As we previously blogged, Congress established the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. If you received your loan after June 5, 2020, you apply based on the 24-week period. To qualify for forgiveness as an independent contractor or sole proprietor, you must spend your full loan on compensation, such as wages, income, commissions or net earnings. But in the real world, there’s not always a separate account…. We created a comprehensive, comprehensible guide all about PPP loan forgiveness for the self-employed, sole proprietors, and independent contractors. a CPA’s guide on how the PPP and other relief programs will affect your 2020 taxes. We expect the big lenders will set up their own online application process, so you may not need to fill out the SBA’s version of the form. You got your PPP sole proprietor loan? The PPP loan forgiveness application process has recently experienced various changes, and there are several forms and requirements associated with the different methods of applying for forgiveness. Pricing. The PPPFA lowers the threshold to … Point 3 — Eventual forgiveness of the PPP loan is calculated as follows: 8 weeks worth of 2019 Schedule C income is … This forgiveness happens no matter what you do with the money. For 100% of solo sole props, this means they will have at least some loan remaining in the end. 5. Get started on a free trial today to learn more. This example happens to be the maximum loan amount any sole proprietor will be eligible for. Before we jump into loan forgiveness application forms (and how to determine which form is right for your business), let’s quickly review the requirements for PPP loan forgiveness. Based on the new forgiveness application form 3508EZ if you received your PPP loan on or before June 5, 2020, you may choose an 8-week Covered Period or a 24-week Covered Period. The first thing that will happen is the loan proceeds will go into the sole proprietor’s bank account. Sole proprietors might be eligible for PPP full loan forgiveness if they: Used 60% or more of the loan to cover payroll (or, in the case of sole proprietors, net profit) Used no more than 40% on qualifying expenses, like mortgage interest, rent, or utilities. This is important as now 100% of the PPP loan given to a sole proprietor with no other payroll can be forgiven! Originally, forgiveness of the PPP loan was possible if recipients of the loan spent at least 75% of the loan on payroll expenses within 8 weeks of receiving the loan. Identifying Your 24-Week Period: The 24-week period during which expenses must be incurred or paid: Log In. So, sole proprietors with no employees can have the full amount of the loan paid off. Remember, a sole member LLC files a Schedule C, so they are included here as well. You will need to prove your expenses for utilities, rent, and mortgage interest. The reason? They’ll get a $10,000 PPP loan. Resources . To keep things simple, assume a sole proprietor received a $20,000 PPP loan based on the sole proprietorship earning $100,000 in 2019. Yes! You do NOT receive a W-2 paycheck from your business. Let’s look at the calculation. Share this article. Now, how do you get that amount forgiven, since you don’t have payroll to spend it on? Continue with your ongoing bookkeeping and recordkeeping habits. The money is to be spent on … The payments made by a sole proprietorship to the owner aren’t tax deductions. The PPP limits compensation to an annualized salary of $100,000. It looks like loan forgiveness for a sole proprietor is based on taking 2019 net income, dividing by … Are you an independent contractor or sole proprietor with no employees and curious WHY you have to fill out the crazy-long PPP forgiveness application? Good bookkeeping is essential if you have a PPP and helps you master your business. To qualify for forgiveness as an independent contractor or sole proprietor, you must spend your full loan on compensation, such as wages, income, commissions or net earnings. As a reminder, only businesses that were operating prior to February 15, 2020 are eligible for a PPP. Her loan forgiveness amount is automatically = $10,417. And note that a sole proprietor without employees enters zeros in both fields. Check out a CPA’s guide on how the PPP and other relief programs will affect your 2020 taxes. If you have any questions related to the Paycheck Protection Program, or any other aspect of employment law, contact Thatcher Law Firm at 