Last Updated: May 18, 2022

PPP Guide for Self-Employed Individuals

Self-employment is the ideal life for many. You are your own boss and you have control over how you do your work; a tempting offer for anyone who had spent his/her life taking orders from others, especially one who’s on his/her toes with a difficult boss, and with no opportunity to earn more than what he/she signed up for.

According to the U.S. Bureau of Labor Statistics (BLS), a 7.9% growth rate for self-employed workers is projected by 2026, that is, from 9.6 million in 2016 to 10.3 million by 2026. This is faster than the projected 7.4% rate for all workers. Evidently, there is a market out there for self-employed individuals.

However, they are also the most vulnerable during economic decline, particularly during the recession caused by the COVID-19 pandemic. Self-employed workers are not accorded with security of tenure like regular employees, so they’re the first ones to be sent home as part of companies’ cost-cutting measures. Based on the data from the BLS, in May 2020, 42.2% of self-employed workers lost their jobs in the past month due to the pandemic.

To combat this, the government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which established a new loan program entitled “Paycheck Protection Program (PPP),” to provide immediate assistance to small businesses, including self-employed individuals, who were affected by COVID-19. The provisions on the PPP authorized the Small Business Administration (SBA) to temporarily guarantee loans under the said program.

Here’s what you need to know before you apply for a PPP loan.

What is the PPP?

The PPP was established in accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act and was later modified by the Paycheck Protection Program Flexibility Act of 2020. It is a loan program that aims to keep small businesses afloat and maintain employment by providing them with funds to pay up to 8 weeks or 24 weeks of payroll costs. A maximum of 40% of the funds can also cover interest on mortgages, rent, utilities, operations expenditures, property damage costs due to public disturbances not covered by insurance, supplier costs, and worker protection expenditures to be COVID compliant.

I Am Self-Employed. Am I Eligible for A PPP Loan?

Yes. Self-employed individuals are covered by the Paycheck Protection Program provided that the following requirements are met:

  1. You were in operation on February 15, 2020;
  2. You derive income from self-employment like an independent contractor or sole proprietor;
  3. Your principal place of residence is in the U.S.; and
  4. You filed or you will file a Form 1040 Schedule C for 2019 or 2020.

I Am A Partner in A Partnership. Can I File A PPP Loan Application Separate from the Partnership?

No. A partnership and its partners are limited to one PPP loan application only. This is to ensure that many eligible borrowers can obtain the loan. The self-employment income of general active partners may be reported as payroll cost in the partnership’s PPP loan application.

How Much Can I Borrow?

The amount of funding to be received is based on the borrower’s monthly average payroll cost in 2019, 2020, or the one-year period before the application multiplied by 2.5. The computation of the average monthly payroll cost depends on whether you are running payroll or not.

Without Payroll Costs

It shall be based on your gross or net income as reported on a 2019 or 2020 Schedule C. To compute your average monthly payroll expense divide your gross income (which must be capped at $100,000) by 12.

With Payroll Costs

Step 1: Subtract payroll costs on the employee benefits program (line 14), pension and profit-sharing plans (line 19), and wages (line 26) from your gross income as reported on line 7 of a 2019 or 2020 Schedule C. The value you get must be capped at $100,000.

Step 2: Add in your annual payroll costs (Note: Only include employees whose primary residence is in the U.S. and their earnings must likewise be capped at $100,000) for the same year of the Schedule C you are using.

Step 3: After adding in your annual payroll costs, divide the value by 12 to get your average monthly payroll expense.

Reminders:

  • Review the SBA supplementary information to the PPP.
  • The application for the PPP has not changed with this new guidance. Schedule C taxpayers with no employees will use the same form found here.
  • With your loan application, you will need to include a copy of your Schedule C. If you have not filed your return, you must still include a completed Schedule C with your application.
  • The loan is based on the net profit reported on your 2019 or 2020 Schedule C. This amount is capped at $100,000.
  • Submit the application with your supporting documents to your lender.

If you would like us to assist you with filing your PPP loan application or your Schedule C, please contact us today.