Important Reminder: The deadline to apply for both first and second PPP loans is March 31, 2021. The exclusive window for self-employed applicants and small businesses with less than 20 employees will close on March 9, 2021 at 5 pm.

The Small Business Administration, which is overseeing the Paycheck Protection Program (PPP) loans under the CARES Act, issued guidance for self-employed individuals applying for PPP loans, including information on calculating the maximum loan amount, how loans may be used, and conditions for loan-forgiveness. Here we break down the PPP as it applies to self-employed individuals, and discuss the new guidelines. The information here is only for use if you are self-employed and don’t have any employees working for you. If you are a small business with employees, then please refer to the SBA guidelines and contact your financial advisers.

Update: Second Draw PPP Loans

The second Covid19 relief bill, enacted as part of the Federal Consolidated Appropriations Act of 2020, extended the PPP Loan program through March 31, 2021 and made a number of significant changes, including:

• Providing additional $284 billion to the Paycheck Protection Program (PPP) with past loan recipients eligible for a second draw.
• Repealing the CARES Act requirement for deducting the EIDL advances from PPP loan forgiveness balance, and simplifying the loan forgiveness process.
• Extending PPP eligibility for local newspapers and TV and radio broadcasters, housing cooperatives, and 501(c)(6) nonprofits, including tourism promotion organizations and local chambers of commerce.
• Expanding qualifying payroll and non-payroll expenses for new and old PPP loans and allowing deductions for expenses paid with proceeds of a forgiven PPP loan, effective as of the date of enactment of the CARES Act and applicable to subsequent PPP loans.
• Creating special set-asides for very small businesses with 10 or fewer employees and for small businesses located in distressed areas.
• Allowing loan awards of up to 2.5 times of payroll expenses, and up to 3.5 times of payroll expenses for small businesses in the restaurant and hospitality industries.
• Excluding PPP loans from in taxable income.

A borrower is generally eligible for a Second Draw PPP Loan if the borrower: 

• Previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses
• Has no more than 300 employees; and
• Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020

More information on the PPP’s Second Draw Loans including a list of lenders is available at the SBA’s website and the Mixedearners.org FAQs.

As always, feel free to contact us with questions. We will try our best to answer them.

I am an author who receives income on a 1099-basis (as royalties, freelance payments, etc.), but I don’t have a business license or operate as an LLC/S-Corp. Can I still apply for a PPP loan?

Yes. You are a self-employed individual and eligible for a PPP loan if:

1. You were working as a self-employed individual as of February 15, 2020, and you can show prior self-employment income;
2. Your principal residency is in the United States; and
3. You have filed or will file a Form 1040 Schedule C for 2019 (this is the form tax filers with self-employment income file to report profits and losses).

Can I use a PPP loan to pay myself?

You may have read that a PPP loan is designed to help small businesses maintain their payroll and may be wondering how this helps you if you’re an independent contractor without a payroll or employees. The recent SBA guidelines make it clear that the PPP can be used for “owner compensation replacement”—in other words, your income from self-employment. You don’t need to have a payroll process in place to be eligible for a PPP loan as a self-employed individual.

I was not self-employed last year (2019) so I did not file a Form 1040 Schedule C for 2019, but I became self-employed on or before February 15, 2020. Does this mean I’m disqualified?

PPP applicants must submit a 2019 Form 1040 Schedule C to show that they are established self-employed individuals. Expenses incurred between January 1, 2020, and February 14, 2020, are not enough for this verification. However, the SBA has stated that it will issue additional guidance for those individuals with self-employment income who: (1) were not in operation in 2019 but who were in operation on February 15, 2020, and (2) will file a Form 1040 Schedule C for 2020.

How much can I get under the PPP as a self-employed individual?

SBA guidelines provide this formula for calculating the maximum loan amount you qualify for as a self-employed individual:

Step 1: Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value). If this amount is over $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a PPP loan.

Step 2: Calculate the average monthly net profit amount (divide the amount from Step 1 by 12).

Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5.

Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

What documentation do I need to apply for a PPP loan?

SBA guidelines state that you will need to provide the following documents with your PPP application:

1. 2019 Form 1040 Schedule C to substantiate the PPP loan amount requested. (This will substantiate your profits and losses in the prior year.)
2. 2019 Form 1099-Misc detailing nonemployee compensation received (box 7).
3. Invoices, bank statements, or book of record that establish you are self-employed. You must provide a 2020 invoice, bank statement, or book of record to establish you were in operation on or around February 15, 2020.

