Update March 30, 2021: The President has signed the PPP Extension Act. It gives business owners until May 31, 2021 to apply for PPP loans.
One of the more confusing aspects of the Paycheck Protection Program ( PPP ) is how to apply for a PPP lend if you are freelance, including if you are a 1099 contractile organ or spear proletarian .
here we will answer coarse questions we ’ ve received including :
- How do I calculate my payroll or wage if I am freelance ?
- What if I have not filed my 2020 tax retort ?
- If I had a loss in my business do I qualify?
- What expenses may be included in the forgive measure ?
By way of backdrop, the Economic Aid Act ( stimulation placard ) passed December 27, 2020 includes fund for three types of PPP loans :
- first time PPP loans for businesses that qualified under the CARES Act but did not get a loan ( “ beginning draw ” PPP loans ) ;
- second pull back PPP loans for businesses that obtained a PPP loan but need extra financing ; and
- extra fund for businesses that returned their beginning PPP lend or for certain businesses that did not get the full sum for which they qualified .
Read more about newly PPP loans included in the Economic Aid Act ( the “ stimulation poster ” ) here .
We encourage you to review the SBA guidance carefully and discuss it with your tax professional, attorney, or financial advisor to clarify how it applies to your business.
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How To Calculate PPP Loan Amount If You Are Self Employed
here we are focusing on those who are freelance and who file a form 1040, Schedule C. As a reminder, the SBA states you may be eligible for a PPP loan if :
- You were in operation on February 15, 2020 ;
- You are an individual with self-employment income ( such as an independent contractor or a lone owner ) ;
- Your chief place of mansion is in the United States ; and
- You filed or will file a form 1040 Schedule C for 2019 or 2020 .
For those who are freelance and file a imprint 1040, Schedule C, the SBA provides discriminate calculations based on whether or not you have employees. You will find those below .
Update: On March 3, 2021 the SBA released a newly Interim Final Rule that applies to PPP applicants who are freelance. Prior to this change, freelance borrowers who file Schedule C used cable 31 of their Schedule C ( web profit ) to calculate the owner ’ s recompense parcel of their loan measure. The raw calculation provides more flexibility, allowing borrowers to use web net income or arrant income. ( If you have already applied for PPP using net profit, see the FAQ below : can I Request More money If I Used net income Profit ? )
note : Do not include payments you make to 1099 contractors in your payroll. They can apply for PPP themselves .
First Draw PPP Loan If You Have No Employees
If you are freelance and have no employees, the SBA provides the follow instructions in the March 3, 2021 for newly PPP loanword borrowers :
If you have no employees, use the watch methodology to calculate your utmost loan total :
step 1 : From your 2019 or 2020 IRS Form 1040, Schedule C, you may elect to use either your occupation 31 net profit total or your line 7 gross income amount. ( If you are using 2020 to calculate payroll costs and have not yet filed a 2020 retort, fill it out and compute the value. ) If this amount is over $ 100,000, reduce it to $ 100,000. If both your net net income and crying income are zero or less, you are not eligible for a PPP loanword .
mistreat 2 : Calculate the average monthly web profit or gross income come ( divide the sum from Step 1 by 12 ) .
footstep 3 : Multiply the average monthly net profit or gross income measure from Step 2 by 2.5. This sum can not exceed $ 20,833 .
This is the come most self hire borrowers with no employees will use to qualify for a first-time PPP loanword .
How to Substantiate Your Income (Self-Employed No Employees)
You must provide the 2019 or 2020 ( whichever you used to calculate lend amount ) form 1040 Schedule C with your PPP lend application to substantiate the measure for which you applied. You must besides include a 2019 or 2020 ( whichever you used to calculate loan amount ) IRS Form 1099-MISC detailing non-employee recompense received ( box 7 ), bill, bank argument, or book of record that establishes you are freelance. If using 2020 to calculate loan amount, this is required regardless of whether you have filed a 2020 tax tax return with the IRS. You must provide a 2020 invoice, bank instruction, or book of record to establish you were in operation on or around February 15, 2020 .
