Photo of a business owner determining how to spend the Paycheck Protection program so most of the loan is forgiven.

7 ways small businesses can maximize PPP loan forgiveness

Updated March 31, 2021

As a business owner, you may have already taken advantage of the Paycheck Protection Program (PPP) created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. If you haven’t, the deadline to apply is May 31, 2021. Sole proprietors and independent contractors filing a Schedule C who haven’t yet applied can now receive a higher loan than before—using gross income, rather than (generally lower) net income, to calculate the loan amount.

In addition, a second loan is available for smaller, harder-hit businesses until May 31, 2021. “Second draw” PPP loans of up to $2 million are targeted for businesses that have fewer than 300 employees and suffered economic harm.

If you’ve secured a loan, you likely used the funds to keep your employees working and business open—all while trying to understand how the “forgiveness” part of the loan works.

There are a number of forgiveness applications depending on the loan size and other requirements, including a detailed forgiveness application (Form 3503) and two simplified versions—Form 3508EZ and Form 3508S (for loans $150,000 or less). To use these simplified forms, you must meet certain requirements outlined in this PPP overview (PDF).

Use our PPP expense tracker (Excel) to document your expenses along the way.

To help you navigate the ever-changing landscape, we’ve compiled seven strategies to maximize loan forgiveness based on business owners’ top concerns.

1. Don’t short yourself on allowable payroll costs.

In addition to making many business expenses eligible for forgiveness, the PPP loan is primarily intended to help business owners keep employees on payroll. And, what qualifies as payroll during the forgiveness period following the loan is broader than you might think. First, select the forgiveness period you will use (any length between 8 and 24 weeks from when you received your loan). Then, consider what you pay for all the following expenses during that time. The forgiveness amount is not limited to salary, wages, commissions, and tips. It also includes:

  • payments for leave (vacation, parental, family, medical, and sick leave),
  • employer contributions to group health care benefits (including group life, disability, dental, and vision insurance premiums) for employees,
  • employer contributions to defined benefit or defined contribution qualified retirement plans for employees, and
  • employer -paid state and local taxes assessed on compensation.

2. But don’t go beyond PPP payroll boundaries.

The most employee payroll expense you can count toward forgiveness is $100,000 annually per employee or:

  • $8,333 monthly,
  • $1,923 weekly.

However, owner compensation is limited to a prorated portion of the owner's 2019 or 2020 compensation, or $100,000—whichever is less, up to $20,833. For details, see Frequently Asked Questions, A-15 (PDF).

Employer contributions for group health, life, disability, dental and vision insurance, retirement, and other benefits for employees are in addition to this cap. For details about group health and retirement benefits for owners, see Frequently Asked Questions A-17 and A-18 (PDF).

PPP payroll excludes:

  • employees living outside the United States,
  • the employer portion of Social Security payroll taxes,
  • wages where the company receives a Families First Coronavirus Response Act payroll tax credit, and
  • independent contractors who’ve worked for your business.

3. Maintain your staffing.

Maximize your PPP loan forgiveness by retaining your full-time and full-time equivalent employees.*

“It’s not the entrepreneur protection program,” says Kimberly Weisul, editor-at-large for and Inc. Magazine. “If you’re an entrepreneur and don’t want to bring your employees back until right before you think you’ll reopen, that makes sense from a financial point of view. But that’s not what this program is for. It's to take employees back earlier than that, even if you don’t have anything for them to do, so they remain employed.”

Here's how it works:

Your staffing level during the forgiveness period following the loan will be compared to one of two prior periods (you can choose which):

  • February 15–June 30, 2019, or
  • January 1–February 29, 2020.

To maximize forgiveness, the deadline to rehire or replace employees who were let go between February 15 and April 26, 2020, is December 31, 2020 for loans made before December 27, 2020, or the end of the selected forgiveness period for loans made after that date. For the forgiveness calculation, if you offer to rehire an employee for the same hours and wages, your head count will not be reduced, even if they decline. The percentage of your loan forgiveness may decline by the same amount as any staff reduction. For additional clarification, see frequently asked questions A-19 (PDF).

If your loan amount is $50,000 or less, you are exempt from having your forgiveness reduced based on any reductions in head count and/or salary and wages under the de minimis exemption. For more information about this and other exceptions, see this PPP overview (PDF).

4. Avoid drastic pay cuts.

For employees earning less than $100,000, loan forgiveness is reduced dollar for dollar for any amount of employee salary cut more than 25%, unless an exception applies. For additional clarification, see frequently asked questions A-20 (PDF). However, if your loan amount is $50,000 or less, you are exempt from having your forgiveness reduced based on any reductions in head count and/or salary and wages under the de minimis exemption.

5. Focus most of your PPP loan on payroll.

Payroll expenses must make up at least 60% of your PPP spending to maximize loan forgiveness. For additional clarification, see frequently asked questions A-22 (PDF).

6. Stay within allowable expenses for the rest of your PPP loan amount.

Paychecks are the main concern of PPP loan forgiveness, but up to 40% can be spent on rent or lease payments, mortgage interest, and utilities, covered operations expenses and supplier costs, worker protection expenditures, and certain property damage costs resulting from public disturbances. (PPP funds also can be used for interest on other debt but can’t be included in forgiveness.)

The guidance on allowable “utilities” expense includes what’s necessary to keep the business operational, such as gas and electric, water, transportation, phone, and internet access.

Keep in mind that all lease or utility service agreements must have been in place before February 15, 2020.

7. If necessary, forge ahead without loan forgiveness.

“Ultimately don’t run your business based solely on loan forgiveness,” says Mark West, national vice president of business solutions for Principal. The long-term stability of your business should be your guiding light and might require you to repay some or all of the PPP at its very favorable 1% rate. And for loans taken prior to June 5, 2020, you have up to two years to repay any portion not forgiven. For those taken on or after that date, you have even longer—up to five years.

“Having to pay back that loan understandably may make many business owners nervous,” West says. But your first loan payment can be deferred, potentially for a year or more.

What’s next?

* A full-time employee is one who works at least 40 hours per week. A full-time equivalent employee is a combination of part-time employees who collectively are employed at least 40 hours per week.

Inc. Magazine and not affiliates of any company of the Principal Financial Group. 

The subject matter in this communication is educational only and provided with the understanding that Principal® and its employees are not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.​

Insurance products issued by Principal National Life Insurance Co (except in NY) and Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-247-1737 , Member SIPC Principal National, Principal Life, and Principal Securities are members of the Principal Financial Group®, Des Moines, IA.