Editor’s note: On Tuesday, May 4th the PPP ran out of general funds and the SBA stopped accepting new PPP loan applications. A reserve of funds is still available for community financial institutions that lend to businesses run by women, minorities, and underserved communities. Additionally, a reserve of funds remains for applications previously submitted but not yet reviewed by the SBA. If you have already submitted your loan application, however, this does not guarantee you funding.
If your business files taxes as an LLC (or sole prop)
As an LLC, your business does not pay taxes. Instead, the tax liability passes onto the business owners. This means that all of the business’ net profits pass directly through to the owners as earnings. LLC managing members are considered to be self-employed through the LLC, and therefore pay self-employment tax on these earnings.
If you are the single owner, 100% of the net profit passes on to you as a tax liability. If you have multiple owners, the percentage of profit passed on to you as a tax liability will be equivalent to your ownership percentage. For example, if you own 40% of the company, 40% of the business profit passes through to you for taxation.
Determining your salary for the PPP
Your payroll cost for the PPP will be the earnings that you are taxed on. As an owner of an LLC, this is the full amount of your net profit, not your owner draws. You may not have withdrawn as much money as your business made in profit, or you may have actually withdrawn more than your business made in profit, but your self-employment tax is based on your net profit.
If you are the sole owner of a business taxed as an LLC, your salary for your PPP application should be the full amount of your business’ net profit in 2019, and you should leave your member draws out of the calculation entirely. If this amount is negative and you don’t have employees, you should consider applying to the SBA Disaster Loan (EIDL) rather than the PPP.
If you are one of multiple managing members of a business taxed as an LLC, your salaries for the PPP applications will be your share of the business profits in 2019 according to your ownership percentage. This will most easily be found through your 2019 Tax Return on each member’s Schedule K-1, looking specifically at the Self-Employment Income reported on line 14. If these amounts are negative and you don’t have employees, you should consider applying to the EIDL and not the PPP.
If your business files taxes as a corporation
Filing as a corporation could mean that you file taxes as an S corporation or C corporation. Even if you are officially organized as an LLC, but file taxes as an S corp or C corp, this will apply to you.
If your business is taxed as a C corporation, the business itself pays taxes on its net profits, and you as an owner also pay taxes on your dividends related to that profit. You may have heard this referred to as “double taxation”. The important thing to know here is that dividends are not considered a salary. If you are taking owner draws as a C corporation, you should be aware that this can have significant implications. The business’ profit does not pass through to you like it does with an LLC, so this money is considered to be the business’ money, and any owner draws you are taking should be considered a loan from the business that you will repay.
If your business is taxed as an S corporation, your owner draws are known as shareholder distributions. It’s important to realize that these distributions are non-taxable, which means there are some pretty strict requirements in place to prevent owners from taking advantage. As an owner of an S corp, you are required to pay yourself a reasonable salary through payroll, meaning that you are remitting payroll taxes on that amount. You are allowed to take distributions in addition to this salary, but it’s best practice to have a combination of the two rather than distributions alone.
Determining your salary for the PPP
When it comes to the PPP, your payroll will be limited to the wages that you are taxed on. As an owner of a corporation, this should only be the amount you have paid yourself by running payroll. This will not be owner draws, distributions, or loans to shareholders, because none of those types of transactions are subject to payroll or self-employment tax.
If you are using a payroll provider, your salary will be included on an annual payroll report along with any W2 employees you may have. If you’ve been running payroll manually yourself or with the help of a CPA, so long as you have been remitting payroll taxes, you can use those salaries in your calculation to apply for the PPP.
The role of bookkeeping
The Paycheck Protection Program requires you to self-report your payroll numbers (for yourself and your employees), or your net profit if you’re self-employed. The numbers you self-report are critical for getting the right loan amount.
If you have employees (and pay yourself a salary through payroll), the best way to fill out your application accurately is to download a payroll report through your payroll provider. That will give you the information you need. However, once you’ve been approved for a loan, it’s highly recommended that you keep accurate books for your business. You’ll need to prove you spent the funds on the appropriate categories in order to get the loan 100% forgiven. If you don’t have a reliable bookkeeping solution in place, Bench can help.
If you’re self-employed, the best way to fill out your application is to get retroactive bookkeeping done for 2019 and January and February of 2020—which will culminate in an annual income statement. Your income statement will show your net profit, which is exactly the information you’ll need. If you need a remote bookkeeper, Bench can help. We’ll do your catch-up bookkeeping for you and provide you with all the financial statements you’ll need to apply for the PPP. Bookkeeping will also be essential after you’ve been approved in order to get your loan fully forgiven.
If you own more than one business
We are also hearing reports that entrepreneurs who own more than one business are having difficulty getting relief funding when their businesses don’t have cleanly separated finances. If you own more than one business, it’s important to get separate bookkeeping done for each business. This will become doubly important when it comes time to prove your expenses for loan forgiveness.
More Paycheck Protection Program resources
- Paycheck Protection Program (PPP) Loans Resource Hub for Small Business
- The Paycheck Protection Program and Health Care Enhancement Act: What You Need to Know
- After the PPP: Your Next Steps After Getting Approved
- Paycheck Protection Program: A Simple Guide
- Self-Employment and the Paycheck Protection Program
- How to Calculate Your PPP Loan Amount
- Required Documents for Your PPP Loan Application
- COVID-19 Resources for Small Businesses, State by State
- How to Get an SBA Disaster Loan (COVID-19)
- Unemployment Benefits and the CARES Act