Overstating Number of Employees on PPP Loan

So your being accused of overstating the number of employees on your PPP loan application, and your terrified because you know this is serious. Maybe you claimed you had 15 employees when you actually had 8, maybe you counted independent contractors as employees when they shouldnt have been counted, maybe you included part-time workers as full-time equivalents and made calculation errors, or maybe—and this is where it gets really bad—you deliberately inflated your employee count to qualify for a larger loan knowing the numbers were false. Now your facing a fraud investigation, your forgiveness application has been denied, and the government is treating this like you stole taxpayer money through deliberate lies about your workforce size.

Here’s what you need to know: **PPP loan amounts were calculated based on your average monthly payroll costs, which meant the number of employees and how much you paid them directly determined your loan amount—you could borrow up to 2.5 times your average monthly payroll**. Overstating the number of employees to inflate your calculated payroll and get a larger loan is federal fraud under 18 U.S.C. § 1344 (bank fraud) and 18 U.S.C. § 1343 (wire fraud), punishable by up to 30 years in prison and up to $1 million in fines. However, not every discrepancy between what you claimed and what you actually had is criminal fraud—there’s a difference between honest calculation errors (you misunderstood who should be counted as an employee, you made mistakes calculating full-time equivalents for part-time workers, you relied on incorrect advice from your accountant), and deliberate lies (you listed fake employees who never existed, you knowingly inflated the count to steal more money). Whether your facing civil consequences (forgiveness denial and repayment) versus criminal prosecution depends entirely on whether the government can prove you KNEW the employee count was false and you INTENDED to defraud.

This article explains what it means to be accused of overstating employees on a PPP application, how the employee count was supposed to be calculated under PPP rules, what kinds of errors or misstatements the government considers fraud versus innocent mistakes, what prosecutors must prove to convict you of fraud for employee count inflation, what defenses exist when the overstatement was unintentional, recent cases showing what sentences people receive for this specific type of fraud, and what you should do immediately if your facing these allegations. If your being accused of inflating your employee count, understanding the difference between fraud and error is critical to your defense.

How Were Employees Supposed to Be Counted for PPP?

To understand whether you overstated employees, you need to understand the actual PPP rules for counting employees. The rules were more complicated than many borrowers realized, which created opportunities for honest mistakes:

Who counted as an employee: For PPP purposes, employees generally meant individuals on your payroll for whom you paid wages and withheld payroll taxes (W-2 employees). The program rules specified that you should count employees based on either: (1) the average number of full-time equivalent employees per month employed during the period from February 15, 2019 to June 30, 2019, OR (2) the average number of full-time equivalent employees per month during the period from January 1, 2020 to February 29, 2020. You could choose whichever period gave you a higher count (and thus a larger loan).

Full-time equivalent (FTE) calculation: Part-time employees were supposed to be converted to full-time equivalents. If a full-time employee worked 40 hours/week, a part-time employee working 20 hours/week would count as 0.5 FTE. Calculating FTEs for businesses with variable part-time hours was complicated and error-prone. Some borrowers used simplified methods (counting each employee as 1.0 FTE regardless of hours if they worked under 40 hours/week, which was allowed under some guidance), while others tried to calculate precise FTEs and made errors.

Who DIDNT count as employees: Independent contractors (1099 workers) generally didnt count toward YOUR employee count for PPP purposes because they could apply for PPP themselves as self-employed individuals. Owners of the business were counted differently depending on business structure—for example, self-employed sole proprietors were counted differently than LLC members or corporate shareholders. Seasonal workers had special rules. And employees who worked less than a certain threshold of hours in some cases werent counted or were counted fractionally.

The complexity of these rules meant many borrowers made calculation errors without fraudulent intent. But the government is investigating cases where the employee count was dramatically inflated beyond what could be explained by calculation errors.

What Counts as “Overstating” Employees?

Overstating employees means you claimed more employees on your PPP application than you actually had based on the correct calculation methodology. This can happen in several ways:

Listing fake employees who never existed: You claimed you had 20 employees when you actually had 12, and you made up 8 fake names and Social Security numbers to inflate the count. This is blatant fraud—your creating fictional people to steal more money. The government discovers this when they cross-reference your application with your actual tax filings (Form 941, W-2s, W-3s) and see that you only reported wages for 12 employees, not 20.

