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Payroll Loan- A 2021 Guide to PPP Loan Forgiveness

The Payroll Protection Program (PPP) loans helped many companies in the US make it through the Covid 19 disruptions. If you’ve secured a loan, you’re most likely using the funds to keep your employees paid and your business liquid.  After you borrow your PPP loan, you will also need to start thinking of getting it paid off. One option is getting it forgiven, but applying for forgiveness can be very intimidating especially if your business only has limited resources at your disposal right now. What made the program popular was the ability for borrowers to have their loans forgiven. However, the payroll deduction loans are issued with specific criteria for debt relief. There are different options you can take to pay your loan at your most preferred pace.  Here’s a comprehensive guide to help you make sure you’re on track to acquire full forgiveness every step of the way.

Understanding PPP Loan Forgiveness

First, a quick refresher of what the PPP is really all about, especially if you’ve already applied several months ago. Here’s everything you need to know and remember about the PPP loan program.

What is the PPP Loan?

The PPP loan gives emergency funds to small businesses struggling financially to minimize the effect of the Covid-19 pandemic. It provides employers with support from payroll loan banks for up to 8 weeks including its benefits. This program also helps pay rent, cover bills, and reimburse applicable overhead.

The primary purpose of PPP loans is for the benefit of employees. The program originated from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Small Business Administration (SBA) backs the payroll deduction loans as they get support from the Department of Treasury.

It authorizes up to $659 billion toward job retention and other expenses. Borrowers can choose between an 8-week or 24-week disbursement period.

PPP Loan Forgiveness explained

Every debt must be paid. PPP borrowers are entitled to loan forgiveness if the funds were legally used for payroll loans, business mortgages, and utility payments. These should be returned during your chosen disbursement period.

Borrowers are eligible to apply for forgiveness anytime up to the maturity date of the loan. If they fail to apply within 10 months, the PPP loan payment will no longer be deferred, and they will have to begin giving loan payments to their PPP lender.

Choosing the PPP Loan Forgiveness form to use

Your lender processes the applications for PPP forgiveness.

You need to fill out a PPP loan forgiveness application form. You have 3 PPP loan forgiveness options. The SBA made these available for different loan circumstances.

Form 3508S

This is for borrowers who have loan amounts greater than $150,000. If you’re one of them, you can use this form if you meet the criteria and if you certify good faith in the following:

  • If you have employees earning $100,000 or less, make sure you didn’t lessen their annual salary by more than 25%.

  • You didn’t cut the number of your employees or their average working hours between January 1, 2020. 

  • Make sure the end of the payroll deduction loan is covered with eligible expenses for your business.

  • Your business was unable to operate to its maximum capacity since the related rules of maintenance standard, social distancing, and other work/customer safety requirements compliance with the Covid-19.

To apply for this form, you will also need to submit documents summarizing your payroll and other expenses when applying for this forgiveness

Form 3508EZ

This is for borrowers who have loan amounts greater than $150,000. If you’re one of them, you can use this form if you meet the criteria and if you certify good faith in the following:

  • If you have employees earning $100,000 or less, make sure you didn’t lessen their annual salary by more than 25%.

  • You didn’t cut the number of your employees or their average working hours between January 1, 2020. 

  • Make sure the end of the payroll deduction loan is covered with eligible expenses for your business.

  • Your business was unable to operate to its maximum capacity since the related rules of maintenance standard, social distancing, and other work/customer safety requirements compliance with the Covid-19.

To apply for this form, you will also need to submit documents summarizing your payroll and other expenses when applying for this forgiveness.

Form 3508

This is for borrowers who aren’t able to use forms 3508S or 3508EZ. It’s the longest form among the three. 

Make sure to fill out the form’s section for PPP Schedule A. This part includes a table summarizing your Full-time Equivalent (FTE) and salary deductions for the given period. 

Before you manually fill out this section, see if your payroll provider has a PPP report provider. Some payroll loan companies have all the information you need in a document. This will save you time.

Borrowers using form 3508 also need to provide documents for payroll and other eligible expenses.

How can I get my PPP loan forgiven?

If you’re ready to apply for forgiveness, contact your PPP lender. They will direct you to the right loan forgiveness form you’ll need. You need to submit the form along with the paperwork detailing how you spent your loan.

Forgiveness is granted to borrowers who kept or rehired employees. They should also be effective in maintaining their staff’s levels of salary before the pandemic. 

