How The Paycheck Protection Program Affects Self Employed People
The $350B Paycheck Protection Program is designed to support small businesses with immediate cash flow during the COVID-19 pandemic quarantine.
If you are an SCorp owner, 1065 partnership owner, sole proprietor, independent contractor or gig worker, you qualify for a PPP loan:
- Sole proprietors who report income and pay taxes on a Schedule C in your personal tax return.
- Independent contractors who collect 1099-MISC forms.
- Gig economy workers who take on-call jobs provided by companies such as Shipt, Uber, TaskRabbit, and Instacart.
- 1120S/S Corporation owners without employees other than themselves and who pay themselves salary and take a distribution.
- 1065 partnership owners who have no employees other than the owners.
- The only stipulation is that your business was operational as of February 15, 2020. If you started your business after that date, you will not be eligible for this program.
How does the Paycheck Protection Program work?
The PPP is designed to help Americans stay employed and retain their salaries. As implied, this is a payroll-focused program, and the cash support is based on your average monthly payroll expense multiplied by 2.5. This includes your salary expenses and health insurance premiums.
The main bonus of the PPP loan is that it can be almost entirely forgiven, and you will not have a tax liability for any portion of the loan that is forgiven, which essentially allows this program to function as a tax-free grant if you keep your payroll expenses similar to what they were before the pandemic for eight weeks, including employee’s salaries and number of employees paid, you can have those expenses forgiven from your loan amount, as well as certain other expenses such as rent and utilities. If you are self-employed (and you are your only employee), this should not be a problem.
IMPORTANT: It is critical to know that you cannot receive both Unemployment Benefits and a PPP loan at the same time. You should consider the payout of each program to determine which is the best fit for you.
How are S Corporations treated under the Payroll Protection Program?
If you are an S Corporation owner and have been paying yourself a reasonable salary through payroll you would apply for a PPP based on your average monthly W2 salary times 2.5. Distributions or dividends from a corporation are not considered to be a salary or self-employment income. Also payments made to contractors aren’t considered payroll and aren’t eligible under the PPP.
How do 1065 Partnerships apply for the Paycheck Protection Program?
If you are a 1065 partnership, each partner would apply to the Paycheck Protection Program similar to a sole proprietor using your net income to calculate your loan amount. Use your total net income payment for 2019 (not to exceed $100k) and divide that by 12. You take that amount and multiple it by 2.5, and that is your loan payment amount.
Sole proprietors and the PPP
If you are a sole proprietor and report your income through a Schedule C your salary is determined by your net profit. If you were operational in 2019 and have filed your 2019 taxes, this will be reported on line 31 of your Schedule C. If you have yet to file your 2019 taxes, but have bookkeeping for your business through 2019, this will be the Net Profit line on your income statement.
Your monthly average payroll expense will be your annual net profit divided by 12. If your annual net profit is over $100,000, you may only claim up to $100,000 divided by 12. Your loan amount will be that amount times 2.5.
Sole proprietors who are married
If you run a sole proprietorship with a spouse, you will only apply to the PPP once, and 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.
If you own more than one sole proprietorship, you have to apply separately for each. But only if these sole proprietorships have separate EINs and existed before February 15, 2020. You can apply separately for as many businesses you own that have separate identification numbers, or separate tax reportings. You may apply for the PPP once with your SSN as a sole proprietor, and then separately for any other businesses you own using their EINs.
How do Independent Contractors (1099) apply for the PPP?
If you work as an independent contractor you are by default considered to be a sole proprietor in the eyes of the IRS. This means your income is reported on the Schedule C of your 1040, and you will use your 1099-MISC to determine your salary and loan amount.
You would divide your net salary (anything below $100,000) by 12 and multiply that number by 2.5 to get your loan amount. Remember to use your net salary, meaning income after expenses.
What financial documents do self employed people need to apply for a PPP loan?
Your lender will want to see all documents related to any wage, commission, income, or net earnings from self-employment.
- Sole proprietorships will need to submit schedules from their 2019 tax return filed (or to be filed) showing income and expenses from the sole proprietorship.
- Independent contractors will need to submit schedules from their 2019 tax return filed (or to be filed) as well as Form 1099-MISC from 2019.
- C and S Corporations (1120 and 1120s) will need to submit 2019 payroll tax filings reported to the Internal Revenue Service.
- 1065 partnerships will need to submit the K1 for each partner. proprietorship.
- Aside from payroll, what else does the PPP cover?
The Paycheck Protection Program funding can cover your office lease, rent, or mortgage interest, provided that you had it before February 15 2020. If you have a home office, you can claim a portion of the expenses (the percentage of your home that’s used as a home office).
Again, collect any paid invoices, statements, lease agreements, or cancelled checks that will help prove you had these expenses.