Counting independent contractors as employees: You had 10 W-2 employees and 8 independent contractors (1099 workers). You counted all 18 as employees when calculating your PPP loan amount. But independent contractors shouldnt have been counted toward your employee total (they could apply for PPP on there own). If you claimed 18 employees and only had 10 actual W-2 employees, you overstated by 8. Whether this is fraud or innocent error depends on whether you knew contractors shouldnt be counted or whether you genuinely misunderstood the rules.

Inflating FTE calculations for part-time workers: You had 15 part-time employees working 20 hours/week each, which should have been counted as 7.5 FTEs (15 × 0.5). But you counted them as 15 full FTEs, inflating your employee count by 7.5. If this was a deliberate decision to get a larger loan, its fraud. If you misunderstood the FTE calculation rules (which were genuinely confusing), it might be an honest error.

Including family members who didnt actually work: You included your spouse, adult children, or other family members as employees on your PPP application even though they didnt actually work for the business or didnt work during the calculation period. You paid them token amounts or created payroll records to justify their inclusion. This is fraud if they werent legitimate employees performing actual work.

Using the wrong calculation period to inflate the count: You cherry-picked a calculation period that wasnt allowed under PPP rules because it gave you a higher employee count. For example, if your workforce shrunk dramatically between 2019 and early 2020, using the 2019 numbers would give you more employees and a larger loan—but if the guidance required you to use 2020 numbers and you used 2019 anyway, thats problematic.

When Does Overstating Become Criminal Fraud?

Not every incorrect employee count is criminal fraud. The government distinguishes between errors and intentional deception:

Innocent errors (probably not criminal fraud):

• You miscalculated FTEs for part-time workers because the methodology was confusing
• You counted independent contractors as employees because you misunderstood who qualified
• You used a calculation period you thought was allowed but wasnt
• Your accountant made errors in preparing the application and you relied on there work
• The discrepancy is relatively small (you claimed 12 employees, actually had 10—the 2-employee difference might be calculation error rather than deliberate inflation)

In these scenarios, you might face forgiveness denial and repayment demands, but criminal prosecution is less likely if you can demonstrate lack of fraudulent intent.

Criminal fraud (likely to be prosecuted):

• You listed employees who never existed—completely fake names and SSNs
• You knowingly included family members who didnt work to inflate the count
• The discrepancy is massive (you claimed 50 employees, actually had 15—thats not a calculation error, thats deliberate inflation)
• You created false payroll records or tax documents to support the inflated employee count
• Theres evidence you knew the count was wrong (emails, texts, communications showing you discussed inflating the numbers)

The key element is INTENT. Did you knowingly inflate the employee count to get more money, or did you make honest mistakes in calculating who should be counted?

What Must Prosecutors Prove?

To convict you of fraud for overstating employees, prosecutors must prove beyond a reasonable doubt:

• You made a statement about the number of employees in your PPP application
• The statement was false (you didnt actually have that many employees based on correct calculations)
• You knew the statement was false when you made it
• You made the false statement with intent to defraud (to obtain a larger loan than you were entitled to)
• The statement was material (it affected the loan amount, which employee counts always do for PPP)

The hardest element for prosecutors to prove is usually knowledge and intent. They need to show you KNEW the employee count was inflated and you did it INTENTIONALLY to get more money. Evidence they use includes:

• Comparing your application to your tax filings (Form 941, W-2s)—if you reported 12 employees to the IRS but claimed 25 on PPP, that’s strong evidence
• Communications showing you discussed inflating numbers
• The magnitude of the discrepancy—massive overstatements are hard to explain as mistakes
• Testimony from employees or former employees contradicting your claimed employee count
• Payroll records showing fewer employees than you claimed

What Defenses Exist?

If your accused of overstating employees, potential defenses include:

Good-faith calculation error: You genuinely tried to calculate your employee count correctly based on the PPP guidance, but you made errors in the methodology. You didnt have intent to defraud—you just misunderstood complex rules. This defense requires showing you had a reasonable basis for your calculation even though it turned out to be wrong. Documentation showing you tried to comply (you consulted guidance, asked your lender questions, kept records) supports this defense.

Reliance on professional advice: Your accountant, CPA, or payroll company calculated your employee count and told you how many to list on the application. You reasonably relied on there professional expertise. If they made errors, those errors dont become your fraud. This defense requires documentation showing you consulted with professionals and relied on there advice.

Confusion about FTE calculations: The FTE calculation rules were genuinely confusing, especially for businesses with variable part-time schedules. You made a good-faith effort to calculate FTEs but got it wrong because the guidance was unclear. If the overstatement resulted from FTE calculation errors rather than listing fake employees, this defense might work.