Make sure you’re also safe from PPP loan fraud, so you won’t have to deal with hefty payments and penalties along the way.

Expenses eligible for loan forgiveness

Along with your loan forgiveness application, you will need to provide proof on how you spent your PPP loan. Remember, only funds spent on allowable expenses will be forgiven. And at least 60% of your loan must be spent on payroll costs to qualify for full forgiveness.

You will need to provide proof of how you spent your entire PPP loan. Keep in mind, only funds spent on eligible expenses will be forgiven. These are:

  • Payroll costs

  • Operating costs

  • Supplier costs

  • Property damage

  • Worker protection

Steps to apply for PPP Loan Forgiveness

Applying for the PPP loan forgiveness process can be a tedious process. But if you get to see its overview, it becomes less intimidating.

Remember, it all starts and ends with your PPP lender. Here’s a step-by-step guide on how you can apply for PPP loan forgiveness.

Contact your PPP lender

Your lender will provide you with the form you need to apply for PPP loan forgiveness. Whether it’s Form 3508S, Form 3508EZ, or Form 3508.

If you need further assistance on how to fill out and submit your application, your lender will guide you.

Compile your documentation and requirements

The SBA needs to see proof that you spent the loan properly before you can apply for PPP loan forgiveness. You need to have documentation for both payroll and non-payroll expenses.

 Payroll expenses are the number of wages and salaries you pay for services. It also includes bonuses, incentives, and other additional benefits. These include:

  • Bank statements

  • Overtime pay

  • Payment receipts

  • Tax documents

  • Productivity bonus

  • Perfect attendance bonus

  • Third-party payroll reports

  • Health card

  • Social security

Non-payroll expenses are usually operating costs that you pay to keep your company moving. These include:

  • Electricity, water, and Internet bill

  • Account statements

  • Rent

  • Maintenance payment

Submit the documentation and forgiveness form to your PPP lender

Complete all the required details in the application form. Submit it to your lender along with the documentation that verifies your spending. 

Then follow up with your lender to submit additional documentation as requested. Consult your lender for additional guidance and provide the requested requirements in a timely manner.

Keep communicating with your PPP lender throughout the entire process

You won’t stop after submitting all forms and documents. Stay in the loop and keep in touch with your lender.

Your PPP lender is responsible for notifying you of all the updates you need to know. If SBA reviews your loan, your lender will let you know right away. You also have the right to appeal certain SBA loan review decisions.

What is the time frame for PPP loan forgiveness?

One of the questions that PPP borrowers always ask is, “What should be my cover period to calculate my loan forgiveness?” 

Your cover period pertains to the timeframe of your loan. You have to spend your PPP funds on eligible expenses to be entitled to forgiveness. 

Keep in mind, you need to spend all your funding on forgivable expenses and you should have the right documentation with you. You are eligible to apply for employer payroll loan forgiveness anytime before your covered period expires. There are 3 PPP cover periods.

8-week cover period

If you received your PPP loan before June 5, 2020, you have the option to choose between an 8-week or 24-week cover period.  

When you choose the 8-week cover period to defer your payments, you should apply for forgiveness within 10 months of your cover period. 

Here are the advantages of choosing an 8-week cover period.

  • You get faster forgiveness. Extending your forgiveness to 24 weeks may lead to the entire loan process extending to next year. If you apply for other employer payroll loans during that time, you could have a difficult time being eligible with the PPP forgiveness issue still around. 

  • It’s easier to meet staffing requirements. Maintaining the number of employees is one condition for loan forgiveness. Some small business owners might find it more convenient to maintain staffing levels for 8 weeks than 24 weeks.

  • You take advantage of current rules and interpretations. The regulations for calculating loan forgiveness are changing fast. If you qualify for full forgiveness after 8 weeks, it would be good to apply right away. If you wait for a few more months, there’s no telling how the guidelines will change and if you will still be qualified.

24-week cover period

If you received your PPP funds after June 5, 2020, then you are only eligible for a 24-week cover period. You should apply for forgiveness within 10 months of your cover period if you want to defer payments. 

Here are the advantages of choosing a 24-week cover period.

  • You have more time to plan. Take advantage of the extended forgiveness period. This gives you more leeway to talk to your advisors and strategize ways on paying your debts.

