Note: This article has been updated to reflect the latest changes from the PPP Flexibility Act, which was signed into law on June 4, 2020.
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, here’s what you need to know, and what you’ll need to apply.
All small businesses qualify for the Payment Protection Program.
Sole proprietors who report income and pay taxes on a Schedule C in your personal tax return.
Independent contractors who collect 1099-MISC forms (but for the PPP, you’ll need to submit a Schedule C, not your 1099s).
Gig economy workers who take on-call jobs provided by companies such as Uber, Lyft, TaskRabbit, and Instacart.
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.
Further reading: The Paycheck Protection Program (A Simple Guide)
What is the benefit of the Paycheck Protection Program?
This program is designed to help Americans stay employed and retain their salaries. As the name implies, this is a payroll-focused program. The payout you receive will be based on your average monthly payroll expense multiplied by 2.5. Under the PPP, your payroll expense can include your salary expenses and health insurance premiums.
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 a tax-free grant). If you keep your payroll expenses consistent to what they were before the COVID-19 pandemic, 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!
However, it is important to note that you cannot receive both Unemployment Benefits and a PPP loan at the same time. Since you can use the PPP funds to pay yourself, you’ll be considered to be fully covered during the 24-week covered period. Unemployment benefits would not apply for you. You should consider the payout of each program to determine which is the best fit for you.
Further reading: PPP Loans vs. Unemployment Benefits (How to Choose)
What if I don’t use a payroll service?
If you own a business and do not give yourself a salary through a payroll service, you are likely still eligible for the Paycheck Protection Program—with one exception. Businesses that are structured as C corporations or S corporations must use payroll to pay their owners, because the corporation is taxed separately from the individual. If you own a corporation and have not been paying yourself a salary through payroll, you will not have a salary covered through the PPP. This is because distributions or dividends from a corporation are not considered to be a salary or self-employment income.
Payments made to contractors aren’t considered payroll and aren’t eligible under the PPP.
Sole proprietors and the PPP
If you run a business on your own, your business is a sole proprietorship— even if you haven’t formally let the IRS know.
Since you don’t have employees, you won’t be reporting your payroll costs for the PPP loan. Instead, you’ll be reporting your net business income, which will be reported on a Schedule C. As long as your business was operational prior to February 15 of this year, you can apply to the Paycheck Protection Program.
According to the U.S. Treasury, “regardless of whether you have filed a 2019 tax return with the IRS, you must provide the 2019 Form 1040 Schedule C with your PPP loan application.”
If you’ve already filed your taxes, this should be easy: just submit your filled-out Schedule C to your lender. If you haven’t filed your taxes yet, you will likely need to get retroactive bookkeeping done so you can calculate your net income and fill out your Schedule C properly.
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 net profit as a sole proprietor (which is what the PPP will ask for).
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.
Sole proprietors who are married
If you run a sole proprietorship informally 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 may apply separately for each - but only if these sole proprietorships have separate EINs. The general rule of thumb is that 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.
Independent contractors and the PPP
If you work as a 1099 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, you will still need to fill out a Schedule C in order to qualify for the PPP.
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 proprietorship and independent contractors will need to submit a Schedule C from their 2019 tax return (filed or yet-to-be-filed) showing income and expenses from the sole proprietorship.
All self-employed individuals will need to submit 2019 payroll tax filings reported to the Internal Revenue Service.
Rent, mortgage, and utilities expense
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.
However, if you want to have your loan forgiven, you must spend 60% of the loan funds on payroll costs (and the remaining 40% on rent, mortgage interest, and utilities).
If you’re a sole proprietor, about 75% of the loan acts as a straight replacement for lost profit and doesn’t need to be spent in a particular way. The remaining 25% must be spent on eligible business mortgage interest, rent and lease payments, and utilities in order to be forgiven.
When does the application open?
Sole proprietorships can apply starting April 3.
Independent contractors and self-employed individuals can apply starting April 10.
You are encouraged to apply early as there is a funding cap for this program. You have until June 30 to submit an application.
How do I apply?
You can apply for the Paycheck Protection Program through an SBA-backed lender. We recommend applying through your own financial institution to start—a lender you already have an existing banking relationship with. That will be the fastest way to get approved.
Next, we recommend applying for PPP through a community bank. They have less demand and will likely be able to process you faster.
Here is a the PPP application form from the U.S. treasury, indicating which information you’ll be expected to provide to your bank.
It doesn’t hurt to apply through more than one lender.
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
- Schedule C for a sole proprietorship (mandatory for self-employed folks)
If you don’t have access to those kinds of documents, you can also provide bank records.
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.
Can I apply to the PPP through more than one lender?
Yes! There is no harm in applying through more than one lender. Whoever processes your application first will receive an SBA approval number for your business (if you qualify for the loan). This number is called a PLP. The SBA will only issue one PLP for each Tax ID, meaning there is no chance you will accidentally get approved for two PPP loans.
If you are approved for a PPP loan, your application with the other lenders will eventually be rejected, so it’s best to withdraw your application from the other lenders once you’ve been approved.
So far, there has been no guidance issued by the Treasury or SBA stating that you can only apply through one lender at a time. In fact, lenders are encouraging businesses to apply through multiple lenders, to increase their chances of getting processed in time.
Other COVID-19 resources
- The Paycheck Protection Program and Health Care Enhancement Act: What You Need to Know
- The PPP and EIDL Are Closed. Now What?
- After the PPP: Your Next Steps After Getting Approved
- PPP Loan Forgiveness: The Complete Guide
- PPP Lenders: Where to Get a Paycheck Protection Loan
- How to Calculate Your PPP Loan Amount
- Required Documents for Your PPP Application
- Do I Qualify for the PPP Loan?
- Owner Draws and the PPP
- How to Get an SBA Disaster Loan (COVID-19)
- What is the $10,000 SBA EIDL Grant?
- Unemployment Benefits and the CARES Act
- The Coronavirus Relief Bill: Every Benefit for Small Businesses
- Paycheck Protection Program: A Simple Guide
- COVID-19 Resources for Small Businesses, State by State