SBA ISSUES PAYCHECK PROTECTION PROGRAM GUIDANCE FOR THE SELF EMPLOYED
The Small Business Administration issued long-awaited guidance on April 14, 2020, as to how people with self-employment income can apply for benefits under the Paycheck Protection Program. This applies to sole proprietors and independent contractors who report their income on Schedule C of IRS Form 1040. The guidance also addresses the treatment of partners in a general partnership and members of limited liability companies that are taxed as partnerships. The guidance can be found here:
We described the major details of Paycheck Protection Program (PPP) here:
Sole Proprietors and Independent Contractors
The calculation of your maximum loan amount depends on whether you have employees.
No Employees.
For self-employed people with no employees, first determine your annual net profit for 2019, which you determine by completing Form 1040 Schedule C for 2019, whether or not you have actually filed it with the IRS. Use the amount on Line 31. If that amount exceeds $100,000, may only use $100,000. If that amount is zero or less, you are not eligible for a loan. Divide the Line 31 amount by 12, then multiply by 2.5. That result is your maximum loan amount. In addition to providing your 2019 Form 1040 Schedule C, you must provide 1099-MISC forms showing your nonemployee compensation, invoices, bank statements, and any other supporting records.
With Employees.
For self-employed people who have employees, the calculation essentially the same as the one done by other employers. Include in your payroll costs your annual net profit determined as shown above, that is, by completing Form 1040 Schedule C for 2019, whether or not you have actually filed it with the IRS. The $100,000 limit still applies.
As we previously reported, other permissible payroll costs are:
Payments for vacation, parental, family, medical, or sick leave;
Payments “for dismissal or separation,” i.e., severance payment;
Payments for group health care benefits including insurance premiums;
Payments of any retirement benefits; and
State and local employment taxes
Loan proceeds can be used for these purposes:
Payroll costs;
Payments for vacation, parental, family, medical, or sick leave, and related insurance premiums;
Wages, salaries, commissions, or similar compensation;
Rent;
Mortgage interest payments (includes mortgages in personal property, but excludes prepayment of interest and payment of principal);
Utilities; and
Interest on any other debt incurred before the covered period
There are some additional restrictions use of PPP funds by the self-employed including these:
The guidance states: “…it is appropriate to limit self-employed individuals’ … use of loan proceeds to those types of allowable uses for which the borrower made expenditures in 2019.” This suggests that spending of PPP funds should closely match prior business spending. Other spending may not be forgiven.
As to compensating yourself, referred to as “owner compensation replacement,” the guidance states that forgiveness of such amounts will be limited to eight weeks’ worth (8/52) of 2019 net profit (Schedule C, Line 31).
Partnerships
Partners in a partnership may not apply individually; the partnership is to be the applicant. The rule is the same for members of limited liability companies that are taxed as partnerships.
The self-employment income of such partners and members is to be reported as payroll, up to $100,000 per year as with other employees.
The guidance provides many other details concerning eligible payroll costs, permissible uses of funds, and other matters. Please contact us if you have any questions concerning your application for PPP benefits.
This is not intended to be legal advice. You should contact an attorney for advice regarding your specific situation.
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Gary M. Schuster is partner at the firm and practices business, non-profit, and arts and entertainment law. He can be reached at 866-303-9595 toll free or 845-764-9656 and by email.