  • More portion of your employer payroll loan during Covid can be spent on payroll costs. You’re given more chances to spend your fund on wages, payroll loans, taxes, and benefits.

Alternative payroll cover period

If you have bi-weekly payroll periods, you can also adjust your covered period to start the first pay period after you receive the funds. With this, the cover period aligns better with your payroll schedule. Using this method doesn’t change the cutoff to apply for forgiveness

When does the 24-week PPP period start?

The 24-week period started when the PPP Flexibility Act was implemented last June 5, 2020.  Borrowers must apply for forgiveness within 10 months of their covered period if they want to defer their payments.

Most borrowers may find that using the 24-week period gives them more flexibility. By choosing this time frame, you get to:

  • Increase your forgiveness chances

  • Plan in advance

  • Rehire employees

  • Restore wages

  • Wait for more updates

If you think you’re also prone to loan fraud, you can also take advantage of getting in touch with a PPP law firm for safety measures

What are the new rules for PPP loan forgiveness?

Some changes were implemented to the PPP loans. Former president Donald Trump signed the PPP Flexibility Act which stated changes in employer payroll loans last June 5, 2020. 

This gives borrowers more time to spend government employee payroll loans to obtain forgiveness.

The new law modifies several provisions of the PPP loan to make the process easier for borrowers. Most of the changes are related to forgiveness. This allows borrowers under PPP to defer payroll taxes.

If you’ve already borrowed a loan or you’re planning to get one, here are some changes that you need to keep in mind.

Easier payroll requirements

Before, you needed to spend at least 75% of their PPP payroll loans. The remaining 25% goes to rent, mortgage interest, and utilities for the loan to be forgiven. This was known as the 75/25 rule. 

The PPP Flexibility act reduces this by making it 60/40. So in order for a loan to be forgiven, you are now allowed to spend 60% on payroll while the remaining 40% goes to other eligible expenses like mortgage interest, rent, and utilities.

Extension of forgiveness period

Now, you have a longer timeframe to spend your government employee payroll loans during Covid. The cover period is extended from 8 weeks to 24 weeks. This extension is automatic and there’s no need to inform your lender about this.

The extension applies to all payroll deduction loans. However, those who got their loans before June 5, 2020, can still go with the original 8-week period. This condition most likely benefits self-employed PPP borrowers, because they’re able to choose between the 8-week and 2.5-month owner compensation replacement.

When an employer fails to rehire workers, they can qualify for a new exemption when they’re able to provide documents that prove they were unable to return to normal operating levels.

Rescheduled rehiring exemptions

The deadline employers were allowed to rehire laid-off employees and restore employee wages was originally between February 15 to April 26, 2020. Because of the PPP Flexibility Act, it was extended from June 30 to December 31, 2020.

Deferral and clarification repayment

There’s no need to repay the PPP loan until your forgiveness application is completed. The 6-month payments were removed thanks to the PPP Flexibility Act.

Borrowers are given up to 10 months after the end of their cover period to apply for forgiveness. After that given time frame, payments will be required.

Tax deferral for government employee payroll loans

The PPP Flexibility Act removes the responsibility of having payroll taxes to be immediately due. Employer payroll taxes remain deferred.

Program extension

PPP loans approved after June 5, 2020, will automatically have a loan length of five years. Existing loans originally have 2 years. It can be extended to 5 years if the borrower and lender will agree.

What to Do If You’re Accused of PPP Loan Fraud

If you think you’re accused of PPP loan fraud, your first step is to contact an experienced PPP law firm. They will guide you through the process, so you don’t get charged with hefty payments and penalties.

Criminal prosecutions related to fraud carry serious punishments. The amount of money involved is also dependent on the level of sanction. Business owners accused of PPP loan fraud are prone to face mandatory prison sentences and fines. 

The Department of Justice (DOJ) is currently focusing on tracking PPP fraud. They’re ramping up investigations into loan borrowers across the country. All business owners who borrowed a PPP loan are all on their radar.

For these reasons, it’s very important to consider hiring a lawyer as soon as you become aware you’re accused of PPP loan fraud.

Defining the PPP Loan

The Payroll Protection Program (PPP) provides funds to small businesses to maintain their employees’ paychecks, pay rent, pay bills, hire back employees who may have been laid off, and cover applicable overhead. It originated from the Coronavirus Aid, Relief, and Economic Security Act (CARES). 

