Article written by:
Jeremy Bronson
Director, Accounting & Business Advisory Services
Since the implementation of the Paycheck Protection Program (“PPP”) loan, there have been a number of questions on how self-employed individuals should apply for the loan. On April 15, 2020, the Small Business Administration (SBA) issued guidance for self-employed, partners, and independent contractors.
Individuals with self-employment income who file a Form 1040, Schedule C are eligible for a PPP loan if:
- You were in operation on February 15, 2020
- You are an individual with self-employment income (independent contractor or sole proprietor)
- Your principal place of residence is in the United States
- You filed or will file a Form 1040 Schedule C for 2019
However, if you are a partner in a partnership, you may not submit a separate PPP loan application for yourself as a self-employed individual. The self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by the partnership. Limiting a partnership and its partners to one PPP loan is necessary to help ensure that as many eligible borrowers as possible obtain PPP loans before the June 30, 2020 deadline.
How do I calculate the maximum amount I can borrow and what documentation is required?
If you have no employees:
- Use your 2019 IRS Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value). If this amount is over $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a PPP Loan.
- Calculate the average monthly net profit amount (divide by 12) (from step 1)
- Multiply the average monthly net profit amount by 2.5 (from step 2)
- Add any outstanding amount from an Economic Injury Disaster Loan (EIDL) received between January 31, 2020 and April 3, 2020, that you seek to refinance, less the amount of any advance.
If you have employees:
- Compute 2019 payroll by adding the following:
— Use your 2019 IRS Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value). If this amount is over $100,000, reduce it to $100,000. If this amount is less than zero, use zero.
— 2019 gross wages and tips paid to your employees. Subtract any amounts paid to any individual employee in excess of $100,000 annualized and any amounts paid to any employee whose principal place of residence is outside the United States.
— 2019 employer health insurance contributions (health insurance component of Form 1040 Schedule C line 14), retirement contributions (Form 1040 Schedule C line 19), and state and local taxes assessed on employee compensation. - Calculate the average monthly net profit amount (divide by 12) (from step 1)
- Multiply the average monthly net profit amount by 2.5 (from step 2)
- Add any outstanding amount from an Economic Injury Disaster Loan (EIDL) received between January 31, 2020 and April 3, 2020, that you seek to refinance, less the amount of any advance.
It is our interpretation you will need to provide your 2019 Form 1040 Schedule C, Form 941’s, and state quarterly wage unemployment insurance tax reporting forms for each quarter, along with evidence of any retirement and health insurance contributions, if applicable.
How can PPP loans be used by self-employed and independent contractors?
The proceeds for a PPP loan can be used for the following:
- Owner compensation replacement, calculated based on 2019 net profits above;
- Employee payroll costs as described in the CARES Act, if you have employees;
- Mortgage interest payments on debt incurred prior to February 15, 2020;
- Rent for leases that were in place before February 15, 2020; and
- Utilities for services that were in place before February 15, 2020
At least 75 percent of the requested forgivable dollars shall be used for payroll costs (said another way, no more than 25% of the forgiveness can be for non-payroll expenses). For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any refinanced EIDL will be included.
To discuss this information in more detail, please contact Rebekah Smith, Dustin Minton, or Jeremy Bronson.