First Draw Loan If You Have Employees
If you are freelance with employees, the SBA provides the stick to instructions .
step 1 : calculate 2019 or 2020 payroll ( using the lapp year for all items ) by adding the postdate :
a. At your election, either ( 1 ) the net net income sum from line 31 of your 2019 or 2020 IRS Form 1040, Schedule C, or ( 2 ) your 2019 or 2020 gross income subtraction employee payroll costs, calculated as your gross income reported on IRS Form 1040, Schedule C, production line 7, minus your employee payroll costs reported on lines 14, 19, and 26 of IRS Form 1040, Schedule C ( for either choice, if you are using 2020 amounts and have not yet filed a 2020 return, fill it out and compute the value ), up to $ 100,000 on an annualized basis, as prorated for the menstruation during which the payments are made or the duty to make the payments is incurred ( if this sum is over $ 100,000, reduce it to $ 100,000, or if this amount is less than zero, set this sum at zero ) ;
b. 2019 or 2020 arrant wages and tips paid to your employees whose principal place of residence is in the United States, computed using 2019 or 2020 IRS Form 941 Taxable Medicare wages & tips ( pipeline 5c, Column 1 ) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from taxable Medicare wages & tips ; subtract any amounts paid to any individual employee in excess of $ 100,000 on an annualized footing, as prorated for the period during which the payments are made or the obligation to make the payments is incurred, and any amounts paid to any employee whose principal place of residency is outside the United States ; and
c. 2019 or 2020 employer contributions to employee group health, life, disability, imagination and alveolar consonant policy ( parcel of IRS Form 1040, Schedule C line 14 attributable to those contributions ) ; retirement contributions ( IRS Form 1040, Schedule C, line 19 ) ; and express and local taxes assessed on employee compensation ( primarily under state laws normally referred to as the State Unemployment Tax Act or SUTA from state quarterly wage report forms ) .
step 2 : Calculate the average monthly total ( divide the come from Step 1 by 12 ) .
footfall 3 : Multiply the average monthly amount from Step 2 by 2.5 .
How to Substantiate Your Income (Self-Employed With Employees)
You must supply your 2019 or 2020 ( whichever you used to calculate loan measure ) human body 1040 Schedule C, Form 941 ( or early tax forms or equivalent payroll processor records containing exchangeable information ) and state quarterly wage unemployment insurance tax report forms from each quarter in 2019 or 2020 ( whichever you used to calculate lend amount ) or equivalent payroll central processing unit records, along with evidence of any retirement and health insurance contributions, if applicable. A payroll argument or similar documentation from the pay time period that covered February 15, 2020 must be provided to establish you were in operation on February 15, 2020 .
If you use a payroll march service ask them for a CARES Act report. It should include that information .
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If You are a Partner In a partnership
The SBA has previously clarified that while partnerships are eligible for PPP loans, a spouse in a partnership may not submit a separate PPP loanword application for themselves as a self employed person. ( The IFR released March 3, 2021 did not change the calculation for partnerships. ) The be methodology should be used to calculate the maximum amount that partnerships can borrow :
step 1 : calculate 2019 payroll costs by adding the succeed :
2019 Schedule K-1 ( IRS Form 1065 ) internet earnings from self-employment of individual U.S.-based general partners that are subject to self-employment tax, multiplied by 0.9235,5 up to $ 100,000 per partner :
- Compute the web earnings from self-employment of person U.S.-based general partner that are submit to self-employment tax from box 14a of IRS Form 1065 Schedule K-1 and subtract ( i ) any section 179 expense deduction claimed in box 12 ; ( two ) any unreimbursed partnership expenses claimed ; and ( three ) any depletion claimed on oil and gas properties ;
- if this amount is over $ 100,000, reduce it to $ 100,000 ;
- if this sum is less than zero, set this come at zero ;
2019 gross wages and tips paid to employees whose star position of residence is in the United States ( if any ), up to $ 100,000 per employee, which can be computed using :
- 2019 IRS Form 941 Taxable Medicare wages & tips ( line 5c-column 1 ) from each quarter ,
- Plus any pre-tax employee contributions for health indemnity or other outskirt benefits excluded from taxable Medicare wages & tips, and
- Minus any amounts paid to any individual employee in overindulgence of $ 100,000 and any amounts paid to any employee whose principal seat of mansion is outside the United States ;
- 2019 or 2020 employer contributions for employee group health, life, disability, vision and dental indemnity, if any ( part of IRS Form 1065 line 19 attributable to those contributions ) ;
- 2019 or 2020 employer contributions to employee retirement plans, if any ( IRS Form 1065 trace 18 ) ; and
- 2019 or 2020 employer submit and local taxes assessed on employee compensation, chiefly state unemployment indemnity tax ( from state quarterly wage report forms ), if any .
step 2 : Calculate the average monthly payroll costs ( divide the total from Step1 by 12 ) .
step 3 : Multiply the average monthly payroll costs from Step 2 by 2.5 .