The Small Business Administration (SBA) backs the loans while getting support from the Department of the Treasury.

This program was rolled out in the United States to give emergency funds to small businesses or individuals struggling financially to minimize the impact of the Covid-19. It also provides support for businesses to pay up to 8-weeks of their payroll costs including benefits.

The PPP program prioritizes millions of American employees working in small businesses. It authorizes up to $659 billion toward job retention and other expenses. 

What is PPP Loan Fraud?

Many applicants have attempted to exploit PPP loans for their own gains. Some committed SBA loan frauds last 2020 with falsified documents and information on their application. Others have used the funds for unapproved purchases. The DOJ investigates the cases of individuals involved in PPP loan fraud.

Wall Street Journal (WSJ) reported a word from the SBA’s administrator. He said that there were strong indicators of widespread potential abuse and fraud in the PPP program.

In addition to WSJ’s report, there were companies that were able to forge and get money even if their payrolls exceed the standard of a 500-worker cap.

As of late October 2020, the DOJ received a report that there were 73 defendants with fraudulent loans related to the PPP program.

The rise of synthetic identities

Synthetic identities involve combining real and fake information to open accounts. The majority of banks and lenders are aware of how these help open bank accounts, secure credit cards, and open other types of loans

McKinsey said that synthetic identity is the fastest-growing type of financial crime in the United States. It accounts for 10-15% charge-offs in a typical unsecured lending portfolio.

There were a lot of people who committed SBA loan frauds last 2020. They fabricated their identities to apply for these government funding programs. Several factors enabled fraudsters to take advantage of PPP loans. These include the speed of issuance, loosened credit criteria, and financial rewards.

The US government makes its effort to identify these synthetic identities on their radar. The number of fraud accounts executed in the PPP program is now being tallied.

What Makes You Accountable for a PPP Loan Fraud?

It’s also important to know what causes a borrower to be accountable for PPP loan scams. Make sure you avoid these PPP loan fraud red flags, so you don’t get accused.

Here are some examples of actions that can result in you having SBA complaints about PPP loan fraud.

  • Wrong number of employees 
  • Misclassifying employees as independent contractors to qualify as a small business.
  • Hiding information during a PPP audit of fraud investigation
  • Misclassifying certifications on PPP loan forgiveness application
  • Lowering your standard payroll costs to receive a higher loan amount
  • Failing to rehire employees after receiving PPP funds
  • Cutting employee salaries despite having PPP funds
  • Borrowing PPP funds from multiple lenders
  • Using PPP funds for personal benefit

What is the PPP fraud penalty?

The CARES Act, which originally created the PPP program, does not contain heavy crime penalties when they made it. Rather, the Act only states that PPP loan borrowers who fail to satisfy the employee retention and expense criteria for loan forgiveness are subject to repay the loans at a 1% interest rate. 

Many borrowers saw this as a flaw which enabled them to commit fraud. That’s the reason why the DOJ is strictly coordinating with other federal investigative agencies, such as the IRS and FBI. 

SBA also announced that every borrower who received at least $2 million in PPP funds is subject to mandatory audits. 

Borrowers who received smaller loans are also automatically needed to participate in audits to identify any potential abuse in the PPP program.

The Original Design of PPP Loans

Yes, PPP loans are only available to employers. But the program is actually designed to benefit employees. The borrower should use 75% of PPP loan funds for payroll costs. 

Many business owners assumed that they could use the loans however they wanted– for instance buying a car or paying personal debt. It also led others who didn’t have any intention to use PPP as intended to commit fraud.

Since the majority of the loan funds are designed to be reserved for payroll, employers who receive PPP loans should be able to avoid layoffs.

Some Recent PPP Loan Fraud Cases

The first report on PPP loan fraud was announced last May 2020. Two men were charged after claiming that they have dozens of employees, when in fact, they had no employees at all.

A Reality TV personality was also caught for PPP loan misuse after the DOJ confirmed that he used $1.5 million out of a 2 million loan to buy jewelry and pay for child support.

This January 2021, a man from Texas was charged for his $5 million PPP loan. He allegedly submitted fake tax documents with his two bank applications.

The list of borrowers charged with SBA loan frauds from 2020 only got bigger. Many individuals already lied on their loan applications that were meant to keep employees working during this pandemic. The government is always willing to hold these employers accountable.

