**By Paul Neiffer, Principal CliftonLarsonAllen – Walla Walla Washington – Email – T. 509.823.2920**

The application for PPP loan forgiveness requires each applicant to determine if their loan forgiveness is reduced by either:

- A reduction in average salary or wage of greater than 25%, or
- A reduction in Full-Time Equivalent employees (FTEs).

This post will review how these reductions are calculated and how they may affect each other.

__Salary Reduction Steps:__

- Step 1 – Determine the annualized salary for each employee during the covered period. Ignore any employee whose annual compensation for any pay period in 2019 was greater than $100,000 (bonus amounts are likely not annualized).
- Step 2 – Determine the average annual salary during the period January 1, 2020 to March 31, 2020.
- Step 3 – Divide Step 1 by Step 2.
- Step 4 – If this number is greater than 75%, then you are done and there is no reduction for this employee.
- Step 5 – If this number is less than 75%, then a reduction may be required. But now we have to determine if you meet a safe harbor.
- Step 6 – Enter the average annual salary as of February 15, 2020.
- Step 7 – Enter the average annual salary between February 15, 2020 and April 26, 2020
- Step 8 – If Step 7 is greater than Step 6, you do not meet the safe harbor and go to Step 10. If Step 7 is less than Step 6, go to Step 9.
- Step 9 – Determine the average annual salary as of June 30, 2020. If this amount is greater than Step 6, the safe harbor has been met. There is no reduction for that employee.
- Step 10 – Multiply Step 2 by 75%.
- Step 11 – Subtract Step 1 from Step 10.
- Step 12 – Multiply Step 11 by 8 and divide by 52. This is your reduction amount for that employee.

__Wage Reduction Steps__

The hourly calculation does not appear to use any annual calculation. Rather, you will determine the average hourly wage during each of these steps. Once the final adjustment is calculated in Step 10 (if any), you will then multiply this by average hours worked during January 1, 2020 to March 31, 2020 times 8 and this is your final reduction amount.

Let’s review a salary and an hourly example:

__Salary__ – Farmer John pays Fred an annualized salary of $60,000 during the January 1, 2020 to March 31, 2020 period. During his 8 week covered period that begins on May 1, he drops Fred’s annualized salary to $40,000. 75% of $60,000 is $45,000. We take the difference of $5,000 times by 8 and divide by 52 equals $769.23 (assuming the safe harbor is not met).

__Hourly__ – Farmer John pays Henry $20 per hour for 40 hours of weekly work during the first quarter of 2020. During the 8 week covered period, John drops the average hourly rate to $12 per hour. 75% would be $15 for a difference of $3 per hour. The reduction amount is $3 times $40 times 8 or $960.00 (assuming the safe harbor is not met). Even if Henry worked less than an average of 40 hours per week, the reduction is based on the average weekly hours of the first quarter.

However, let’s assume that John continues to pay $20 per hour for Henry but drops his hours per week from 40 to 20. Even though there is a 50% reduction in Henry’s average compensation during the covered period, there is no reduction under this calculation since the hourly wage did not decrease by more than 25%. Any reduction due to a drop in hours will be part of FTE calculation discussed next.

__FTE Reduction__

Your forgiveness may be reduced if your average FTEs during the covered period is less than the average number of FTEs for any of the following periods, at your election:

- The period beginning on February 15, 2019 and ending on June 30, 2019, or
- The period beginning on January 1, 2020 and ending on February 29, 2020, or
- For a seasonal employer, as determined by the SBA, either of the two previous periods or any 12-week period between May 1, 2019 and September 15, 2019.

Any employee working at least 40 hours is counted as 1 FTE. Other employees are determined to be a fraction of 1 based on average weekly hours divided by 40 hours or you can elect to treat them as .5 FTE. Here is an example:

Susan employs the following employees during the covered period:

- James, a salaried worker, equals 1 FTE.
- Mary, a salaried worker, equals 1 FTE.
- Ben, an hourly worker averages 10 hours per week, equals .25 FTE.
- Brittany, an hourly worker averages 20 hours per week, equals .5 FTE.

Her calculation of FTE is 2.75 based on actual hours. She can qualify for 3 FTE if she elects the optional method which likely would be to her benefit in most cases.

Let’s assume that during the periods listed above that she had 4.5 FTEs and her calculated forgiveness was $80,000 (she spent at least 75% of the loan amount on payroll costs).

We first need to determine the FTEs for two other periods:

- The period from February 15, 2020 through April 26, 2020, and
- For the pay period that includes February 15, 2020.

If the average FTEs for the first period is less than the second period, Susan must compare her FTEs on February 15, 2020 to her FTEs on June 30, 2020. If the June 30, 2020 FTEs are greater than the February 15, 2020 FTEs, the safe harbor is met and no reduction in forgiveness is required.

For our example, let’s assume that Susan does not meet the safe harbor. In this case, 3 / 4.5 FTEs is 66.67% times $80,000 equals $53,333 of final forgiveness or a reduction of $26,667.

As you can see these calculations can get complicated and if you have a few hundred employees, the hourly/salary calculation is required on each employee (earning less than $100,000 in 2019).

We will keep you posted.

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