Written by: Danielle Manzo
This article was last updated on April 7, 2020. The latest, official updates can be found here.
On March 27, 2020 the U.S. federal government signed the $2 trillion Coronavirus Aid, Relief, and Economic Security (“CARES”) Act into law. The Paycheck Protection Program (“PPP”) is one of the key measures of this bill providing $349 billion Small Business Administration (SBA) loans aimed at encouraging businesses to keep workers employed during the coronavirus pandemic.
Starting this Friday, April 10, 2020, independent contractors and self-employed individuals can apply. We encourage you to act quickly, as there is a funding cap under the legislation and applications are processed as received -- so here is everything you need to know:
Key Highlights:
100% guaranteed loan by the SBA
All small businesses are eligible -- including sole proprietorships, self-employed individuals, and independent contractors
You cannot receive Unemployment Benefits and PPP at the same time
Maturity rate of 2 years and an interest rate of 1%
No loan payments are required for the first 6 months
No collateral or personal guarantees are required
No borrower or lender fees
Intended to cover eight weeks of expense starting from the loan origination date
Can be forgiven and turned into a non-taxable grant
Do I qualify for the program?
Small businesses, sole proprietorships, independent contractors, and self-employed individuals can all qualify who have 500 or fewer employees (exceptions apply for those over 500) and your business was operational as of February 14, 2020.
Do I qualify as a sole proprietorship, independent contractor and/or self-employed individual?
Sole proprietorship - If you run your own business, you are a sole proprietor, even if you have not registered with the IRS. Your revenue is reported on a Schedule C within your personal income tax return.
Independent Contractor - If you work independent of the company on a contracted basis and are not an employee, you are an independent contractor and by default considered to be a sole proprietor by the IRS. Your revenue is reported on a Schedule C within your personal income tax return and you likely receive 1099-MISCs from the companies you do business with.
Both sole proprietors and independent contractors are typically self-employed individuals.
If you are an LLC taxed as an S Corporation or C Corporation or your business is incorporated, you are considered a small business within the guidelines of PPP. You likely will not have received 1099-MISCs and file a separate corporate tax return.
How much can I receive?
The maximum amount you can borrow is your monthly average payroll cost in 2019 multiplied by 2.5, up to a maximum of $10 million.
For new businesses, your monthly average payroll cost may be calculated using the time period of January 1, 2020 to February 29, 2020.
What are “payroll costs”?
Under the PPP program, “payroll costs” are:
Salary, wages, commissions or tips (maximum of $100,000 on an annual basis for each employee).
Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of employee health benefits including group health care coverage, insurance premiums and payment of any retirement benefit.
State and local taxes assessed on compensation of employees.
For a sole proprietor or independent contractor: “Payroll costs” are wages, commissions, income, or net earnings from self-employment or similar compensation, (maximum of $100,000 on an annual basis for each employee).
What if I don’t use a payroll provider?
You are likely still eligible for the Paycheck Protection Program. The main exception is businesses set-up as C Corporations or S Corporations must use payroll to pay their owners. If you have not been paying yourself a salary through payroll (with tax withholdings) and are set-up as an S Corporation or C Corporation, then those payments are not covered under PPP as “payroll costs”.
What can I use the loan proceeds for?
Salaries, Wages and Commissions
Vacation, sick, parental/family/medical pay
Retirement contributions
Group health care coverage premiums
State and local taxes
Administrative Costs: (in force before February 15, 2020)
Utilities (electricity, gas and water)
Communication (phone or internet access)
Insurance premiums or other healthcare costs
Rent and lease agreements
Interest on mortgage obligations
How will the loan be forgiven?
As long as a minimum of 75% of the PPP loan is used to fund payroll and employee benefit costs and the remaining 25% is spent on administrative costs (listed above), you will be eligible to apply for 100% forgiveness. The loan forgiveness application will start 8 weeks following your loan signing date.
The amount forgiven may be reduced if:
Your business reduces the number of employees retained; or
If wages are reduced by more than 25% for any employees that made less than $100,000 annually in 2019.
If you’ve already decreased your employees, you have until June 30, 2020 to restore your full-time employment and salary levels.
TIP: Create a new bank account to hold the funds and keep detailed accounting and bookkeeping records so it is easier to track and document expenses when you are applying for loan forgiveness.
What if the loan is not forgiven?
The first payment is deferred for 6 months and fully paid in 2 years at a 1% fixed interest rate. There are no prepayment penalties or fees.
How do I apply?
First contact your existing banking institution and find out if they are participating in the PPP SBA lending program. They may have an application online or refer you to another banking institution.
You can also submit to any existing SBA-approved lender here.
QuickBooks Online is working on a loan application for the PPP and expecting to release it on Wednesday, April 8th.
The complete SBA’s PPP application is here.
TIP: Complete the paper application even if your banking institution has an electronic version so you will have all the documents and information readily available and documented in case your banking website times out or you have to re-apply.
What supporting documents will I need?
Sole Proprietorships, Independent Contractors and Self-Employed Individuals will need have the following documents ready:
2019 tax return (filed or to be filed) including the Schedule C illustrating income and expenses
1099-MISCs
Identification (i.e. Driver’s License)
If you have employees, a Payroll Report and 2019 IRS Form 941s
TIP: Have documentation relating to mortgage interest, rent payments and utilities available as some SBA-approved lenders may ask for more supporting details.
How long will this program last?
The program is open until June 30, 2020.
Are there other relief programs?
Yes, you can find additional information on those on the SBA website here.
References:
U.S. Department of Treasury Fact Sheet: https://home.treasury.gov/system/files/136/PPP--Fact-Sheet.pdf
U.S. Department of Treasury: https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses
PPP Application: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf.
DISCLAIMER:
Field Pros Direct, LLC do not provide tax, legal or accounting advice. This post and material has been prepared for informational purposes only and does not constitute and should not be relied on for legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Field Pros Direct, LLC assumes no liability for actions taken in reliance upon or engaging in any transaction based on the information contained herein.