Why PPP Loan Recipients are at Risk

When applying for PPP funds to cover payroll and other costs during this pandemic, borrowers should know these beforehand:

  • How prone the loan program is to fraud schemes
  • How aggressive federal governments will become in the coming months
  • How difficult it will be to ensure compliance for a loan to be forgiven

The rules and regulations governing the PPP program are changing. Borrowers may find themselves unsure if they’re eligible for a loan or if they’re qualified for loan forgiveness. 

The DOJ continues to investigate allegations of PPP loan fraud. While the SBA is consistent in auditing businesses with PPP loans. The potential risk for borrowers facing criminal protection for PPP fraud is high. 

The penalties associated with PPP fraud shouldn’t be ignored. If you think you’re being accused, don’t hesitate to look for legal guidance. Connect with Miami PPP Loan Fraud Firm.

What happens if PPP loan funds are misused?

PPP loan fraud is a serious violation and the US government is prepared to punish employers who abuse the terms of the loan. Most people think that fraud is always intentional. But even inadvertent PPP loan misuse also puts the borrower at the same amount of risk.

Here are some of the federal crimes the DOJ may pursue against borrowers suspected of PPP fraud and their corresponding penalties:

  • Bank fraud – Up to 30 years in prison and/or up to $1,000,000 fine
  • Wire fraud – Up to 20-30 years in prison and/or up to $1,000,000 fine 
  • Mail fraud – Up to $1,000,000 fine and/or 20-30 years in prison
  • Making false statements to the SBA or a financial institution – Up to 30 years in prison and/or up-to $1,000,000 fine
  • Aggravated identity theft – 2 years in prison, plus additional penalties for the underlying felony offense
  • Attempt and conspiracy – any attempt or conspiracy to commit a fraud offense is penalized with the same punishments as the actual fraud offense
  • Making false statements to federal agents – A fine and/or up-to 5 years in prison
  • Conspiracy to defraud the government – A fine and/or up-to 5 years in prison
  • Tax evasion – Up to $100,000 fine (for an individual) or $500,000 (for a business) and/or up to 5 years in prison

The most serious penalties are mostly tied to crimes like bank fraud, mail fraud, and wire fraud. Other federal crimes in the list carry fewer penalties, but the maximum sentences for these crimes still include a lot of fines and some years to spend in prison.

If you’re accused of PPP fraud, even if you don’t actually borrow PPP funds, you’re also prone to the same criminal penalties. Contacting the right PPP law firm will help you get the job done.

How to report PPP loan abuse?

There are different ways on how to report PPP abuse. If you think you’re targeted for an SBA loan investigation or if you’re planning to report one near you, here are some things you can do.

Contacting the Office of the Inspector General

You have the option to report PPP loan frauds and PPP loan misuse involving SBA programs online or by calling the Office of the Inspector General at 800-767-0385.

You may remain anonymous when reporting your SBA loan complaints. However, they won’t be able to contact you for more information about your complaint. And this may prevent them from fully investigating the case and they may not be able to inform you about the results of their review.

Contacting the Select Subcommittee on the Coronavirus Crisis

The House of Representatives established this organization in April 2020. It’s modeled on Harry Truman’s Special Committee to investigate the National Defense Program– which oversaw defense spending while the entire nation was mobilized for World War II.

Here you can report PPP loan frauds, abuse, price gouging, profiteering, or other unethical practices of funds related to the COVID 19 crisis.

Reporting to a PPP Lawyer

Working with a knowledgeable PPP lawyer with experience in handling federal fraud cases is also a great option when confronted with a PPP fraud investigation. 

The DOJ is looking for ways when it comes to digging deep into PPP fraud cases and investigating businesses that obtained funds through the federal loan program.

If you’re targeted by a PPP fraud audit or investigation, keep in mind that you may also face civil penalties from the federal government.

Sending a Complaint to the Department of Justice

The DOJ enforces the law and defends the interest of the United States according to the federal government. They seek punishment for those guilty of unlawful behavior.

You can also consider directly contacting the DOJ. Fill their web complaint form or contact them at 202-353-1555.

When should you approach a PPP Lawyer?

With the recent rising cases of PPP fraud investigation and arrest publicized in the media, it’s important to hire a PPP attorney to protect your business’ reputation. 

The DOJ is very strict when it comes to this subject matter. When facing such allegations, your entire future is at stake. 

