Paycheck Protection Program Loans

Overview: Independent Contractors

With Updates as of April 23, 2020

Continue to Check SBA’s Website

This information is provided for general informational and educational purposes only and does not constitute legal advice. Please

note guidance is changing regularly and we encourage you to check with the SBA and your lender for updated information.

What We Cover Here

• Paycheck Protection Program Overview

• Similarities and Differences: Organization and

Independent Contractor Applicants

• Documents to Prepare and Collect, How to

Apply, Calculating Total Loan Request, and

Forgiveness

• Additional Resources

Who is this guidance for?

FMA develops guidance primarily for

nonprofit organizations.

Over the past few weeks, many nonprofits in our

PPP workshops have expressed concern when

learning that independent contractors are excluded

from a nonprofit’s allowable payroll calculations.

Given how closely many nonprofits work with

independent contractors, they requested guidance

to support their independent contractors in

applying for a PPP loan for themselves.

Who is this guidance for?

As a result of responding to nonprofit requests, we

focus exclusively here on the category of

independent contractors most frequently

mentioned by the nonprofits with whom we work:

independent contractors without employees

and/or who are not partners in a partnership.

Note: The loan calculation formula differs for independent

contractors with employees and those who might be in a partnership.

If this describes you, we encourage you to read the SBA’s Interim

Final Rule released April 14th which contains the relevant guidance.

Introduction to Audited

Financial StatementsFMA Paycheck Protection Program Toolbox

https://fmaonline.net/ppptoolbox/

Introduction to Audited

Financial StatementsAdditional questions?

Please reach out to

FMACARES@fmaonline.net

One of our experts will assist you

with your questions as soon as possible

Overview of the Program and

How to Apply

Introduction to Audited

Financial StatementsProgram Overview

The Paycheck Protection Program is a loan

administered by the Small Business Administration

designed to provide short-term stability to small

businesses, nonprofit organizations, and

independent contractors.

The goal is to keep employees of nonprofits and

businesses and self-employed individuals such as

independent contractors off the already-crowded

unemployment rolls.

Introduction to AuditedKey Similarities & Differences

Organizations Independent Contractors

Maximum Loan

Amount

2.5x average monthly

payroll2.5x average monthly net profit

Timeline for

Calculations

2019 calendar year

OR past 12 monthsONLY 2019 calendar year

Terminology

average monthly

payroll; payroll

expenses

average monthly net profit;

owner compensation

replacement

What is included in

“payroll expenses?”

salary, benefits, state

and local taxes…

ONLY what you pay yourself,

net of expenses

How much of the loan

can be spent on

“payroll expenses?”

a minimum of 75% of

the loan up to 100%.

limited to a maximum of 75%

of the maximum loan amount.

Basics of the Program: 5 Key Questions

1. Can I apply?

2. What do I need to apply?

3. How much can I borrow?

4. What can the loan be used for?

5. How much of the loan can be forgiven?

Basics of the Program: Eligibility

Can I apply?Yes, if you are an independent contractor and:

1. You were in operation on February 15, 2020

2. Your principal place of residence is in the United States

3. You filed or will file a Form 1040 Schedule C for 2019

4. You are not currently facing criminal charges, on probation or

parole and within the last five years, you have not been

convicted, pled guilty, pled no contest, been placed on pretrial

diversion, or placed on any form of parole or probation

connected with a felony charge

Note: Additional SBA guidance is forthcoming for independent contractors who

did not file 2019 taxes, but began working no later than January 2020.

Introduction to Audited

Financial StatementsBasics of the Program: Documentation

What do I need to apply?

Check with your lender. They will likely request the

following information at a minimum:

• Documentation that you were operating as an

independent contractor on or around February 15, 2020

(e.g., a 2020 invoice, bank statement, or book of record)

• Completed 2019 1040 Schedule C

• Your 1099s for 2019

Basics of the Program: Loan Amount

How much can I borrow?

Step One: Find your net profit for 2019 - it is

listed on Line 31 of your 2019 IRS Form 1040,

Schedule C.

Basics of the Program: Loan Amount

How much can I borrow?

Step Two: Divide Line 31

net profit by 12 to calculate

your average monthly net

profit. Net profit is capped

at $100,000.

Step Three: Multiply your

average monthly net profit

by 2.5 to calculate your

maximum loan amount.

Example: If your Line 31

net profit was $31,200

$31,200 = $2,600

12

$2,600 X 2.5 = $6,500(maximum

loan amount)

(average monthly

net profit)

What can the loan be used for?

Category Details Amount

Forgivable?

Pay yourself(owner compensation

replacement)

8 weeks of 2019 average

weekly net profit

(capped at $15,385)

ONLY 8 weeks of

2019 average weekly

net profit

(capped at $15,385)

Business expenses:limited to mortgage

interest, rent, and

utilities

*ONLY if agreements

predate Feb 15th

*ONLY if claimed as

deductible expenses on

2019 Schedule C

ONLY expenses

incurred in the 8

weeks after loan

disbursement

Interest payments on other debt

obligations

* ONLY if obligations

predate Feb 15thNONE

Loan Use: What Can You Pay Yourself?

Calculating owner compensation replacement:

Step One:

Find net profit

Line 31

Schedule C

Step Two: Divide by 52 weeks for

average weekly net profit

Step Three: Multiply by 8 for

owner compensation replacement

8 weeks of “owner compensation replacement”

$31,200 = $600

52

$600 x 8 = $4,800

(PPP terminology for independent contractor payroll expenses)

Business Continuation, Not Expansion

$4,800

$6,500

Maximum loan

amount

Maximum you can

pay yourself

Formula(2019 net profit/12

months) x 2.5

(2019 net profit/52

weeks) x 8

Calculation ($31,200/12) x 2.5 ($31,200/52) x 8

Total $6,500 $4,800

= ~75% of maximum loan amount

What can the remaining 25% of the loan

be used for?

