Self-employed without employees? You can still get a PPP loan
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There has been a tremendous amount of frustration on the part of small business owners operating as sole proprietorships trying to get a Paycheque Protection Program (PPP) Loan. To make matters worse, many bankers and loan officers have been overwhelmed by the number of applications, the speed of the stimulus rollout, and the sporadic advice from the SBA regarding the sole proprietorship protocol.
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Then there is the historical and perpetual confusion shared by many self-employed workers regarding the difference between independent contractors and employees. Unfortunately, all of these factors have converged simultaneously over the past month, making it very difficult for small business owners to properly apply for the P3 – and many have simply given up on trying to apply.
My hope is to provide some clarity to sole proprietors across America who are desperately trying to get a P3 loan before the money runs out. Let’s start by putting some facts on the table before continuing.
Key concepts for the self-employed
- Being an independent contractor means that you are a small business owner or sole proprietor.
- Receiving one or more 1099s constitutes an independent contractor.
- As an independent contractor or sole proprietor, you must file a Schedule C with your 1040 tax return each year.
- Paying workers with a 1099 is NOT having employees. If you made have employees, you would issue W2s and pay employment taxes and workers’ compensation insurance.
- You can have a limited liability company (LLC) and still be a sole proprietor or an independent contractor.
The calculation of the PPP for the sole owner
As stated above, this article applies to those of you filing a Schedule C as a Sole Proprietor / Independent Contractor, NOT if you are filing as an S-Corporation and receiving a salary. I will mention this again because it is important that sole proprietorships are not confused by some of the rules that apply to corporations and not to them. Please note the following:
- No calculation on the PPP app will involve payroll, because you do not have employees, and therefore no payroll number for you or others will exist.
- Again, paying others with a 1099 is not considered payroll.
- Health insurance premiums will not be taken into account in any part of the calculation.
- Contributions to retirement accounts, whether it is a SEP, Solo 401k, or IRA, are irrelevant.
(These four items above only apply to companies with W-2 Payroll)
Then, in order for a sole proprietor to properly apply for the PPP loan, it is absolutely necessary that they have filed their personal income tax return 1040 2019 and the accompanying Schedule C.
Unfortunately, in the first weeks of the recovery plan, some banks keen to help their clients would allow sole proprietorships to apply with a simple 1099, an income statement or even a 2018 tax return. applies to you and you have finally received a PPP loan based on this information, it is important that you immediately get professional advice on how to move forward through the forgiveness and subsequent application stage.
Once the business owner has their 2019 Schedule C in hand, the math is actually pretty straightforward. The calculation is as follows:
Income from Schedule C 2019 (line 31)
Total divided by 12 and multiplied by 2.5
For example, if a sole proprietor has the following net income in 2019, the PPP would be:
$ 80,000 in net income, equals $ 16,666
$ 40,000 in net income, equals $ 8,333
Net income of $ 20,000, equals $ 4,1666
Again, keep in mind that this is tax-free income and can be fully forgiven if the business owner spends the money according to the guidelines of the CARES Act.
How to get a loan forgiveness
At first glance, the process seems fairly straightforward on how the loan is canceled. Essentially, the business owner has eight weeks to spend the money on specific expenses in order to be fully forgiven. The money must be spent on payroll (presumably compensation for the business owner), as well as some for rent, utilities, and interest on fixed debt obligations.
However, the loan waiver process is still somewhat unclear for a sole proprietor. A significant amount of guidance has been provided to business owners with payroll, but how do the self-employed actually get paid for complying with the law? Only time will tell, and I will post more articles and videos on the subject as the SBA and the Treasury Department release more advice.
Takeaway meals: Find out if P3 works for your business, and do it by calculating the numbers based on your Schedule C for 2019. None of this happens, and demand doesn’t even start, until the sole proprietor files its Schedule C 1040 2019. Enter line as soon as you can if you are looking for the PPP loan and consult a professional while you wait.
Mark J. Kohler is a CPA, lawyer, co-host of the radio show, Refresh your heritage, and author of the new book, The legal and playbook – Revolutionary Solutions for Your Small Business Questions: 2nd Edition, and The Business Owner’s Guide to Financial Freedom – What Wall Street isn’t telling you. He is also a partner of the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm CPA K&E, LLP.