Approaching the right PPP attorney helps you secure your business reputation and freedom.

When your business is at risk of PPP loan fraud charges

If your business is currently the target of an investigation for PPP fraud or you’re charged with offenses, you must hire a PPP lawyer as soon as possible, especially if you’re facing any of these charges:

  • Application fraud
  • Fraudulent use of PPP loan funds
  • Fraud in certification for loan forgiveness
  • Lapping PPP loans from multiple lenders

Federal charges are serious, and trying to fight your case alone without any support from a PPP lawyer is almost impossible. 

The decisions you choose for your business early on can make or break your case. You need to have a PPP lawyer to guide you every step of the way.

When you’re helping a friend

If you have a friend or a partner who might have questions or concerns about the SBA loan investigation, it would be great to refer them to a lawyer for guidance. 

It’s also good to be mindful of others’ situations, especially if you think they might run into trouble. Suggesting for them to approach a PPP lawyer shows you care. 

If you want to make sure you’re compliant

Prevention is still better than cure. If you want to make sure you or your family/friend are compliant with the PPP loan, it would also be wise to approach a PPP lawyer.

PPP loan fraud is not always intentional. There are some businesses prone to charges because they’ve overlooked some important details. A lawyer can help you make sure you’ve crossed all your T’s and dotted all your i’s, so you’ll be free from SBA complaints along the way.

Payroll Expenses in PPP Loans: Everything You Need to Know

Keeping track of your payroll expense is very important, especially if you applied for a PPP loan. You need to stay compliant with the latest regulations.

The PPP Flexibility Act also requires borrowers to allot 60% in payroll expenses. You need to allocate the right amount for eligible payroll expenses and stay away from fraud.

Payroll expenses are for compensating employees and contractors in your business. These are also used to hire workers. Processing your payroll requires you to collect and manage data. This means your employer’s payroll expenses are likely to change from time to time. 

There are a lot of things you need to consider when managing your PPP loan’s payroll expenses. Here’s everything you need to know.

Defining a Payroll

If you have several employees in your business, you’ll have to do payroll. It’s a great way to stay organized, and there’s no way to avoid it.

A payroll is an amount your business pays for labor for your employees. It’s the total of all compensation you must pay to your employees for a specific period of time and date. This includes salaries, wages, bonuses, and benefits.  

It’s a process of paying which includes the tracking of working hours, calculation of employee’s pay, and distribution of payments through direct deposit or check.

What is payroll expense?   

Payroll expense refers to the number of wages and salaries you pay to your employees. This also includes the cost of all related payroll taxes, health benefits, and social security. 

In many businesses, employer payroll expenses drive the majority of their monthly and yearly expenditures. 

It’s very essential to manage payroll expenses on profit and loss. This helps avoid redundancies.

Here are some payroll expense examples that you may see in your PPP loan:


Most of the time, wages are related to employee compensation based on the number of hours multiplied by the hourly rate.

The employee earning hourly wages is paid on a weekly basis that follows the number of hours worked.


US employees working in a company are always paid a salary. And often, it’s given in a bi-weekly payroll period depending on the company. 

Salary is always related to employee compensation on an annual basis. For instance, $45,000 per year.


Employers also have a list of payroll expenses in the form of employee benefits. This means providing for employees’ health care funds, retirement funds, social security payments, and other bonuses.

FICA Tax Deductions

Federal Insurance Contributions Act (FICA) is the federal law that requires employers to withhold separate taxes from the wages they pay their employees. FICA  taxes are 6.2% for social security and 1.45% for Medicare. 

It’s a total of 7.65% of the tax for payroll withholdings.

Payroll Taxes

A Payroll tax is also a payroll expense example. It’s a percentage withheld from an employee’s pay by the employer. It’s paid to the government on the employee’s behalf.

The tax is based on wages, salaries, and some bonuses paid to employees. Payroll taxes are deducted from an employee’s earnings and are paid to the Internal Revenue System (IRS).

State and federal income tax withholdings

Employers must deduct federal state and local income taxes from wages and salaries. It’s the employee’s annual income and the number of allowances specified in their W-4 that determines the amount deducted.

Unemployment tax withholdings

The Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA) give temporary income for employees who lose their jobs.

An employer’s FUTA is always 6% during the first $7,000 gross income an employee earns. Unemployment taxes vary on each state’s unemployment program. 

What percentage of expenses should payroll be?