Are there restrictions on the kinds of expenses I can use a PPP loan for?

Not necessarily. But only the following expenses qualify for loan forgiveness:

1. Owner compensation replacement, calculated based on 2019 net profit.
2. Employee payroll costs for employees whose principal place of residence is in the United States, if you have employees.
3. Mortgage interest payments (but not mortgage prepayments or principal payments) on any business mortgage obligation on real or personal property, business rent, and utility payments as long as you have claimed or are entitled to claim a deduction for such expenses on your 2019 Form 1040 Schedule C.
4. Interest payments on any other debt obligations that were incurred before February 15, 2020 (such amounts are not eligible for PPP loan forgiveness).
5. Refinancing an SBA Economic Injury Disaster Loan made between January 31, 2020, and April 3, 2020 (maturity will be reset to PPP’s maturity of two years).

Do I have to pay back a PPP loan?

The full principal amount of the PPP loans and any accrued interest qualifies for forgiveness as long as at least 60% of the loan is used for payroll expenses (including self-employment income in the form of “owner compensation replacement”) and the remaining is used for business expenses listed above. This is the basic qualification for forgiveness, but there are further limitations that will determine the amount actually forgiven:

1. PPP loans must be applied to payroll/owner compensation replacement and qualified business expenses during an eight-week period beginning on the date of disbursement of the loan.
2. “Owner compensation replacement” that is ultimately forgiven is capped to an amount equal to eight weeks’ worth of your 2019 net profit (excluding leave amounts and certain tax credits).
3. Only those business expenses (rent, utilities, and mortgage payments) incurred before February 15, 2020, are eligible for forgiveness. In other words, if you didn’t have these expenses in 2019, you can’t use these for forgiveness in 2020.

You will need to submit to your lender evidence of business rent, business mortgage interest payments on real or personal property, or business utility payments during the covered period if you used loan proceeds for those purposes.

If a PPP loan is not forgiven in full (including if there has been a reduction in the forgiveness amount for an EIDL advance), any remaining balance due on the PPP loan must be repaid by the borrower. PPP loans that received an SBA loan number on or after June 5, 2020 have a five-year maturity while loans that received an SBA loan number before June 5, 2020 have a two-year maturity that can be extended to five years by agreement between the borrower and lender. The promissory note for the PPP loan will state the term of the loan.

This SBA FAQ on PPP loan forgiveness provides additional important details about forgiveness and repayment conditions.

How much of my PPP loan will be forgiven?

Both First and Second Draw PPP Loans made to eligible borrowers qualify for full loan forgiveness if during the
8- to 24-week covered period following loan disbursement:
• Employee and compensation levels are maintained;
• The loan proceeds are spent on payroll costs and other eligible expenses; and
• At least 60 percent of the proceeds are spent on payroll costs

Partial loan forgiveness is available if these threshold criteria are not met. If a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.

Do I have to use the loan within a certain time?

Not necessarily. But only the amounts used within eight weeks from the date of disbursement are eligible for forgiveness. Otherwise, you will have to pay back the loan when it comes due.

I hire independent contractors (e.g., cover designers, editors, etc.). Can I use their salaries in calculating the loan I would ask for? Are those salaries considered payroll expenses?

No. The freelancers or independent contractors you hire to help you in your writing activities are not considered payroll employees. You cannot use their salaries as payroll expenses. You cannot use the payments made to them to calculate the loan amount you ask for, nor are payments made to them during the loan period eligible for loan forgiveness.

I got an Economic Injury Disaster Loan (EIDL). How does that affect my eligibility for a PPP loan?

If you received an SBA EIDL loan, you can still apply for a PPP loan. If you received an EIDL loan between January 31, 2020 and April 3, 2020 and you used it for payroll costs, then your PPP loan must be used to refinance your EIDL loan. As of January 8, 2021, the SBA is no longer deducting EIDL advances from the amount of PPP loan forgiveness a borrower is qualified for. If the EIDL advance was deducted from your loan forgiveness amount prior to the new rules going into effect, SBA will issue a reconciliation payment to your lender.

For more information on using PPP and EIDL loans together, please review the SBA’s FAQ and consult your lender.