How to Substantiate Your Income (Partnership)
The partnership ’ south 2019 IRS form 1065 ( including K-1s ) must be provided to substantiate the applied-for First Draw PPP Loan measure. If the partnership has employees, other relevant supporting documentation, including the 2019 IRS Form 941 and express quarterly engage unemployment insurance tax reporting form from each quarter ( or equivalent payroll processor records or IRS Wage and Tax Statements ) along with records of any retirement or group health, life, disability, vision, and dental policy contributions must besides be provided to substantiate the First Draw PPP Loan come .
If the partnership has employees, a payroll statement or exchangeable documentation from the pay up period that covered February 15, 2020 must be provided to establish the partnership was in operation and had employees on that date. If the partnership has no employees, an invoice, deposit argument, or book of record establishing the partnership was in operation on February 15, 2020 must rather be provided .
If Your Business is an LLC
How to calculate your loan measure will depend on how your LLC files its taxes. The SBA states that “ LLCs should follow the instructions that apply to their tax filing condition in the reference period used to calculate payroll costs ( 2019 or 2020 ) —i.e., whether the LLC filed ( or will file ) as a exclusive owner, a partnership, or a pot in the address period. ”
If Your Business is an S Corp
If you are freelance and your clientele operates as an S Corporation, you may qualify based on payroll ( including payroll you pay yourself ). however, if you lone pay yourself compensation through owner ’ s draw or distributions, you may not qualify. We recommend you read : Does Owner ’ s Draw Qualify as Payroll for the PPP Program ?
Second Draw PPP Loans
The stimulation legislation created second draw PPP loans for those who :
- Previously received a first draw PPP Loan and has or will use the full amount only for authorized uses by the date the second loan is disbursed;
- Have no more than 300 employees; and
- Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.
More data about qualifying for a irregular draw PPP loanword can be found here.
The calculation for second draw loans is exchangeable to first pull loans with one exception : if your clientele has a NAICS code beginning in 72 ( which is broadly food service and accommodations businesses ) you may qualify for a loan of 3.5 times average monthly payroll. other businesses will qualify based on 2.5 times average monthly payroll as earlier .
The March 3, 2021 Interim Final Rule describes the follow method acting for calculating the loan amount :
“ The utmost sum of a moment Draw PPP Loan to a borrower that has income from self-employment and files an IRS shape 1040, Schedule C, is calculated as follows, depending on whether the borrower has employees :
( i ) For a borrower that has income from self-employment and does not have any employees, the maximum loanword come is the lesser of :
( A ) the intersection obtained by multiplying : ( 1 ) the net net income or gross income of the borrower in 2019 or 2020, as reported on IRS Form 1040, Schedule C, that is not more than $ 100,000, divided by 12 ; and ( 2 ) 2.5 ( or, lone for a borrower assigned a NAICS code beginning with 72…at the clock of expense, 3.5 ) .
This amount can not exceed $ 29,167 for NAICS code 72 borrowers and $ 20,833 for all early borrowers .
( two ) For a borrower that has income from self-employment and has employees, the maximum loan amount is the lesser of : ( A ) the merchandise obtained by multiply :
( 1 ) the sum of ( one ) one of the two following options, up to $ 100,000 ; if this amount is less than zero, set this amount at zero ( if you are using 2020 and have not yet filed a 2020 reappearance, fill it out and compute the value ) :
- the borrower’s net profit reported on IRS Form 1040, Schedule C for 2019 or 2020, divided by 12;
- or line 7 from the borrower’s 2019 or 2020 IRS Form 1040, Schedule C, minus lines 14, 19, and 26, divided by 12; and
( two ) the median entire monthly payment for employee payroll costs incurred or paid by the borrower during the like year elected by the borrower ; by ( 2 ) 2.5 ( or, merely for a borrower assigned a NAICS code beginning with 72 at the time of spending ; or ( B ) $ 2,000,000 .
What If I Have not Filed my 2020 Tax Return for My Business ?
The SBA does not state that you must file your 2020 tax return before you apply. The good news is that if you want to qualify based on your gross income ( credit line 7 ), you ’ ll only need to complete lines 1-7 of your Schedule C to get that phone number used to calculate your loan sum. For many independent contractors, freelance individuals and gig workers, that should be reasonably simple. You ’ ll find Schedule C instructions here. ( be sure to check with your tax professional if you have questions. )
here ’ s what that first gear part of Schedule C looks like :
alternatively you may use information from your 2019 Schedule C to qualify alternatively .
