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

We recognize that sole proprietors and independent contractors may not have payroll.  But they are STILL ALLOWED TO APPLY for the PPP LOANS!

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 income that applies to the PPP must be subject to either the payroll tax or self-employment tax. Sole proprietors and independent contractors generally report their business income and expenses on Schedule C of their individual income tax return, which is attached to Form 1040. The amount of income that is subject to self-employment taxes can be found on line 31 of Schedule C.  It is this amount that can be used as part of the PPP “Payroll Costs” calculation.  Take the number from Schedule C line 31 (if this amount is over $100,000, then reduce it to $100,000), divide by 12 months to get your average monthly “payroll cost.” Then multiply by 2.5.  If the amount on line 31 is zero or less, then you are not eligible for a PPP loan.

What if my sole proprietorship has employees?

For sole proprietors with employees, you can calculate your “payroll costs” by adding the earnings from Schedule C line 31 (if this amount is over $100,000, then reduce it to $100,000), to employee wages, employer health insurance  costs for employees (line 14), employer retirement plan contribution for employees (line 19), and employer state and local taxes assess on employee compensation, primarily state unemployment insurance.  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.

How do self-employed deductions, such as home office expense, ½ self-employment tax deduction, self-employed retirement and health insurance deductions factor into the calculation?

The amount reported on Schedule C line 31 already includes the home office deduction (see line 30 of Schedule C.) The other deductions noted here are not factored into the net self-employment earnings calculation. They are adjustments to income to arrive at Adjusted Gross Income. It does not change the net self-employment earnings number.

What if you have more than one 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.

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 and the remaining amount, which cannot exceed 25% of the loan proceeds, on interest on a mortgage or loan secured by personal property used in the business, rent, and utilities within 8 weeks from the date of receiving the funding. 

Forgiveness requirements also mandate that you maintain staff headcount.  You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.