If you are self-employed — as a sole proprietor or independent contractor with no employees — you may still be able to apply for a Paycheck Protection Program (PPP) loan until June 30, 2020. Don’t let the “paycheck” in the name fool you into thinking you wouldn’t qualify for this forgivable loan. In fact, since you don’t have staff headcount, payroll, and benefits to calculate, your application process (for the loan and later for forgiveness) should be much simpler.
The PPP is now reopened and the application deadline extended until August 8, 2020. You can apply now through Fundbox.
In essence, even as a sole proprietor, the PPP loan can provide you with funds equivalent to 2.5 months of net earnings you would have made — if it weren’t for the coronavirus/COVID-19 pandemic — based on a comparative period from 2019 (or the first 2.5 months of 2020 if your business began this year).
You can also use a portion of this loan to cover some operational expenses for your business (like business-related rent, utilities, or interest payments on a mortgage or other business loans). However, if you want to qualify for loan forgiveness, these operational expenses can only account for up to 40% of your total loan amount.
How Much Can You Expect to Borrow?
For most independent contractors, calculating your PPP borrowing limit is a 3-step process:
- Find line 31 on your 2019 IRS Form 1040 Schedule C (If you haven’t filed yet for 2019, go ahead and fill it out). If the amount on Line 31 is over $100,000, write $100,000.
- Divide the amount from Step 1 by 12.
- Multiply the amount from Step 2 by 2.5. For most borrowers, this will be your maximum PPP loan amount.
NOTE: If you received an EIDL loan between January 31, 2020 and April 3, 2020 you can refinance that as part of your PPP loan (minus any amount received as an EIDL grant).
Here’s how you can spend your PPP loan
- Replace your compensation (based on your 2019 income)
- Pay interest payments on a mortgage or loan (such as an auto loan) you use to perform your business*
- Make business rent payments*
- Make business utility payments*
- Make interest payments on any other debt incurred before February 15, 2020 (but such amounts are not eligible for loan forgiveness)
*You must have claimed a deduction on your 2019 taxes for expenses described in 2, 3, and 4 above.
Here’s What You’ll Need to Apply for a PPP Loan
PPP loan applications must be approved June 30th, 2020. Contact your business lender. To help ensure customer success, Fundbox has stopped accepting new applications as of June 26th. If your application is accepted by a lender before their cutoff, the following documentation is needed:
- Completed PPP Application Form
- Include your contact name and email address.
- Indicate your Business Type (Independent Contractors and Sole Proprietors have slightly different document requirements).
- Check Yes or No for all questions on the form.
- If you answer Yes to questions 1,2, 5, or 6, you do not qualify for a PPP loan.
- If you answer Yes to question 3 or 4, you may still qualify, but you must include an Addendum on a separate sheet explaining the details.
- 2019 Proof of Self Income
- 2019 IRS Form 1040 Schedule C.
- Check profit noted on line 31. If line 31 shows $0 or less, you do not qualify for a PPP loan.
- Proof of health insurance payments may also be accepted (but are not required) as part of the lender’s document review and loan calculation process. For Sole Proprietors & Independent Contractors, receipts and invoices showing payments can be in your name.
- Business Formation Date (must have the formation/established date)
- Your earliest W9, or
- Articles of Incorporation/Organization
- Proof of ownership (with Social Security Number)
- 2019 IRS Form 1040 Schedule C that shows business name and owner name, or
- 2018 IRS Form 1040 Schedule C may be acceptable if the primary owner provides a written statement that ownership has not changed since 2018 or detailing how the ownership has changed.
- IRS Form W9 (for Independent Contractors only).
- Unexpired government-issued photo ID
- Along with your SSN, lenders will also require a government-issued ID such as a Passport or a state-issued Driver’s License.
- To verify your identity, you may be asked to attach a “selfie” photo of yourself holding your photo ID by your face so both are visible and legible in the same image.
- If using a Driver’s License, also attach a separate photo showing the back of your Driver’s License.
- Electronic Funds Transfer Information
- So the lender can deposit approved funds into your account, you may be asked to provide a bank statement (either an electronic [pdf] or scanned copy) showing both the name on the account and the account number. If the account number is misidentified, the wrong bank account will be credited.
- For independent contractors and sole proprietors, the bank statement can be in the owner’s name.
Remember: as a sole proprietor, your PPP application won’t involve payroll calculations.
- Paying others with a 1099 is not considered payroll.
- Benefits you pay yourself will not be considered, so you don’t need to be calculated, including:
- Health-insurance premiums
- Contributions to retirement accounts, whether a SEP, Solo 401k or IRA
Who Can Apply?
As a sole proprietor or independent contractor, you may be eligible for a PPP loan if all of the following are true:
- You were already in operation on February 15, 2020. (With very few exceptions, you can’t have started a business this March or April and expect to get PPP funds.)
- Your primary place of residence is the United States. (You don’t have to be a U.S. Citizen);
- Your business has filed — or will file — a 2019 tax return with the IRS.
For independent contractors, this means a Form 1040 Schedule C for 2019 showing self-employment income. (You don’t have to have filed your form 1040 tax return yet — since the deadline was extended to July 15 — but you’ll at least have to provide a completed Schedule C showing itemizations for the 1040. )
- Furthermore, to qualify, you must certify in good faith that the loan is “necessary to support [your] ongoing operations.” (In other words, PPP loans should be your only way of accessing needed money.)
What If You Don’t Qualify for 100% Forgiveness?
Amounts not forgiven simply convert into a 1% interest loan, payable over the next five to ten years (depending on the lender). There’s even a grace period. No payments would be required until the SBA remits the forgivable amount to your lender. If you do not request forgiveness, you will not have to make any payments for 10 months following the date of disbursement of the loan. (However, interest will still accrue from the date loan was disbursed.)
Time is Running Out to Apply
PPP loan applications must be approved June 30th, 2020. Contact your business lender. To help ensure customer success, Fundbox has stopped accepting new applications as of June 26th.
The information discussed in this article and podcast was collected from a variety of external sources, and to the best of our knowledge, was correct as of April 27, 2020. This content is for informational purposes only. Fundbox and its affiliates do not provide financial, legal, or accounting advice. You should consult your own financial, legal, or accounting advisors before engaging in any transaction.