Interest payments on other debt obligations based on

agreements dated before February 15, 2020

Business-related expenses:

Mortgage interest, Rent, and/or Utility payments that are:

• based on agreements dated before February 15, 2020

• claimed as deductible expenses on 2019 Schedule C

* Line #16a: mortgage interest

* Line #20: rent or lease

* Line #25: utilities

Authorized Expenses? 2019 Schedule C

confirms your claimed deductions

Forgiveness and Authorized Use of Loan

Category Forgiveness Authorized but not

forgiven

Pay yourself

(owner compensation

replacement)

ONLY 8 weeks of 2019 average

weekly net profit

NONE – no additional

money can be paid to

yourself.

Business expenses:

limited to mortgage

interest, rent, and

utilities

* expenses incurred in the 8

weeks after disbursement

* ONLY if agreements predate

Feb 15th

* ONLY if claimed as

deductible expenses on 2019

Schedule C

* Expenses incurred

after first 8 weeks

* ONLY if agreements

predate Feb 15th

* ONLY if claimed as

deductible expenses

on 2019 Schedule C

Interest payments on

other debt obligationsNONE

ONLY if agreements

predate Feb 15th

Full and Partial Loan Forgiveness

If you anticipate not having enough authorized business expenses

for full forgiveness, you can…

1. Try to borrow a lower amount

2. Keep balance as 1% 2-year loan. Spend loan only on

(1) authorized business expenses or (2) interest on debt

obligations. Unauthorized expenditures constitute fraud.

3. Return unspent balance. There is no penalty for prepayment.

Keep all loan proceeds in a single bank account.

75% owner compensation replacement

25% authorized business expenses

must be spent within 8 weeks of disbursement of the loan

For full loan forgiveness,

Introduction to AuditedLoan Forgiveness Process

What is needed for forgiveness?

Certification: You must certify that the amount of

forgiveness you are requesting is related to forgivable

expenses: 8 weeks of owner compensation replacement

and authorized business expenses.

Documentation: You must submit documentation of

payment for authorized business expenses including

cancelled checks, payment receipts, transcripts of

accounts, or other documents.

Introduction to Audited

Financial StatementsLooking at the Application

This is what we know so far. Lenders will have their way of completing but

organizations are encouraged to start with this.

https://home.treasury.gov/system/files/136/Paycheck-

Protection-Program-Application-3-30-2020-v3.pdf

What else is on the application?

Field Suggested Guidance

Business Legal Name Your name on your tax return

DBA or Trade Name If you go by a DBA on your tax return

Business Address Address on your tax return

Business TIN (EIN, SSN) Can be your SSN or TIN/EIN if you have one

Business Phone Your phone number

Primary Contact Your name

Email Address Your email address

Average Monthly Payroll 2019 Form 1040 Schedule C, Line 31 - net profits,

divided by 12

x 2.5 = Loan Request(+ EIDL, Net of

Advance if Applicable)

average monthly payroll (average net profits) X 2.5(*note – additional calculations needed if you have an EIDL

advance or loan)

Number of Employees 1

Purpose of the Loan Check all that apply. Do not select Other, nor spend

on other expenses.

Considerations: EIDL

If you have applied for or received an Economic Injury Disaster

Loan advance grant or loan…

EIDL Advance Grant EIDL Loan

Maximum loan

calculation

Reduce PPP maximum

loan calculation by

grant amount.

Increase PPP maximum loan

calculation by amount of

outstanding balance

Loan

management

If you receive after your

PPP loan has been

disbursed, forgiveness

amount is reduced by

amount of grant.

If EIDL loan was used for

payroll costs, your PPP loan

must be used to refinance

your EIDL loan.

If EIDL loan was not used for

payroll costs, no impact.

Introduction to Audited

Financial StatementsConsideration: Unemployment Benefits

As an independent contractor, you may also be eligible to receive

unemployment benefits. If you are receiving unemployment

benefits, you must disclose the PPP loan during your weekly

recertification call.

Because the PPP loan is intended to replace your net income for

8 weeks, it is likely that you will be ineligible to receive

unemployment benefits during those 8 weeks immediately

following disbursement of the PPP loan.

Check the rules of your state and with a tax accountant if you

have questions.

Introduction to Audited

Financial StatementsConsiderations: Unemployment Benefits

.PPP Unemployment Benefits

Eligibility Independent contractor whose

work has been impacted by

COVID-19. You can be working

at the time you receive it. No

limits on income.

Must recertify on a weekly basis that

you are looking for work and are

unable to find any. Ineligible if working

more than 3 days/week or earning

more than $504/week.

Timeline 8 weeks up to 39 weeks (varies by state)

Structure Forgivable loan, no tax Taxed on benefits

Amount 2.5 x monthly net profit Varies by state. ½ of state minimum +

$600/week bonus through July 31st.

In NY, minimum is $782/week through

July 31st.

Payment Lump Sum. Can apply for

forgiveness after 8 weeks

Weekly.

Introduction to Audited

Financial Statements

What Independent Contractors Need to

Do Immediately if You’re Interested

1. Reach out to your bank or other lenders to

confirm they’re an SBA lender who will be

processing PPP applications for independent

contractors. Confirm what paperwork they need

2. Gather your 1099s from 2019 and fill out your

Schedule C for 2019 if you haven’t yet.

3. File your taxes if lender requires it.

4. Apply!

Introduction to Audited

Financial StatementsFMA Paycheck Protection Program Toolbox

https://fmaonline.net/ppptoolbox/

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