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  • Alex O'Neil

About the Payment Protection Program

The Payment Protection Program is a $660 billion forgivable loan program designed to assist smaller businesses that have been negatively impacted by COVID-19. The main aim is to keep the staff and bills paid during the pandemic. But here's a question: What if you don't have any employees?

Here, I wiill break down how the PPP loan application and forgiveness processes can differ for people who are self employed, sole proprietors and independent contractors as well!


How is the PPP different for self employed people?

Whilst many small businesses have been able to apply for PPP loans since April 3, the applications sent in from self employed individuals weren't accepted until April 10. This separate guidance applies mainly to businesses which aren't incorporated. So mainly sole proprietorships, LLCs and 1099 contractors.

The reason things are different for these people

What makes things different for this group?


The Paycheck Protection Program loan amounts are generally calculated using the businesses average payroll expense. When it comes to a business which doesn't have employees or payroll, the loan amounts taken into consideration have to be calculated based upon the profit the business is making.


When it comes to sole proprietorships and LLCs, they are not affected by separate tax liabilities in the same way corporations are. Their businesses are taxed differently, on a personal basis, which would make following the same regulations impossible due to the way Corporations pay their employees and pay tax.


Applying for PPP Loans for the Self Employed.


In contrast to Corporations which use their W-2 employee payroll costs when calculating their PPP loan amounts, self-employed individuals have to go through a different process.


When they apply for their PPP loan, the average monthly payroll cost is substituted by calculating the average of what their monthly owner draws (Owner Compensation).


To easily do this, you can put your monthly draws from 2019 into a simple spreadsheet, such as excel or google sheets and divide the sum total by 12, which will give you your monthly average net profit. This applies differently for businesses that have been operating under 12 months, which would divide their total by the number of months they have been in business. Multiply the result by 2.5 and you will get your PPP loan amount. So (Total 2019 Monthly Draws / 12) x 2.5 = PPP Loan Amount.


These are different from standard payroll costs in that they don't include payroll taxes. So unlike Corporations, you'll leave these costs out. Your Payroll Cost amount must be larger than $2,400 in order to apply.


To support the application, sole proprietors should provide this tax documentation.

1040 with a Schedule C and/or

1099 statements.


Applying for PPP Loan Forgiveness for the Self-Employed


For self-employed borrowers with no employees, PPP loan forgiveness is pretty easy.


Owner Compensation Replacement


Self-employed individuals get their compensation reimbursed and forgiven rather than spending on payroll. This is referred to as "Owner Compensation Replacement."


Your Owner Compensation Replacement value is 2.5 months worth of your net income as reported in your 2019 Schedule C. This has an annualized cap of $100,000. Your maximum possible loan amount is $20,833, with $15,385 automatically eligible for forgiveness as Owner Compensation Replacement. It is also possible to get the remaining $5,448 forgiven, if spent on approved expenses over the 24-week covered period.


What else can the loan be spent on?


PPP funds should be used during the allotted 24-week period for payroll. When it comes to self-employed folks without employees, the payroll funds can only be used to pay the owners.


If self-employed folks wish to qualify for forgiveness, there are some very narrow categories in which they may do so.


Rent - This includes business housing and the costs of computer software and hardware.

Business Utilities - This includes water, gas, transportation, cable and software costs.

Mortgage Interest - For pre-existing business property mortgages.

Required Business Services - Services that support the production of business products and services.


It is important to remember that COVID-19 supplies are considered business-related expenses, as are the migration of your website if necessary. You can also consider new software required to run your business under these conditions as a valid expense.


You may be wondering if it is possible to pay contract workers using this loan. Sadly PPP loans can only be used to pay W-2 employees, because contractors are regarded as self-employed and are considered as separate tax entities by the IRS.


At ANCUR INC, we suggest to Sole Proprietors that you should follow the rules, but also take note that the rules do not dictate how you personally distribute your personal funds, which includes using them to pay contract workers if necessary.


Here are a few tips to ensure that you qualify for full forgiveness:

Make regular even payments. We would recommend bi-weekly.

Track all withdrawals, including all the dates and amounts throughout the 24-week forgiveness period.

Keep your records in excel or your favorite accounting software.


Form 3508EZ


A new EZ application form for the forgiveness of the PPP loan (Form 3508EZ) has been recently introduced into the system. It's a simple, one page form, designed to make the process a lot easier. You can apply for forgiveness with the EZ application if:

You are self-employed, an independent contractor or a sole proprietor.

You had no employees at the time you applied for your PPP loan application.

If you didn't include any employee payroll expenses in the average monthly payroll costs calculation on your loan application.


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