There’s been a lot of coverage on the new Paycheck Protection Program (PPP), intended to help eligible organizations retain their workforce. PPP loans are available for 501(c)(3) nonprofits, 501(c)(19) veterans organizations, most small businesses with 500 or fewer employees, sole proprietorships, self-employed individuals and independent contractors. Read more about PPP loan forgiveness and other program terms.
PPP loans are available in amounts up to the lesser of two and a half months of payroll costs (based on an annual average of the 12 months prior to the loan origination date or calendar year 2019) OR $10 million. A breakdown of allowable and excluded payroll costs can be found here. For sole proprietors and independent contractors, payroll costs are defined as wages, commissions, income or net earnings from self-employment, capped at $100,000 on an annualized basis per individual employee.
April 3 was opening day for applications from small businesses and sole proprietorships; on April 10, banks began accepting applications from independent contractors and self-employed individuals. PPP loans will be available through June 30, 2020.
Let’s take a look at how PPP works for independent contractors and self-employed individuals. Please keep in mind, individuals may not receive unemployment and a PPP loan simultaneously. Your RKL advisor can help determine which benefit is the best fit for you.
Self-Employed and PPP
Self-employed individuals are eligible for PPP if they meet this four-part test:
- Were in operation on February 15, 2020
- Earned self-employment income
- Reside principally in the U.S.
- Filed or will file a Form 1040 Schedule C for 2019
Calculation of PPP loan amount depends on employee count. Self-employed individuals with no employees should start by locating net profit amount either on Line 31 of Schedule C on your 2019 tax return or the Net Profit line of your most recent income statement. Divide this annual net profit figure by 12 to determine monthly average payroll expense. Note: If annual net profit surpasses $100,000, divide $100,000 by 12. Multiply the resulting amount by 2.5 then add in the amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 that you wish to refinance (minus any advance of an EIDL COVID-19 loan, which does not have to be repaid).
Self-employed individuals who do employ others must start by computing 2019 payroll. Take Line 31 Schedule C net profit amount up to $100,000 and add gross 2019 wages and tips paid to U.S.-based employees from 2019 IRS Form 941 Taxable Medicare wages & tips (see April 14 update to the Interim Final Rule for more detail on this calculation), employer health insurance contributions, retirement contributions and state and local taxes on employee compensation. Then, divide this figure by 12 and multiply that average monthly amount by 2.5. Finally, add in the amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 that you wish to refinance (minus any advance of an EIDL COVID-19 loan, which does not have to be repaid).
Independent Contractors and PPP
According to Small Business Administration guidance, independent contractor cost does not count toward the payroll costs of the contracting company. For the purposes of PPP, independent contractors must file individually. Use your income reported on Schedule C and 1099-MISC to determine salary and loan amount (following the steps above for a self-employed individual with no employees). Be sure to use net salary (income after expenses).
Partnerships and PPP
In an April 14 update to the Interim Final Rule, the Small Business Administration confirmed that partnerships are eligible for PPP loans, but individual partners should not apply for their own individual self-employed loan. However, self-employment income of up to $100,000 per active general partner may be reported on the partnership’s PPP loan application
Documents to Prep for PPP Application
Self-employed individuals should gather the necessary documents to substantiate wages, income, commission or net earnings for their lender, including these specific items by employee type:
- Self-employed with employees: 2019 Form 941 and state quarterly wage unemployment insurance tax reporting forms; schedules from 2019 tax return filed (or to be filed)
- Self-employed with no employees: Schedules from 2019 tax return filed (or to be filed);
- Independent contractor: Schedules from 2019 tax return filed (or to be filed) and 2019 Form 1099-MISC
According to the Interim Final Rule, applicants “must also submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.”
We will continue to update this post as more guidance becomes available. Applicants should also read the U.S. Treasury’s PPP Frequently Asked Questions. Your RKL advisor is available to help PPP applicants gather the necessary documentation, complete the application and answer any questions.