PPP for the Self-Employed

On April 14, 2020, the U.S. Small Business Administration issued additional guidance to explain how the Paycheck Protection Program (PPP) works for self-employed individuals. Self-employed individuals are eligible to apply if:

  • They were in operation on February 15, 2020;
  • They have self-employment income (for example, they are an independent contractor or sole proprietor);
  • Their principal residence is located in the United States; and
  • They have or will file a Form 1040 Schedule C for 2019.

Maximum Loan Calculation (No Employees)

The maximum loan amount for a self-employed individual without employees is calculated as follows:

STEP 1:

Take the net profit amount from line 31 of your 2019 Form 1040 Schedule C. If the amount is over $100,000, reduce it to $100,000. If the amount on line 31 is zero or negative, you are not eligible for a PPP loan.

STEP 2:

Divide the amount in Step 1 by 12 to calculate the average monthly net profit amount.

STEP 3:

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

STEP 4:

Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 to be refinanced, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

Item List Required by Lender

Self-employed individuals must provide the following items to their lender in connection with the loan:

  • 2019 Form 1040 Schedule C;
  • 2019 IRS Forms 1099-MISC received by the self-employed individual detailing the nonemployee compensation received or an invoice, bank statement, or book of record that establishes that they are self-employed; and
  • 2020 invoice, bank statement, or book of record to establish that they were in operation on or around February 15, 2020.

Maximum Loan Calculations (with Employees)

For self-employed individuals with employees, the maximum loan amount is calculated as follows:

STEP 1:

Compute 2019 payroll by adding the following:

  • Take the net profit amount from line 31 of your 2019 Form 1040 Schedule C. If the amount is over $100,000, reduce it to $100,000. If the amount on line 31 is zero or negative, set this amount at zero.
  • 2019 gross wages and tips paid to employees computed using 2019 IRS Form 941 taxable Medicare wages and tips (line 5c-column 1) from each quarter plus any pre-tax employee contributions for health insurance and other fringe benefits excluded from taxable Medicare wages and tips; subtract any amounts paid to employees in excess of $100,000 annualized and any amounts paid to any employee whose principal place of residence is outside the United States; and
  • 2019 employee health insurance contributions (health insurance component of Form 1040 Schedule C line 14), retirement contributions (Form 1040 Schedule C line 19) and 2019 state unemployment taxes. Self-employed individuals are not allowed to include their own health insurance or retirement
STEP 2:

Divide the amount in Step 1 by 12 to calculate the average monthly amount.

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 to be refinanced, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

Additional Lender Requirements (with Employees)

Additional documents required to be submitted to the lender for self-employed individuals with employees include:

  • All 2019 Forms 941;
  • All 2019 state quarterly wage unemployment insurance tax reporting forms;
  • Evidence of any retirement and health insurance contributions; and
  • A payroll statement from the pay period that covered February 15, 2020.

Loan Usage

PPP loans may be used by self-employed individuals for the following items:

  • Owner compensation replacement;
  • Employee payroll costs for employees whose principal place of residence is in the United States;
  • Mortgage interest payments on any business mortgage obligation on real or personal property;
  • Business rent payments;
  • Business utility payments;
  • Interest payments on any other debt obligations that were incurred before February 15, 2020 (these amounts are not eligible for loan forgiveness)
  • Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.

The loan proceeds cannot be used for interest, rent or utility expenses unless they were claimed or entitled to be claimed on the 2019 Form 1040 Schedule C. At least 75% of the PPP loan proceeds must be used for payroll costs.

Loan Forgiveness

The amount of loan forgiveness can be up to the full amount of the loan plus accrued interest. Actual loan forgiveness will depend on the amount spent during the eight-week period following the receipt of the loan funds.

Costs eligible to included in the loan forgiveness calculation are:

  • Payroll costs up to $100,000 of annualized pay per employee (maximum of $15,385) as well as health care and retirement benefits for employees (but not owners) and state unemployment taxes:
  • Owner compensation replacement calculated based on the net profit on the 2019 Form 1040 Schedule C. Forgiveness amount is limited to eight weeks' worth (8/52) of the 2019 net profit excluding any qualified sick or family leave equivalent amount;
  • 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;
  • Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C; and
  • Utility payments under service agreements dated before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C.

To request loan forgiveness the following documentation must be submitted to the lender:

  • Borrower certification that the documentation presented is true and correct and the amount for which forgiveness is request was used to retain employees (if applicable), make interest payments on mortgage obligations, make payments on rent obligations, or make utility payments;
  • Form 941 and state unemployment insurance tax reporting form or equivalent payroll processing records that best correspond to the eight-week period following receipt of the loan funds (if applicable);

Evidence of payment of business mortgage interest payments on real or personal property, business rent and business utilities during the eight-week period following receipt of the loan funds.

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