What If My business Showed a Loss ?
prior to the March 3, 2021 change, if you were freelance and did not have employees, your clientele must have showed a net net income on either your 2019 or 2020 Schedule C to qualify for PPP. now your clientele must show gross income or a final profit to qualify. freelance individuals with employees may besides qualify based on payroll plus owner ’ randomness compensation using the methods described above. More businesses are likely to qualify for PPP using the new calculation .
Can I Request More money If I Used net profit ?
If you applied for PPP as a freelance individual using net profit, you may discover you could get a larger loan by using gross income. The change in calculation methods is not retroactive. The IFR states that it applies to “ loans approved after the effective date .
however, it appears that whether you can get a larger loan amount depends on the condition of your loan. information provided by SBA to lenders states that a lender may cancel a PPP loanword application and submit a new application on behalf of the borrower all the way up to the distributor point where the loanword funds have been disbursed to the borrower but a form 1502 ( reporting the lend ) has not been submitted by the lender to the SBA. ( The borrower would have to repay the loan first gear. )
once the loan has been disbursed and the lender has filed Form 1502 with the SBA, there is no option to reapply for a larger amount .
Contact your lender if you have already submitted a loanword application based on Schedule C net profits and have questions about the newly calculations .
Keep in mind that if you already qualified based on the maximal owner ’ s recompense of $ 20,833 based on web net income on your Schedule C there is no need to do anything. ( For second describe loans to businesses with a NAICS code starting in 72, the utmost amount based entirely on owner ’ s recompense is $ 29,167 ) .
Is There a downside to Using Gross Income alternatively of net net income ?
possibly. PPP borrowers must certify that “ current economic doubt makes this loan request necessary to support the ongoing operations of the Applicant. ” however, there has been a “ safe harbor ” for loans below $ 2 million .
The SBA appears to be concerned that the gross income calculation may be more submit to fraud or abuse. So it has warned that “ if a Schedule C file clerk elects to use gross income to calculate its loan sum on a first Draw PPP Loan and the borrower reported more than $ 150,000 in crying income on the Schedule C that was used to calculate the borrower ’ randomness loanword measure, the borrower will not ( emphasis added ) automatically be deemed to have made the statutorily required authentication concerning the necessity of the loan request in good faith, and the borrower may be subject to a review by SBA of its certification. ”
It goes on to say that “ SBA will review a sample of the population of First Draw PPP Loans made to Schedule C filers using the gross income calculation if the crying income on the Schedule C used to calculated the borrower ’ second loan sum exceeds the threshold of $ 150,000. If the borrower exceeds this doorsill, then SBA will, for the sample draw, assess whether these borrowers complied with the PPP eligibility criteria, including the commodity faith loanword necessity certificate. ”
Although second draw PPP loanword borrowers must calm make the economic necessity authentication, the SBA does not appear to be a concerned about these applicants, since they must demonstrate a 25 % decrease in receipts. It says : “ all Second Draw PPP Loan Borrowers will be deemed to have made the needed documentation concerning the necessity of the loan in good faith. ”
What Is the January/February time period I ’ ve Heard Referenced ?
The CARES Act became law March 27, 2020 and in the first cycle of PPP, self employed business owners did not get instructions on how to calculate payroll right away. When the guidance did come out, it did not include instructions for businesses that weren ’ thymine in occupation in 2019 but were in business by the deadline of February 15, 2020 required to qualify .
late the SBA provided instructions for businesses that were not in business in 2019 but were in clientele in January and February 2020. Those instructions by and large allowed those businesses to calculate their loanword measure using their median monthly payroll costs incurred in January and February 2020. This calculation is still an choice, or the business may use all of 2019 or all of 2020 to qualify. For details on how to calculate the January/February choice, see the SBA guidance dated January 17, 2021 : Questions 10 & 11 .
Can I Use PPP to Refinance My EIDL Loan ?
Some borrowers have received both a PPP loanword and an Economic Injury Disaster Loan ( EIDL ). There are some very specific but express circumstances where you can refinance an EIDL lend with PPP. ( Note we are talking about an EIDL loan here, not the EIDL grant or progress. ) Pay careful attention to the dates here !
- You must use PPP to refinance your EIDL if you received EIDL loan funds from January 31, 2020 through April 3, 2020 ; and used the EIDL loanword funds to pay payroll costs .
- You may ( optionally ) use PPP to refinance EIDL loan funds received from January 31, 2020 through April 3, 2020 ; and you used the EIDL lend for purposes other than payroll costs .
