The brand-new Paycheck Protection Program was recently created to support American companies with immediate cash relief during this pandemic. If you are a sole proprietor, an independent contractor, or any that files a 1099 form, here’s what you need to know to apply.
Who Qualifies For The Payment Protection Program.
Sole Proprietors who report income and pay taxes on their Schedule C on their tax return.
Independent Contractors who collect 1099-MISC forms.
Sharing Economy Workers who take jobs provided by companies such as Uber, Lyft, TaskRabbit, and Instacart.
The only requirement is that your company was operational as of February 15, 2020. If you started your business after that date, you would not be eligible for this program.
What If You Don’t Use A Payroll Service?
If you own a company and do not give yourself a wage through a payroll service, you are likely still suitable for the Paycheck Protection Program—with one exemption. Companies that are structured as C corporations or S corporations must use payroll to pay their owners because the corporation is taxed independently from the individual. If you own a corporation and have not been paying yourself a salary through payroll, you will not have a salary covered through the PPP. This is because distributions or proceeds from a corporation are not considered to be a salary or self-employment income. Payments also made to contractors aren’t considered payroll and aren’t eligible under the PPP.
Sole Proprietors And The Paycheck Protection Program
If you run a company on your own, your business is a sole proprietorship— even if you haven’t formally let the IRS know.
Since you don’t have workers, you won’t be reporting your payroll expenses for the PPP loan. Instead, you’ll be reporting your net business income, which will be documented on your Schedule C. As long as your business was operational before February 15 of this year, you can apply to the Paycheck Protection Program.
According to the U.S. Treasury, “regardless of filing a 2019 tax return with the IRS, you must provide the 2019 Form 1040 Schedule C with your PPP loan application.”
If you’ve previously filed your taxes, this should be simple: just submit your Schedule C to your lender. If you haven’t filed your taxes yet, you will likely need to get retroactive bookkeeping done so you can calculate your net income and fill out your Schedule C appropriately.
If you don’t have bookkeeping or a tax return, we strongly recommend that you get caught up with your bookkeeping. Without a payroll service, bookkeeping is the best way to determine your profit as a sole proprietor
What will the Paycheck Protection Program Ask For?
Your monthly average payroll cost will be your annual net profit divided by 12. If your annual net profit is over $100,000, you may only declare up to $100,000 divided by 12.
Sole Proprietors Who Are Married
If you run a sole proprietorship informally with a spouse, you will only apply to the Paycheck Protection Program once, and your spouse would not be considered to have a salary through the company unless he or she was paid as a contractor before February 15, 2020.
If you own more than one sole proprietorship, you may apply separately for each – but exclusively if these sole proprietorships have separate EINs. The standard rule of thumb is that you can apply individually for as many businesses you own that have different identification numbers or separate tax reporting. You may apply for the Paycheck Protection Program once with your SSN as a sole proprietor, and then separately for any other businesses you own using their EINs.
Independent Contractors And The Paycheck Protection Program
If you work as a 1099 independent contractor, you are by omission considered to be a sole proprietor in the eyes of the IRS. This means your freelance earnings get reported annually on a Schedule C within your tax return. You will have a Schedule C even if you pick up odd jobs or do freelance work, and this Schedule is based on the 1099-MISC forms you collect from the companies or individuals who have hired you as a contractor.
Proof Of Income
The lender will want to see all documents related to any wages, commission, income, or net earnings from self-employment that you have received. This indicates that you’ll need to accumulate any earnings reports, pay stubs, or invoices you have.
Sole Proprietorships will need to submit a Schedule C from their 2019 tax return filed (or to be filed), showing income and expenses from the sole proprietorship.
Independent Contractors will need to submit schedules from their 2019 tax return filed (or to be filed) as well as Form 1099-MISC from 2019.
All Self-Employed Individuals will need to submit 2019 payroll tax filings reported to the Internal Revenue Service.
Rent, Mortgage, And Utility expense
The Paycheck Protection Program funding can cover your office lease, rent, or mortgage interest, provided that you had it before February 15 2020. If you have a home office, you can claim a portion of the expenses (the percentage of your home that’s used as a home office).
Again, collect any paid invoices, statements, lease agreements, or canceled checks that will help prove you had these expenses.
However, if you want to have your loan forgiven, you must spend 75% of the loan funds on payroll costs (and the remaning 25% on rent, mortgage interest, and utilities).
If you’re a sole proprietor, 75% of the loan acts as a straight replacement for lost profit and doesn’t need to be spent in a particular way. The remaining 25% must be spent on mortgage interest, rent and lease payments, and utilities in order to be forgiven.
When Does The Application Open?
Sole proprietorships can start to apply on April 3.
Independent contractors and self-employed individuals can also start to apply on April 10.
You are encouraged to apply early as there is a funding cap for this program. You have until June 30 to apply.
How do I apply?
You can apply for the Paycheck Protection Program through an SBA-backed lender. We recommend applying through your own financial institution to start—a lender you already have an existing banking relationship with. That will be the fastest way to get approved.
Next, we recommend applying for PPP through a community bank. They have less demand and will likely be able to process you faster.
Here is the PPP application form from the U.S. treasury, indicating which information you’ll be expected to present to your bank.
Financial Records You’ll Need
You’ll need to provide payroll/bookkeeping records to prove your payroll expenses.
That could include:
- Payroll processor records
- Payroll tax filings
- Form 1099-MISC records
- Schedule C for a sole proprietorship
If you don’t have access to those kinds of documents, you can also provide bank records.
If You Own More Than One Business
We are also learning that entrepreneurs who own more than one company are having trouble getting relief funding when their businesses don’t have cleanly divided finances. If you own more than one business, it’s important to get separate bookkeeping done for each company. This will become essential when it comes time to prove your expenses for loan forgiveness.
For bookkeeping help, please visit our partner page for more information.