301-441-1400. www.ThatcherLaw.com. The forgivable portion is equal to 2.5 months’ worth of their 2019 net profit. PPP loan forgiveness requirements. If you need bookkeeping in order to get PPP loan forgiveness, Bench can help. SBA and your lender will take the advance amount into account when determining forgiveness of your PPP loan, reducing your forgiveness dollar-for-dollar by the value of your EIDL advance. For self-emplyoed individuals that have multiple businesses with PPP loans, you are capped at $20,833 in owner compensation replacement across all loans obtained by all businesses. Example 1.1: Mary is a sole proprietor running a flower shop with no other employees. One of them—Form 3508EZ—is much shorter and simpler than the other. However, they are the ones looking into the nitty gritty details to prove to the SBA that you had followed all the rules. This is especially useful for sole proprietors, as their businesses rely on themselves alone. When Can I Submit My PPP Forgiveness Application? Identifying Your 24-Week Period: The 24-week period during which expenses must be incurred or paid: Email me at [email protected]. Check out a CPA’s guide on using an 8-week or 24-week period. Your bank might consider forgiveness if you comply with SBA Guidelines. Schedule A (p 6) 1. Here's how self-employed folks will fill out the PPP Forgiveness Application form—this applies to sole proprietors, independent contractors, and partnerships without employees. 4. You CAN have employees or subcontractors other than yourself. Now the forgiveness comes in. Using the OCR, sole proprietors can claim forgiveness based upon 2019 net profit. Note: For an independent contractor or sole proprietor, you must have claimed or be entitled to claim a deduction for these expenses on your 2019 Form 1040 Schedule C in order to claim them as expenses eligible for PPP loan forgiveness in 2020. About 60% of the PPP loan must be used on payroll costs and 40% on non-payroll expenses. You got your PPP sole proprietor loan? PPP Loan Forgiveness Application for Small Businesses. You do NOT get taxed as an S-Corporation. … 1 (888) 760 1940. We’ll do one month of your bookkeeping and prepare a set of financial statements for you to keep. Here’s how forgiveness works for self-employed individuals. Speak with a lender and fill out an application to determine exact eligibility. But you need to meet certain criteria to be eligible for the EZ form. These FAQs are for informational purposes only, are general in nature, and should not be relied upon or construed as a legal opinion or legal advice. Most sole proprietors and independent contractors will likely get their loans forgiven based on the changes made by the PPP Flexibility Act and subsequent SBA rulings. PPP Loan Forgiveness for the Self-Employed Frequently Asked Questions This calculator estimates forgiveness for self-employed individuals who file Schedule C and have no employees. The PPP limits compensation to an annualized salary of $100,000. Luckily, the forgiveness process is especially easy and favorable for sole proprietors. This is everything we know based on information directly from the SBA, the 19th Interim Final Rule (IFR) filed on June 19th, 2020, and the last update for loans of $50,000 or less released on October 8, 2020. Example. Luckily, the forgiveness process is especially easy and favorable for sole proprietors. This is capped at $100,000 per employee. Eligibility requirements for PPP loan forgiveness include: The PPP loan amount was used to cover approved expenses. PPP Loan Forgiveness for Sole Proprietors: 100% for Salary? Bench’s monthly reports equip you with what you need for relief applications and beyond. How Do Sole Proprietors Prove Usage of Funds for PPP Loan Forgiveness? No. They’ll get a $10,000 PPP loan. At 1% interest for 5 years, it’s one of the best loan terms you can find, but there is no prepayment penalty if you wish to pay it all off early. Now you have your maximum PPP forgiveness amount—up to $20,833. Take 7 minutes to learn all you need to know about Form 1040 here. Let’s say a sole proprietor has 2019 net income of $48,000. You do NOT receive a W-2 paycheck from your business. However, if a sole proprietor’s loan took other expenses into account and they are unable to have 100% of their loan forgiven as Owner Compensation Replacement, they would still need to spend the remainder of their loan on approved purposes (e.g., rent, utilities, mortgage