- Youcannot use PPP to refinance an EIDL lend if you received EIDL loan funds before January 31, 2020 or after April 3, 2020. This is the majority of borrowers .
What Else Do I Need to Apply ?
In accession to the tax documents you used to calculate your lend amount, you will need the watch software documentation :
- A transcript of your driver ’ mho license or recommendation .
- A invalidate check for the deposit of your PPP loan. Some lenders require you have a business bank account. If you don ’ t have one, we recommend opening one so your palatopharyngoplasty funds can be deposited into that account. This will make it easy to track how you spend palatopharyngoplasty funds .
- For second draw PPP loans you must have the number from your first PPP lend. SBA loan numbers ( PLP ) have eight numbers followed by a dash then two more numbers ( i, XXXXXXXX-XX ) .
What Expenses Can I Use My PPP Loan For ?
It ’ sulfur important to spend your loan proceeds correctly if you want to qualify for full forgiveness. The SBA has established some identical specific steering regarding the consumption of PPP loan proceeds for those with income from self-employment who file a form 1040, Schedule C .
With the new rule the SBA introduced a raw term called “ owner expenses ” and describes it like this : “ In the context of determining a borrower ’ second eligible expenses and forgiveness sum, this interim final principle refers to the owner compensation partake of a Schedule C file clerk ’ randomness loanword amount as ‘ owner expenses ’. ”
PPP is intended to keep workers on payroll, and that may include compensation for freelance individuals. In fact, entire forgiveness broadly requires the occupation to use at least 60 % of PPP funds for payroll related expenses during specific time periods. The March 3, 2021 steering from the SBA describes it this room :
- For borrowers that use net profit to calculate lend amount, owner compensation refilling, calculated based on 2019 or 2020 ( using the same class that was used to calculate the loanword sum ) internet profit .
- For borrowers that use arrant income to calculate loanword measure, owner expenses ( clientele expenses plus owner compensation ), calculated based on 2019 or 2020 ( using the lapp year that was used to calculate the loan sum ) gross income ( this sum can not exceed $ 20,833 ) .
- For borrowers who used gross income to calculate the lend come and have no employees, owner expenses peer gross income .
- For borrowers who used crying income to calculate the loanword sum and have employees, owner expenses equal the dispute between gross income and employee payroll costs .
For businesses with employees, payroll may besides include employee payroll costs for employees whose principal place of residency is in the United States .
In addition, borrowers may qualify for full forgiveness if they use up to 40 % of PPP funds for early eligible expenses during the cover period. These include :
- mortgage interest payments* ( but not mortgage prepayments or star payments ) on any clientele mortgage obligation on real or personal property ( e.g., the sake on your mortgage for the warehouse you purchased to store business equipment or the sake on an car loan for a vehicle you use to perform your business ) ,
- commercial enterprise lease payments ( for example, the warehouse where you store commercial enterprise equipment or the vehicle you use to perform your clientele ), and
- business utility payments ( for example, the cost of electricity in the warehouse you rent or gas you use driving your business vehicle ) .
- concern payments on any early debt obligations that were incurred before February 15, 2020 ( such amounts are not eligible for PPP lend forgiveness ) .
- The stimulus legislation created a new category of covered expenses that may be included in non-payroll costs. We detailed those in this article about the new PPP loans. These expanded expense categories apply to anyone with a PPP loan that has not yet been forgiven, even if you received it in 2020.
*Note that you must have claimed these expenses on your form 1040 Schedule C to include those costs for forgiveness purposes .
For many freelance individuals, PPP loan forgiveness will be based largely or wholly on owner ’ mho compensation refilling. We discuss this in detail in our article : Self-employed: How to Fill Out the PPP Forgiveness Application .
The Bottom Line on Applying for PPP When Self-Employed
If you qualify for PPP, by all means be certain to apply. This lend may be fully forgiven and may provide necessity fund to your clientele .
That said, it will be a bunch easier to apply for PPP if your bookkeeping is up to date and you have kept estimable records of the income and expenses of your business. If you have operated your business with cash payments that you did not report to the IRS, co-mingled personal and business funds, or if you have maximized expenses to the distributor point where your occupation merely shows a loss, you are likely not going to be able to qualify for the PPP loan your clientele may have been entitled to otherwise. Your accounting professional can prove invaluable in this march so make certain you enlist their assistant in determining which COVID relief programs are best for your business .
This article was primitively written on April 14, 2020 and updated on June 2, 2022 .
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