Just the Facts: Everything you Need to Know About PPP Loans and Forgiveness as An Independent Contractor/Sole Proprietor

Do you qualify for a PPP Loan if you are an Independent Contractor or Sole Proprietor?

For an individual with Self-Employment Income who files a Form 1040, Schedule C to be eligible for a Payroll Protection Program (PPP Loan), it must meet the following requirements:

  1. In operation on February 15, 2020;
  2. An individual who is a independent contractor or a sole proprietor (a partner in a partnership cannot file a separate PPP loan application as self-employed);
  3. Your principal place of residence is the United States; and
  4. You filed or will file a Form 1040 Schedule C for 2019.

*** SBA will issue additional guidance for those individuals with self-employment income who: (i) were not in operation in 2019 but who were in operation on February 15, 2020, and (ii) will file a Form 1040 Schedule C for 2020.***

How to Calculate Maximum loan amount if you have NO EMPLOYEES.

Step 1:  Find your net profit on your 2019 IRS Form 1040 Schedule C at line 31.  If your net profits for 2019 are over $100,000.00, you must reduce it to $100,000.  If your net profits are zero or less, you do not qualify for PPP loan.

Step 2:  Divide your 2019 net profit from Step 1 by 12 to obtain your average monthly net profit amount.

Step 3:  Multiply your average monthly net profit 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 that you seek to refinance, less the amount of any advance under the EIDL COVID-19 loan because it does not need to be repaid. 

Documents need if you have NO EMPLOYESS.

  1. 2019 Form 1040 Schedule C (regardless if not filed);
  2. 2019 IRS Form 1099-MISC, invoice, bank statement, or book of record that establishes your are self-employed.
  3. 2020 invoice, bank statement, or book of record to establish you were in operation on or around February 15, 2020. 

How to Calculate Maximum loan amount if you HAVE EMPLOYEES.

Step 1:  Add:

  1. Net profit on your 2019 IRS Form 1040 Schedule C at line 31.  If your net profits for 2019 are over $100,000.00, you must reduce it to $100,000.  If your net profits are less than zero, you must set it to zero;
  2. 2019 gross quarterly wages and tips paid to employees whose principal place of residence was the U.S. (line 5c  – column 1 of the 2019 IRS Form 941) plus any pre-tax employee contributions for health insurance or other fringe benefits (that was exclude from Form 941) minus any amount over $100,000, annualized, paid to any individual employee and  any amounts paid to employees whose primary residence is outside of the U.S.
  3. 2019 employer health insurance contributions (Form 1040 Schedule C line 14), retirement contributions (Form 1040 Schedule C line 19) and state and local taxes assessed on employee compensation (i.e. State Unemployment Tax Act)

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

Step 3:  Multiply your average monthly net profit 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 that you seek to refinance, less the amount of any advance under the EIDL COVID-19 loan because it does not need to be repaid. 

Documents need if you HAVE EMPLOYEES.

  1. 2019 Form 1040 Schedule C;
  2. 2019 Form 941 (or other tax from or equivalent payroll processor records);
  3. State quarterly wage unemployment insurance tax reporting form for each quarter in 2019;
  4. Evidence of any retirement and health insurance contributions, if applicable;
  5. A payroll statement or similar document to establish operation on February 15, 2020.
  6. 2019 IRS Form 1099-MISC, invoice, bank statement, or book of record that establishes your are self-employed.
  7. 2020 invoice, bank statement, or book of record to establish you were in operation on or around February 15, 2020. 

What expenses can the PPP Loans be used for?

  1. Owner compensation based on 2019 net profit.
  2. Employee payroll costs  which includes wages, commissions, or tips (capped at $100,000 a year per individual), Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;  State and local taxes assessed on compensation. 
  3. The following 2019 expenses that you claimed or are entitled to claim as a deduction: mortgage interest payments on any business real or personal property, business rental payments, and business utility payments.  If you did not claim any of the foregoing expenses as on your 2019 Form 1040 Schedule C, the loan proceeds cannot be used towards that expense. 
  4. Interest payments on any debt obligations that were incurred before February 15, 2020, however, that amount will not be eligible for PPP loan forgiveness. 
  5. Refinancing the EIDL loan made between January 31, 2020 and April 3, 2020

Restrictions of use of the PPP loan.

At least 75 percent of the PPP loan proceeds shall be used for payroll costs. 

What amounts are eligible for forgiveness?

The full principal amount of the loan plus any accrued interest may be forgiven but it will depend on the total amount spent over the covered period:

  1. Payroll costs (for eight weeks, a max of $15,385 per individual);
  2. Covered benefits for employees (not owners), including health care expenses, retirement contributions and state taxes imposed on employee payroll paid;
  3. Owner compensation replacement limited to eight weeks’ worth of 2019 net profit excluding any qualified sick leave equivalent amount for which a credit is claimed under section 7002 or 70004 of the Families First Coronavirus Response Act;
  4. Payments of interest on the business’ mortgage obligations on real or personal property incurred prior to February 15, 2020 to the extent they are deductible on Form 1040 Schedule C;
  5. Rental payments on business leases in force before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C; and
  6. Utility payments in place before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C.

What documents will you need to request a loan forgiveness?

  1. Borrower certification required by Section 1106(e)(3) of the Act;
  2. If you have employees:
    1. IRS Form 941; and
    2. State quarterly wage unemployment insurance tax forms (or equivalent payroll processor records).
  3. All documents evidencing business rent, mortgage interest payments on real or personal property, or business utility payments during the covered period if the loan was used to cover those expenses. 
  4. The 2019 Form 1040 Schedule C provided at the time of applying for the PPP loan.
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