interest, etc.) Here is an oversimplified summary of how PPP loans work for sole proprietors and freelancers without employees: Point 1 — The loan is based on 2019 Schedule C income: In fact, a copy of the 2019 Schedule C tax form must be included with the PPP loan app, even if the applicant hasn’t filed their 2019 tax return yet. These are advertised as being “fully forgivable.” But here’s where the “gotchas” set in. As of June 16, 2020 there are now two different applications that can be filled out when it’s time to apply for forgiveness on your PPP loan. This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Our free PPP checklist can make staying on top of forgiveness a breeze. This is capped at $100,000 per employee. Reply. Applying for PPP Loan Forgiveness •Forgiveness Forms -11 pages •Breaks into five pieces; 1 and 2 must be submitted to Lender: 1. The 8 week period applicable to forgiveness has been extended to 24 weeks. But, as a sole proprietor, how can you prove the funds were used on a payroll if you don’t have payroll? The PPP FAQs also clarifies that all PPP lenders may accept scanned copies of signed loan forgiveness applications and documents containing the information and … We created a comprehensive, comprehensible guide all about PPP loan forgiveness for the self-employed, sole proprietors, and independent contractors. As a sole proprietor, your loan is based on your 2019 net profit divided by 12 – this is what gets you to a … Your owner compensation replacement value is two and a half months of your net income as reported on your 2019 Schedule C, with an annualized cap of $100,000. Bench is an affordable and powerful financial reporting software. When it comes time to apply for forgiveness, sole proprietors can claim “Owner Compensation Replacement,” which allows them to automatically claim a portion of their PPP loan as lost profit. For example, if you receive $15,000 in owner compensation from one business, you will only be able to receive $5,833 compensation from all other businesses you have an ownership stake in. Sole proprietors might be wondering how this applies to them, given that they don’t have any employees to pay. (Check out a CPA’s guide on using an 8-week or 24-week period). Unlike ordinary employers, whose loans were calculated based on their average payroll expenses, sole proprietors’ PPP loans were determined by calculating 2.5 times their average monthly net incomes in 2019. All or part of the PPP loan you receive can be forgiven if you keep your fulltime employees or rehire them within 24 weeks of receiving the loan or by December 31, 2020. Sole proprietor and independent contractor requirements. A forgivable PPP loan is already tax-free, so the IRS wants to prevent double-dipping (getting free money from the same source twice). If you are using an 8-week forgiveness period, you can claim 8 weeks’ worth of owner compensation replacement. If the borrower obtained an EIDL advance, provide the amount and the EIDL application number. You must apply for forgiveness within 10 months after the end of the ‘Covered Period.’ which is the 24-week period that starts when you received your PPP loan. Schedule A instructions (p 5) 3. This number times 2.5 equals your PPP loan amount. In order to have your loan forgiven, you need to use a certain amount of the loan exclusively for payroll expenses (as a sole proprietor, essentially you are going to use the loan to pay yourself). To be eligible for forgiveness, at least 60% of the PPP funds must be spent on payroll costs. However, for the owner compensation replacement, you just need to provide your 2019 Schedule C to be able to claim the amount for forgiveness. Because ABC Cookies is a Schedule C Sole Proprietorship and can check Box 1 on Form 3508EZ Instructions, it … If you do, then you face very different Payroll Protection Program (PPP) loan forgiveness rules than a sole proprietor or Single Member LLC would face. However, since sole proprietors usually don’t have payroll, their PPP loan is instead based on 2019 net profit as reported on the 2019 Schedule C tax return divided by 12. Sally is Sole Proprietor with no employees. For Accountants. In that post we talked specifically about the new PPP forgiveness rules self-employed taxpayers (e.g., sole proprietors, … PAYCHECK PROTECTION PROGRAM (PPP) LOAN FORGIVENESS PRE-WORK EXAMPLES ® Chase for Business | Loan Forgiveness pre-work examples 2 ABC Cookies received $20,833.00 in a PPP loan on May 4, 2020, and spent the funds across an 8-week Covered Period, which ended on June 29. Her loan forgiveness amount is automatically = $10,417. This forgiveness happens no matter what you do with the money. That means that the maximum possible loan amount is $20,833, and this entire amount can be used as personal income replacement. Hello, I have read the following online and wanted to get any professional opinion if accurate. Submitting Form 3508S Forgiveness Application To receive forgiveness, a borrower submits the completed 3508S loan forgiveness application (or an online equivalent) and any required documentation to the PPP lender. But the $20,000 isn’t taxable. Self-employed individuals can use a simplified forgiveness application we call the ‘EZ Form’. Forgivable Loan Request $17,708 ($85,000 ÷ 12 * 2.5) In this case, the PPP accounting rules allow the sole proprietor to use all of the $20,000 for “owner compensation replacement.” And in fact, to get forgiveness, the business may need to use the entire PPP loan for that. All Rights Reserved. Below, we’ve provided a summary of the various application options which is intended to help borrowers make the right decision as to which application method to utilize. Note: this is a follow up post to “Government Clarifies PPP Loan Forgiveness for Self Employed Taxpayers”, which we published last week. In this case, the PPP accounting rules allow the sole proprietor to use all of the $20,000 for “owner compensation replacement.” And in fact, to get forgiveness, the business may need to use the entire PPP loan for that. You operate as a sole proprietorship or a single-member LLC. Sole proprietors might be eligible for PPP full loan forgiveness if they: Used 60% or more of the loan to cover payroll (or, in the case of sole proprietors, net profit) Used no more than 40% on qualifying expenses, like mortgage interest, rent, or utilities. Her 2019 Schedule C Net Income was $50,000. The PPP Flexibility Act has extended the term of PPP loans to five years (from two) at a one percent interest rate. I hope that clears things up for you! The loan amount is $100,000 divided by 12 x 2.5 = $20,833. Sole proprietors might be wondering how this applies to them, given that they don’t have any employees to pay. The lender (i.e. How sole proprietor PPP loans are calculated. Which means your PPP loan is roughly ten weeks worth of net profit. Which loan forgiveness application should sole proprietors, independent contractors, or self-employed individuals with no employees complete? Application instructions (pp 1 & 2) 2. Simplified Reporting Requirements As a sole proprietor, 1099 contractor, single-member LLC, or a gig economy member, you may be eligible for a PPP loan. Our 4 minute guide about Owner Compensation Replacement breaks down some common questions about using it, including if it’s compatible with PUA (spoiler alert—it’s not). 2019 Net Sched C (Line 31) = $85,000. However, you will have a $21,000 tax liability (21% corporate rate). That means the maximum possible loan amount is $20,833, with $15,385 automatically eligible for forgiveness as owner compensation replacement. For example, if a Sole-Proprietor has the following net-income in 2019, the PPP would be as follows: $80,000 net-income, equates to $16,666 . You operate as a sole proprietorship or a single-member LLC. Update: If you received under $50,000 you can apply for PPP forgiveness with form 3508S. UDPATE: Not so fast on this. PPP Forgiveness Application and Attestation (pp 3 & 4) 1. How it Works. (Update: below is what bankers told me; but read the Forbes article I linked to above; it looks like loan forgiveness is automatic on an amount equal to: 2019 net income, divided by 52, times 8.) Take 7 minutes to learn all you need to know about Form 1040 here. SBA PPP Loan Guidance on Sole Proprietors & Self-Employed Businesses First Southwest Bank • April 14, 2020 The following information is based on our interpretation of the CARES ACT, the SBA Interim Final Rule (and amendments), as well the guidance from the US Treasury in their FAQ’s (as updated). © 2020 Thatcher Law Firm. We are an online bookkeeping provider powered by real humans. Let’s say a sole proprietor has 2019 net income of $48,000. This $669 billion-dollar loan program was designed to help businesses negatively affected by COVID-19 continue to pay their employees. Update: If you received under $50,000 you can apply for PPP forgiveness with form 3508S. In essence, the PPP loan should be roughly ten weeks’ worth of 2019 net profit. However, since sole props and contractors usually don’t have payroll, their loan is based on 2019 net profit divided by 12, to get a monthly “average” net profit. The best part? Schedule C Sole Proprietor – With Employees. 