In most cases, payroll expenses between 15-30% of gross revenue are the safe zone for the majority of businesses.

Payroll that’s more than 30% of gross revenue is one of the most common reasons why some businesses fail. 

Yes, payroll is always one of the most important expenditures for an employer. But it’s also the expense that can make or break a business.

Knowing what percentage of revenue to spend on your payroll is the first step towards your business’ profitability. The productivity of your staff along with how your management implements the incentives will play an essential role to increase your long-term revenue.

What are the most common payroll deductions?

It’s important for employers to know that there are always deductions to take out of their employee’s paychecks on a regular basis.

Payroll deductions are withheld from an employee’s total earnings to pay taxes, garnishments, and benefits. Payroll taxes can be voluntary or involuntary. They may be taken out of a paycheck on a pre-tax or post-tax basis.

These are generally processed in every pay period. Calculations can be done manually or automatically through a payroll service provider. Most businesses that choose automation to reduce errors and ensure payments are filed with the proper authorities in a more organized manner.

Here are the 6 common types of involuntary payroll deductions that you and your employees will always see.

Federal Income Tax

The government uses federal tax to pay for the country’s growth and development. 

When you pay tax to the American government, it means you’re investing in your economy. The government uses the federal tax for the following:

  • Maintaining, repairing, and building infrastructure
  • Providing emergency funds
  • Benefits for government workers
  • Pension funding
  • Discovering new feats, such as space exploration
  • Improving education, health, agriculture, and public transportation
  • Providing food and shelter for the poor

State income tax

State taxes pay your state’s government. The amount depends on which state your business is based in. You can check your state tax here.

The amount each employee owes is calculated depending on their W-4, marital status, and a number of allowances. Some employees don’t have to withhold state income tax if they are paid low wages or have a large number of personal exemptions. 

Social security tax

The social security tax is under FICA. This requires employees to provide contributions in every paycheck they receive. The amount to be deducted from an employee depends on their taxable income.

The funds collected for social security pay an employee’s disability fund, retirement fund, and survivor’s benefits.

Medicare tax

Just like the social security tax, Medicare tax is also a part of FICA. This helps pay for hospital care, checkups, and doctor fees.

Employers are obliged to pay Medicare taxes to the federal government.

Insurance policy deductions

This is for employees who have their employer-sponsored health, dental, and vision care plans. They will see a deduction of the amount they owe in their pay periods. 

Employees can also contribute to their own health savings account. The contribution is tax-deductible and it grows tax-free every year.

Retirement deductions

Employees also contribute pre-tax funds deducted every pay period for their 401(k) or 403(b) retirement plans. 

The 401(k) is a retirement plan that allows employees to save and invest for their own retirement. It’s done on a tax-deferred basis. Only an employer is allowed to sponsor this plan to their employees.

The 403(b) is a retirement plan offered to tax-exempt institutions. These are nonprofits, churches, hospitals, and public schools.

Employers may offer this plan as a part of an employee’s benefits package. 

Other Payroll Withholdings

There are other payroll expenses influencing profit and loss. You might see them on your employee’s paychecks. These deductions are always voluntary and have authorization from the employee.

  • Retirement plans
  • Life insurance premiums
  • Job-related expenses
  • Union dues
  • Charitable contributions
  • US Savings bond purchases
  • Money owed to your employer

What payroll expenses are included in the PPP?

PPP borrowers ask, “What is included in payroll expenses in the PPP?” 

But you need to know first that there were some changes on how you should spend payroll expenses in your PPP loan

Before, at least 75% of PPP loans must be used for payroll costs, while the remaining 25% goes to rent, mortgage interest, and utilities. This was known as the 75/25 rule. 

The PPP Flexibility Act reduced this to 60/40. You are now allowed to spend 60% of your PPP loan for payroll expenses. The remaining 40% goes to other eligible expenses like mortgage interest, rent, and utilities.

Here are the payroll expense examples included in the PPP loan. At least 60% of your PPP loan should be spent here:


This is the total cash and non-cash payments you provide your employee. Compensation is frequently one of the biggest expenditures for businesses with employees. Here the types of compensations that might be in the list of your payroll expense journal entry:

  • Base pay
  • Sales or productivity commissions
  • Overtime pay
  • Cash tips
  • Bonus pay, merit pay, and referral 
  • Benefits
  • Stock options
  • Other non-cash benefits like free lunch and gym membership

Leave of absence

A leave of absence is the time allowed for an employee to be away from work. It’s usually requested by the employee to attend special events happening or personal matters in his life. 

