Updated: Apr 7
What is the Paycheck Protection Program
The brand-new Paycheck Protection Program (PPP) is designed to support American small businesses with immediate cash support during the COVID-19 pandemic. If you are a sole proprietor, an independent contractor, or a gig worker, you can also qualify and apply for this loan starting April 10th! What’s really cool about this “loan” is that it can be forgiven! That’s right, if you use 75% of it for payroll expenses then you don’t have to pay it back!
Who Qualifies for This Program
· Business owners – Who pay salaries to themselves and/or their employees
· Sole proprietors – individuals who report income and pay taxes on a Schedule C in your personal tax return. You can have an LLC but are not required to incorporate to qualify for this loan.
· Independent contractors – individuals who collect 1099-MISC forms for work done or services performed
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 Much Can You Apply For & is This Really Free Money?
You can apply for up to 2 ½ times your average payroll expense, up to $10 million. The biggest perk of this program is that it can be almost entirely forgiven. You do not have to pay tax on any portion of the loan being forgiven (meaning the loan becomes tax-free grant). If you keep your payroll expenses consistent to what they were before the COVID-19 pandemic for a further eight weeks, including the salary paid and the number of employees paid, you could be eligible to have those expenses forgiven from your loan amount, as well as certain other expenses such as rent and utilities. The good news is that if you are self-employed (and you are your only employee), this should be easy to achieve!
To see how much your business can apply for, use this calculator!
How Does it Work for Sole-Proprietors
If you run a business on your own, your business is a sole proprietorship— even if you haven’t formally let the IRS know. This means that your business income will be reported on a Schedule C within your personal tax return. As long as your business was operational prior to February 15 of this year, you can apply to the Paycheck Protection Program.
Your salary will be 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.
If you don’t have bookkeeping or a tax return, we strongly recommend that you get caught up with your bookkeeping. Without a payroll service, bookkeeping is the best way to determine your salary as a sole proprietor.
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.
How Does It Work for Independent Contractors
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 freelance income gets reported annually on a Schedule C within your personal tax return. You will have a Schedule C even if you pick up odd jobs or do freelance work, and this Schedule is based on the 1099-MISC forms you collect from the companies or individuals who have hired you as a contractor.
Your salary is most easily determined by looking at the net profit listed on your Schedule C. If you have already filed your 2019 taxes, or prepared a 2019 return, this will be reported on line 31 of the Schedule C. If you have not filed your 2019 taxes but have accurate bookkeeping completed for all of 2019, this will be the Net Profit line on your Income Statement.
If you have neither of those things, your best estimation would come from adding all of your 1099-MISC income together. To find your monthly average, simply divide this amount by 12. If your annual net profit is over $100,000, you may only claim up to $100,000 divided by 12.
Proof of Income
The lender will want to see all documents related to any wage, commission, income, or net earnings from self-employment that you have received. This means that you’ll need to collect any earnings reports, pay stubs, or invoices you have. 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. All self-employed individuals will need to submit 2019 payroll tax filings reported to the Internal Revenue Service.
How to apply?
You can apply for the Paycheck Protection Program through an SBA Backed Lender. Here is a list of the top 100 SBA Lenders.
Here is the PPP application form from the U.S. treasury, indicating which information you’ll be expected to provide to your bank.
Financial records you’ll need
You’ll need to provide payroll/bookkeeping records to prove your payroll expenses.
That could include:
Payroll processor records
Payroll tax filings
Form 1099-MISC records
Income and expenses from a sole proprietorship
If you don’t have access to those kinds of documents, you can also provide bank records. These documents will also be needed to apply for your loan forgiveness, so please keep clean records.
Need Help Applying?
These applications can seem pretty daunting when you go in alone. Our firm is offering free consultations to help you navigate this loan process! CLICK HERE TO SCHEDULE!