1B. This form applies to you as long as you don’t have employees on payroll. It is not necessary to document any payroll. Schedule A worksheet (p 9) 1. However, since sole proprietors usually don’t have payroll, their PPP loan is instead based on 2019 net profit as reported on the 2019 Schedule C tax return divided by 12. If you don’t have any eligible business expenses you can use the PPP funds for, the remaining balance of the loan will need to be repaid according to the PPP loan terms. You got your PPP sole proprietor loan? PPP Loan. Owner compensation up to $100k is a legitimate, forgivable expense for sole proprietorship PPP loans and is calculated into the total amount received; you cannot apply for a second/separate PPP loan. As long as they fit within the categories of utilities, rent, and mortgage interest, home office expenses can be forgiven. This is essentially your entire PPP loan, assuming your loan amount did not factor in additional payroll expenses. Why? Just as PPP loan applications were funneled to the SBA through borrowers’ banks, so are the applications for loan forgiveness, said attorney David Roth of Munsch Hardt Kopf & … So, sole proprietors with no employees can have the full amount of the loan paid off. The amount of Owner Compensation Replacement you’re eligible to claim for forgiveness is calculated by multiplying your reported net income in 2019 on your Schedule C by 2.5/12 (or 0.208). Instead of spending your funds on payroll, you can automatically get 2.5 month’s worth of net profit forgiven, without having to spend it on anything. You do NOT get taxed as an S-Corporation. in order to have their entire loan forgiven. The SBA has now made it clear that businesses can use a Schedule C filled out for January and February 2020 if the business started after June 30, 2019. You received a PPP loan of any type. In most cases this will be equal to the entirety of a sole proprietor’s PPPP loan (subject to a $20,833 cap). Are you an independent contractor or sole proprietor with no employees and curious WHY you have to fill out the crazy-long PPP forgiveness application? If you do have payroll expenses, then you can use the standard forgiveness application. You can count rent, mortgage interest and utility payments toward forgiveness as well. Leave a Reply Cancel reply. Keep in mind that your lender and the SBA have the right to request and audit your business’s financial documents and records, as outlined in your loan agreement. Example 1.1: Mary is a sole proprietor running a flower shop with no other employees. For sole proprietors or independent contractors with no employees, the maximum possible PPP loan is therefore $20,833, and the entire amount is automatically eligible for forgiveness as owner compensation replacement. You CAN have employees or subcontractors other than yourself. Sign up for a trial of Bench. Your bank might consider forgiveness if you comply with SBA Guidelines. Learn more about how we can help you stay informed on your business. Yes, it’s possible that your entire PPP loan can be claimed as personal income replacement! Phone: 301-850-1246 Toll Free:  866-604-3882 Fax: 301-441-9602. Her 2019 Schedule C Net Income was $50,000. If for some reason your loan is not forgiven, you can repay it based on the latest PPP loan terms. For sole proprietors or independent contractors with no employees, the maximum possible PPP loan is therefore $20,833, and the entire amount is automatically eligible for forgiveness as owner compensation replacement. A concept called owner compensation replacement was introduced to help answer that exact question. PPP loans for sole proprietors are determined by the borrower’s owner compensation replacement based on 2019 net profit with an annualized cap of $100,000. Now the forgiveness comes in. Remember, if you choose the new the 24 week forgiveness window, 100% of a sole proprietor’s PPP can be forgiven. Specify the forgiveness amount requested. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Forgiveness applications are not being accepted or processed just yet. Their PPP loan limit is easy enough to calculate: $48,000 / 12 = $4,000 x 2.5 = $10,000. No, the Treasury has indicated that if you filed a Schedule C for 2019, you must use it when applying for the PPP. The greatest thing about the Paycheck Protection Program is that the loan and interest can be completely forgiven, turning the loan into a form of free government stimulus. But the $20,000 isn’t taxable. Their PPP loan limit is easy enough to calculate: $48,000 / 12 = $4,000 x 2.5 = $10,000. With independent contractors and self-employed individuals becoming eligible to apply for U.S. Small Business Administration Paycheck Protection Program (PPP) loans Friday, April 10, 2020, the SBA issued an interim final rule on how Schedule C sole proprietors and individual partners in a partnership should treat their self-employment income regarding the PPP loan process. This is called “Owner Compensation Replacement”—it makes things nice and simple. This is especially useful for sole proprietors, as their businesses rely on themselves alone. The remaining PPP funds will need to be spent on utilities, rent, and mortgage interest expenses in order to be forgiven. If participating in the EIDL program, sole proprietors without employees received $1000 in a loan advance. Required fields are marked * Name * Email * Your Review. Out of that account, you will “pay” yourself by writing a check to yourself, or initiating a transfer between the busine… Under the CARES Act, borrowers are eligible for forgiveness of funds spent during the “Covered Period” – the 24 weeks after disbursement, or until the end of the year, whichever is earlier. Your personal bookkeeper will be there to walk you through everything so there’s zero learning curve. The PPP FAQs also clarifies that all PPP lenders may accept scanned copies of signed loan forgiveness applications and documents containing the information and … Sole proprietors and independent contractors are finding the PPP loan especially appealing because of the “owner compensation replacement” concept that can grant them full forgiveness, letting them use the funds however they want. Note: For an independent contractor or sole proprietor, you must have claimed or be entitled to claim a deduction for these expenses on your 2019 Form 1040 Schedule C in order to claim them as expenses eligible for PPP loan forgiveness in 2020. To be eligible for forgiveness, at least 60% of the PPP funds must be spent on payroll costs. But they must be for spaces … The PPP loan has a two-year maturity timeline with a 1% interest rate. Whenever you’re talking taxes, reading about taxes, planning to reduce your business taxes, you first need to know how the … Disclaimer | Site Map | Privacy Policy | Business Development Solutions by FindLaw, part of Thomson Reuters, How to Get PPP Loan Forgiveness as a Sole Proprietor, An Employer’s Guide to the COVID-19 Vaccine, SBA Cracks Down on PPP Abuse With New “Necessity Questionnaire”, AP Investigation Finds Sexual Misconduct In High Ranks Of FBI, Fourth Circuit Sheds Light on “Reasonable” Accommodation Requests, Tipped Workers Deserve Protection From Harassment By Customers. Add the sole proprietor’s 2019 Schedule C line 31 net profit, up to $100,000, to 2019 gross wages paid to employees (up to $100,000 max per employee) ... 2020 (such amounts are not eligible for PPP loan forgiveness). Exceptional Legal Counsel in Maryland, Virginia, and Washington, D.C. by thatcherlawfirm | Sep 25, 2020 | Firm News |. Sole proprietor and independent contractor requirements. In other words, you will lose $21,000 in deductions you would typically get. It really is best if this is a separate business account! No pressure, no credit card required. Generally, eligible expenses your business pays can be claimed as tax deductions. Your bank might consider forgiveness if you comply with SBA Guidelines. Borrowers who received loans prior to June 5, 2020, may elect to use the 8-week forgiveness covered period and can claim eight weeks’ worth of OCR. – with employees pieces ; 1 and 2 must be submitted to lender:.. Applicable to forgiveness has been extended to 24 weeks consult his or her own attorney business. Guide to SBA 7 ( a ) loans for Small businesses relief Resources a! Applies to you as long as you don’t have payroll expenses average payroll expenses or... About form 1040 here or sole proprietor with no employees or a single-member LLC %... 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