Most employers pay for leaves. Employees have the privilege to be compensated with:

  • Sick leaves
  • Vacation leaves
  • Paid holidays
  • Paid time off
  • Maternity leave
  • Paternity leave
  • Parental leave
  • Rehabilitation leave
  • Study leave

Separation pay and final pay

Separation pay is the compensation to an employee who is parting ways with the company for the following reasons:

  • Redundancy
  • Lay off
  • Termination
  • Sickness

Some states also require employers to provide final pay to employees. This is the last paycheck an employee will receive upon resignation.

Insurance premium

An insurance premium is the number of money employees or employers pay for insurance policies. These premiums cover healthcare, home, life, and vehicle insurances.

Once you sign up for an insurance policy, your insurer will charge you a premium. Failing to pay on the part of the employee or employer will result in the cancelation of the coverage.

Retirement plan contributions

Supporting employees for their retirement is essential. This should reflect in their payroll

Whether the retirement plan is for 401(k) or 403(b), employers under a PPP loan can also include retirement contributions to employees. 

State and federal taxes

As mentioned earlier, the federal tax is a payroll expense to contribute to the country’s growth and development. While the state tax pays for your state’s government.

Both of these are also included in payroll expenses for PPP loans.

Payroll liabilities vs payroll expenses

Expenses and liabilities play essential roles in your business’s payroll expense accounting. Yes, these two are included as separate entities in your journal entry. But both of them are connected. 

The amount in your expense account pertains to your total payroll amount for the pay period. While the amount in each liability account determines either the amount you owe, the amount deducted from employees, and to whom you must send money.

Payroll Expense

Your list of payroll expenses represents the total expenditure paid to employees in the form of salaries. The company will record all these expenses in categories.

In the financial statement, the employer payroll expense is presented in the income statement. It will be used to compare with the current financial year’s income

Payroll expenses are classified as a temporary account. It will be closed at the end of the fiscal year.

Employers are obliged to cut the Total Debt Service (TDS)  and other Tax when they pay salaries to employees. The payroll expense account gets adjusted with these taxations. 

The total salary of an employee will include all the deductions in the payroll expense journal entry.

Payroll Liabilities

These are payroll expenses that are due but not yet paid. It’s an obligation deferred until a future date. Your payroll liabilities can also be employee deductions which must be remitted to the IRS and other organizations.

If the employer won’t be able to pay during payday, it will become a payroll liability. The amount owed is usually paid to a third party

The payable account is presented in the balance sheet during payroll expense accounting. It’s composed of permanent accounts and it doesn’t close at the end of the fiscal year, unlike the payroll expense.

The net payroll cost after adjusting all the TDS and tax deductions are in the payroll expense profit and loss account. But when not paid, it becomes payroll liabilities. All these will be under tax duties.

Common Payroll Liabilities

It’s important for employers to be aware of which payroll liabilities they’re responsible for. Because these obligations represent money that must be paid on a future date.

It’s very easy to overlook them. And if not careful, these can cause a business to run out of funds.

Employee Wages

It’s normal to have these as your liability. Because the main reason for running payroll is to pay your employees. 

Before you pay them, those unpaid wages are classified as liabilities because you owe them to your workers.

Payroll Taxes

Taxes are one of the most common payroll obligations. These are payroll tax liabilities you must withhold:

  • Social security tax
  • State income tax
  • Federal tax
  • Medicare tax

When you withhold these taxes, you don’t deposit them immediately to a third-party agency. Instead, they are classified as payroll tax liabilities until your deposit date.

Service Payroll Costs

Taxes and wages are not only your payroll liabilities. If you’re using a system for your payroll, you have to pay for software or a Professional Employer Organization (POE).

Other Costs

There are other types of deductions that you might withhold for your employee’s wages. These are health insurance contributions, retirement fund contributions, and wage garnishments.

How payroll liabilities can be turned into payroll expense

Payroll liabilities can become payroll expenses. An employer accrued liabilities as their employees work. 

Most of them pay in arrears. These are money owed that should have been paid later.

Before a salary gets to an employee, it’s considered a payroll liability. But after it gets paid, it becomes a payroll expense.