The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) established the Paycheck Protection Program (PPP), through which the Small Business Administration (SBA) provided relief of payroll expenses to small businesses through forgivable loans of up to 2.5x average monthly payroll expenses.
On April 14, the SBA provided additional guidance for those who are self-employed, and distributed additional guidance on how these individuals can apply for the PPP. An individual is eligible if the following requirements are satisfied:
- Self-employed as of February 15, 2020
- Holds a principal place of residence in the United States and
- Has (or will) file(d) a form 1040 Schedule C for 2019,
Self-employed individuals with no employees may calculate PPP eligibility by reviewing net profit for 2019 (limited to $100,000) averaged on a monthly basis, multiplied by 2.5. Note that if funds from an Economic Injury Disaster Loan (EIDL) have been received, the self-employed individual must deduct any EIDL advances from the amounts applied for, as EIDL advances are considered forgivable.
Self-employed individuals with employees may calculate PPP eligibility as follows:
- Calculate average monthly net profit for 2019
- Calculate average monthly payroll as follows:
- 2019 gross wages and tips for employees residing in the United States, plus
- Pre-tax employee contributions for health insurance or fringe benefits, plus
- Employer health insurance contributions, retirement contributions, and state and local taxes assessed on employee compensation.
- Add (1) and (2), and multiply 2.5
Note that amounts paid to individual employees are limited to $100,000 on an annual basis.
Funds can be used for replacement of owner compensation, employee payroll costs, mortgage interest payments (or interest payments on other debt incurred by February 15, 2020), or refinancing an SBA EIDL. At least 75% of proceeds should be used for payroll costs.
The following documentation is required to substantiate loan application amounts, as well as amounts paid for payroll subsequent to loan disbursement:
- IRS Form 1040 and Schedule C
- 2020 invoice, book of record, bank statement, or other document to establish operations in place as of February 15, 2020
- If the self-employed individual has employees, appropriate payroll documentation should be provided (see the Act for further information)
Please note that the above information does not apply to partnerships. The SBA has clarified that partnerships are eligible to apply for a PPP loan at the entity level.