Paycheck Protection Program: New Guidance for Self-Employed Businesses

In a previous post, we provided an overview of the Paycheck Protection Program (PPP), one of the loan provisions under the CARES Act. There has been an abundance of new information released about this program, including additional guidance for independent contractors and sole proprietors. If you are self-employed, what should you know?

Do Schedule C filers qualify for PPP loans? If you are self-employed (such as an independent contractor or a sole proprietor), you file a Form 1040, Schedule C, your business was in operation on February 15, 2020, and your principal place of residence is in the United States, you are eligible for a PPP loan.

What information do you need? In addition to your contact information, some additional items you need to supply with your application may include:

  • 2019 Form 1040 Schedule C 
  • 2019 Form 1099-MISC detailing non-employee compensation (Box 7), invoice, bank statement or other documentation that establishes that you are self-employed
  • A 2020 invoice, bank statement or other documentation that establishes you were in business on February 15, 2020

If your business has employees, additional documents you may need are:

  • 941 Employer’s Quarterly Federal Tax Forms for each quarter in 2019
  • 2019 Payroll records
  • State unemployment tax reporting forms for each quarter in 2019
  • Payroll records for the pay period that included February 15, 2020
  • Evidence of any retirement and health insurance contributions, if applicable

How to calculate the PPP loan amount if you are self-employed and have no employees:  If you are self-employed and have no employees, the SBA provides the following instructions: 

Step 1: Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount. 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. 

Step 2: Calculate your average net monthly profit. To do this, take the amount from your 2019 Form 1040 Schedule C line 31 (net profit) and divide it by 12. That gives you your average monthly net profit. 

Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5. 

Step 4: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

How to calculate the PPP loan amount if you are self-employed and have employees:  If you have employees, the SBA provides the following instructions: 

Step 1: Compute 2019 payroll by adding the following: 

  1. Your 2019 Form 1040 Schedule C line 31 net profit amount up to $100,000 annualized, if this amount is over $100,000, reduce it to $100,000, if this amount is less than zero, set this amount at zero; 
  2. 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c- column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips; 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; and 
  3. 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 (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms). 

Step 2: Calculate the average monthly amount by dividing the amount from Step 1 by 12. 

Step 3: Multiply the average monthly amount from Step 2 by 2.5. 

Step 4: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid). 

What amounts are eligible for forgiveness? How much is forgiven will depend on the total amount spent over the covered period— the eight weeks after the loan is disbursed— on the following, according to the SBA

  • Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), 
  • Covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums); 
  • Owner compensation replacement, calculated based on 2019 net profit with forgiveness of such amounts limited to eight weeks’ worth (8 divided by 52) of 2019 net profit, excluding any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) (Public Law 116-127) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA. 
  • Payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments); 
  • Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments); and. 
  • Utility payments under service agreements dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C (business utility payments). 

How do I apply? These loans are administered through select banks and other financial institutions.  The SBA website can help you to find a lender in your area. Contact your bank directly to receive an application and for a list of the specific documents you will need to provide to them.

Note: The information provided in this blog does not, and is not intended to, constitute legal or tax advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information in this blog may not constitute the most up-to-date information. This blog contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser.