As small businesses continue to flood lending institutions with their Paycheck Protection Program (PPP) applications, a second wave is coming as the SBA now opens the program on Friday April 10th to self-employed individuals and independent contractors. While we still await formal guidance regarding the program specific to the self-employed, we wanted to share with you some of the information we do have via interim guidance and clarifications.
Where can I find the application for the PPP program that must be submitted through my bank?
You can find the application via SBA.gov:
Is there a requirement that I be in business during 2019?
No, as long as your business was operational prior to February 15, 2020, you can apply for the PPP.
How is the loan size determined for an individual filing a Schedule C Form with no employees?
Loan size is determined by your net profit. Line 31 of your 2019 Schedule C Form or your most recent income statement if you have not filed. Divide this profit by 12 to arrive at a monthly average payroll expense and multiply this by 2.5. Note that the net profit amount is capped at $100,000. As a result the maximum monthly average payroll cost would be $8,333 x 2.5 resulting in a loan size of $20,832. At this juncture, it is unclear whether or not owner benefits such as self-employed health insurance can be added to the monthly payroll cost calculation.
What about my spouse, can he or she apply as well?
Yes, assuming the spouse has their own activity reported under either their social security number or separate EIN#. Your spouse would not be considered to have a salary through the business unless he or she was paid as a contractor prior to February 15, 2020.
Is there a difference if I am considered an independent contractor?
No, independent contractors would also report their income and expenses via a Schedule C Form and you would calculate the loan size as previously mentioned (Line 31 of your Schedule C multiplied by 2.5 keeping in mind there is a $100,000 cap).
Do employees and subcontractors paid under my sole proprietorship count?
Only employees paid on a W-2 would count as “payroll costs” within the 2.5 x “payroll costs” loan size determination.
How will the forgiveness element work for the self-employed/independent contractor?
As a reminder, for small businesses to qualify for forgiveness, they must track and demonstrate that within the eight week period following loan funding they spend 75% of the payments on “payroll costs” while the remaining 25% may be used for rent, utilities and interest. While we do not have any official guidance with respect to the self-employed, we can only speculate. Some anticipate that the self-employed and independent contractor will be subject to these same restrictions and will need to properly document how the loan proceeds were used to pay general expenses, inclusive of rent, utilities, or interest. It is unclear how draws for the self-employed will count towards the requisite spend.
I am self-employed, can I enter the PPP program and also collect unemployment?
No, individuals may not receive unemployment and also receive PPP loan proceeds. You will need to evaluate which would offer you the most take home dollars. Loan forgiveness under the PPP would be tax free, whereas unemployment compensation would be taxable.
What documents do you anticipate the banks will require?
Schedules from your 2019 tax return filed- Schedule C along with supporting schedules (or draft Schedule C if not filed) or most recent income statement (e.g. QuickBooks Profit & Loss Statement); any associated 1099s received should also be included. It is speculated that some banks may require additional documentation (e.g. bank statements, invoices, etc.). As specified in 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.”
Where can I find a comparison grid on the SBA’s PPP program and EIDL program?
See our comparison grid here:
PAYCHECK PROTECTION PROGRAM LOANS Frequently Asked Questions (FAQs)