Expertise Beyond the Numbers

Paycheck Protection Program (PPP): Loan Guidelines for Sole Proprietors and Independent Contractors

Updated 4/23/2020 at 10:43pm ET

SC&H’s Key Takeaways

  • PPP loan applications for sole proprietors and independent contractors start April 10, 2020.
  • You can borrow 2.5 times your average monthly “payroll costs.”
  • Payroll costs are defined as net earnings from self-employment.
  • Loan forgiveness is available if you spend 75% of the loan proceeds on payroll costs and 25% on mortgage, rent, and utilities. Must spend in the 8 weeks following receipt of the loan proceeds.

The U.S. Treasury Department issued Beginning Friday, April 10, 2020, banks are accepting Paycheck Protection Program (PPP) loan applications from sole proprietors and independent contractors.

In order to qualify, you needed to have begun operations prior to February 15, 2020. Proceeds from the PPP loan can be used to cover your mortgage, rent, office lease, utilities, payroll costs, and your net self-employment earnings. For those that have a home office, you can claim a portion of the mortgage, rent and utilities based on the percentage of your home used as a home office. If the loan proceeds are used for those expenses in the 8 weeks following receipt of the funds, the loan will be forgiven.

How much can you borrow?

You are allowed to apply for 2.5 times your average monthly payroll costs. The CARES Act defines payroll costs for sole proprietors and independent contractors as:

The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period.

The nature of the income that applies to the PPP must be subject to either the payroll tax or self-employment tax. Sole proprietors report their business income and expenses on Schedule C of their individual income tax return, Form 1040. The net earnings from Schedule C, which is found on line 31 of Schedule C, is subject to self-employment tax. Independent contractors can either report their income on Schedule C or as Other Income on Schedule 1, line 8. As long as the Other Income is subject to self-employment tax, it applies to the PPP calculation.

PPP Loan Calculation for Businesses with Employees

For businesses with employees, you simply take the net self-employment earnings from Schedule C line 31, add back employee wages, employer health insurance costs for employees, and employer retirement plan contribution for employees. Take that number and divide by 12 months to get your average monthly “payroll cost.” Then multiply by 2.5.

Keep in mind that the wages for any employee, as well as the net self-employment income from Schedule C line 31, may not exceed $100,000 for the purposes of this calculation.

PPP Loan Calculation for Businesses without Employees

For businesses without employees, you simply take the net self-employment earnings from Schedule C line 31, and/or Schedule 1 line 8, divide by 12 months to get your average monthly “payroll cost.” Then multiply by 2.5.

What about self-employed deductions such as home office expense, ½ self-employment tax deduction, self-employed retirement and health care deductions? How are those factored into the PPP calculation?

Net self-employment earnings reported on Schedule C line 31 is after the home office deduction, which is line 30 of Schedule C. That deduction will cause a reduction in the average monthly payroll cost. The deductions for ½ self-employment tax, self-employment health insurance, and self-employment retirement plans (like a SEP IRAs or solo 401ks) are not factored into the net self-employment earnings calculation. They are adjustments to income to arrive at Adjusted Gross Income, not adjustments to arrive at net self-employment earnings. Likewise, backing out the ½ self-employment tax is only used to determine the amount of net self-employment income subject to self-employment tax. It does not change the net self-employment earnings number.

What if you have multiple Schedule C businesses?

If you have multiple Schedule C businesses, you can include the net self-employment earnings from each entity in the PPP calculation.

What documentation will need to be attached to the application?

The language in the CARES Act briefly touches on the documents needed for the loan application, stating the need to provide:

“Documentation as is necessary to establish such individual as eligible, including payroll tax filings reported to the Internal Revenue Service, Forms 1099–MISC, and income and expenses from the sole proprietorship, as determined by the Administrator and the Secretary.”

Business income and expense can be established with either the 2019 Form 1040, Schedule C and/or internal financial statements (balance sheet and income statement). In normal times, a Schedule C would carry more weight. These aren’t normal times and financial statements may suffice. But it’s ultimately up to the Administrator and the Secretary. Your lender may ask you to provide additional document based on their internal requirements. At minimum, you should be prepared to include the following documents (if applicable):

  • 2019 tax return, including Schedule C. and/or Schedule 1.
  • If your 2019 tax return is not complete, attach the 2019 financial statements along with a 2018 tax return.
  • All 2019 Form 1099-MISC.
  • 2019 payroll tax forms 940/941.
  • Any other documents that can substantiate income, including invoices, bank statements, and earnings statements.

Forgiveness Requirements

In order to have your loan forgiven, you must spend at least 75% of the loan funds on payroll costs, which include an amount for owner compensation based upon 2019 net earnings. The remaining amount, which cannot exceed 25% of the loan proceeds, must be spent on interest on a mortgage, a loan secured by personal property used in the business, rent, and utilities. To the extent that these expenses are incurred in connection with a home office, only the tax deductible portion will apply. Additionally, these expenditures must take place within the 8 weeks following receipt of the loan proceeds.

The SBA designed loan application can be found here.  Banks have their own applications and are generally requiring that borrowers use those.

If you have any questions or would to speak with one of our team members, please don’t hesitate to reach out. SC&H is here to help.