Independent contractors issue: You counted 1099 workers as employees because you didnt realize PPP rules excluded them from the employee count. This was a misunderstanding of eligibility rules, not fraud. If you can show you had legitimate 1099 relationships with these workers and you genuinely thought they counted, this might avoid criminal charges (though you’d still have to repay the portion of the loan attributable to the miscount).

The discrepancy is minor and explainable: The difference between what you claimed and what you should have claimed is small (1-3 employees) and can be explained by timing differences, calculation methodology differences, or how seasonal workers were counted. Minor discrepancies that dont suggest deliberate fraud are less likely to result in prosecution.

You corrected the error when you discovered it: When you realized you’d made an error in calculating employees, you voluntarily disclosed it to the SBA and offered to repay any excess loan amount. Voluntary correction demonstrates lack of intent to defraud.

Recent Cases and Sentences

To understand the consequences, here are examples from recent prosecutions involving inflated employee counts:

Defendant who claimed 50 employees, actually had 5: Created fake employee names and SSNs to inflate payroll costs, obtained approximately $400,000 in PPP loans. Sentenced to 60 months (5 years) in federal prison, 3 years supervised release, and full restitution. The massive discrepancy (10× inflation) and fake employees showed clear intent to defraud.

Defendant who included family members who didnt work: Claimed spouse and adult children as employees even though they didnt work for the business, inflated employee count from 8 actual employees to 15 claimed employees. Obtained $180,000 based on inflated payroll. Sentenced to 36 months in prison, supervised release, and restitution.

Pattern: Sentences for employee count fraud typically range from 2-6 years depending on the amount obtained, the magnitude of the inflation, and whether fake employees were created versus just miscounting real people. Defendants who cooperate and plead guilty receive lower sentences (2-3 years), while those who go to trial receive higher sentences (5-7 years).

What Should You Do If You’re Accused?

If your being investigated or accused of overstating employees:

Step 1: Gather documentation showing your actual employee count. Collect Form 941 (quarterly payroll tax filings), W-2s and W-3s for the relevant periods, payroll journals, timesheets, and any records showing how many people actually worked for you and how much you paid them. Your attorney needs to see the real numbers to compare with what you claimed.

Step 2: Reconstruct how you calculated the employee count on your application. Try to document what methodology you used, what guidance you relied on, whether you consulted with professionals, and why you arrived at the number you did. If you have emails, notes, or communications showing your calculation process, preserve them—they might demonstrate good faith even if the calculation was wrong.

Step 3: Hire a federal criminal defense attorney immediately. Dont try to explain the discrepancy to investigators yourself. Employee count fraud is a serious federal charge, and you need experienced representation. The attorney will evaluate whether you have defenses based on calculation error, reliance on advice, or confusion about rules.

Step 4: Dont lie or create false documentation. If you realize you overstated employees, dont compound the problem by creating fake payroll records or false tax documents to justify the inflated count. That turns a potentially defensible situation into clear criminal fraud. Dont destroy records either—that’s obstruction.

Step 5: Evaluate whether cooperation makes sense. If you genuinely made errors and can demonstrate lack of fraudulent intent, your attorney might advise cooperating with investigators and offering to repay any excess loan amount. Cooperation can sometimes result in the government declining to prosecute criminally and instead pursuing civil repayment. But this decision should be made with attorney guidance, not on your own.

Talk to a Federal PPP Fraud Defense Attorney Today

Being accused of overstating the number of employees on your PPP loan application is serious and can result in federal fraud charges, significant prison time, and financial penalties. But not every incorrect employee count is criminal fraud—the outcome depends on whether you acted with fraudulent intent or made honest mistakes in applying complex rules.

Our firm defends clients facing allegations of inflated employee counts on PPP applications. We review your application and your actual payroll records to determine the discrepancy. We evaluate whether the overstatement can be explained as calculation error, FTE confusion, misunderstanding of who counts as an employee, or reliance on professional advice. We present defenses to prosecutors when innocent explanations exist. We negotiate reduced charges or civil resolutions when possible. And we defend at trial when necessary.

If your accused of overstating employees, contact us today for a confidential consultation. We’ll review your application and your actual records. We’ll assess whether defenses exist based on your specific facts. We’ll advise on whether cooperation makes sense or whether other strategies are better. And we’ll develop a defense plan to minimize consequences. Time is critical in these cases—dont wait until charges are filed.

Employee count fraud allegations are serious, but innocent errors happen. Call us now.