detrimental to their business”.


The SBA has offered additional guidance to say that any small business that receives a PPP loan of less than $2 million is considered to have certified the need for their loan if they act in good faith. The SBA determined that this safe harbor is appropriate because “borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment.”


Please note that employers may not take out a loan under the Economic Injury Disaster Loan Program (EIDL) and a PPP for the same purposes (to cover payroll costs). An employer may refinance an existing EIDL loan into a PPP loan by adding the amount of an EIDL to the sum of the payroll costs.


Applicants may be ineligible if they have a loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.

Note: A loan under the Paycheck Protection Program no longer makes the borrower ineligible for the Employee Retention Tax Credit (but the loan must be applied to different expenses than the tax credit), and retention tax credits may now be claimed retroactively. Also, utilizing paid leave tax credits available under the FFCRA may reduce the amount forgiven on a PPP loan by the amount of the credits. Check with your accountant or legal advisor for how these may impact your business.

Loan amounts and eligibility will ultimately be determined by lenders. For different loan types, different thresholds may apply.

Do PPP loans cover paid sick leave?

Yes. PPP loans cover payroll costs, including costs for employee vacation, parental, family, medical, and sick leave. However, the CARES Act excludes qualified sick and family leave wages when a reimbursable tax credit would be allowed under certain sections of Families First Coronavirus Response Act. Get more detail about the Paid Sick Leave Refundable Credit in the IRS guidance.

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

In general, employers can calculate their aggregate payroll costs using data either from the previous 12 months or from the calendar year 2019.


Seasonal businesses can use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019. A company that was not in business from February 15, 2019 to June 30, 2019 can use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020.

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

Employers can use their average employment over the same time periods as above to determine their number of employees. However, employers can opt to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that business has been operational —  if it hasn’t been operational for 12 months.


The SBA has clarified their guidance for determining the number of full-time employees. For purposes of loan eligibility, the CARES Act defines the term 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 their 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 a total of 250 employees for your PPP loan application.

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

Under the Act, payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees.


As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of the payroll tax.


For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.

More answers about average payroll costs

For additional information about calculating average monthly payroll costs for PPP loans, see our complete guideAnd if you’re an OnPay client, please note that you can create an average payroll report within our app. For additional questions, see detailed guidance from the SBA or talk to a tax professional.

How do I apply for a Payroll Protection Program loan?

Applications for PPP loans will be accepted until March 31, 2021. Businesses can apply through any SBA-approved lender. If you have questions about the application process, click here.


You can apply by completing the Paycheck Protection Program loan application and submitting it with the required documentation to an approved lender. Here’s a downloadable copy of the application. 


Additional PPP borrower information is available from the Department of Treasury, or get a full rundown on the SBA’s website. For more information about how to manage your business during the COVID-19 outbreak, please take a look at our Resource Center.

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Erin Ellison is the former Content Marketing Manager for OnPay. She has more than 15 years of writing experience, is a former small business owner, and has managed payroll, scheduling, and HR for more than 75 employees. She lives and works in Atlanta.