Beginning April 10, sole proprietors and independent contractors can apply for the Paycheck Protection Program (PPP). This is the forgivable loan that is available through your bank. What qualifies is slightly different.

There are specific guidelines if you have a business with no employees. You can borrow 2.5 times your average monthly “payroll costs.”

Payroll costs are defined as net earnings from self-employment up to $100K annually.

The Federal Stimulus CARES ACT defines payroll costs for sole proprietors and independent contractors as:

The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period.

The nature of the income that applies to the PPP must be subject to either the payroll tax or self-employment tax.

PPP Loan Calculation for Businesses without Employees

For businesses without employees, take the net self-employment earnings from Schedule C on the 1040 line 31 or Schedule 1 line 8, divide by 12 months to get your average monthly “payroll cost.” Then multiply by 2.5.

So it seems the max would be $20,833 for sole proprietors and independent contractors. However, you may be able to add insurance expenses and money put into a SEP.

Loan forgiveness is available if you spend 75% of the loan proceeds on payroll costs and 25% on mortgage, rent, and utilities. You must spend in the 8 weeks following receipt of the loan proceeds. For those that have a home office, you can claim a portion of the mortgage, rent and utilities based on the percentage of your home used as a home office.

Required Documentation for the loan

The rules state “Documentation as is necessary to establish such individual as eligible, including payroll tax filings reported to the Internal Revenue Service, Forms 1099–MISC, and income and expenses from the sole proprietorship, as determined by the Administrator and the Secretary.”

This means 2019 tax return, including Schedule C or Schedule 1 and all 2019 Form 1099-MISC.

Of course, the documentation required may vary by bank or SBA Lender. If you have questions or I can help in any way, please let me know.