PPP Loan Sizing Enhancements for Self-Employed Individuals

  • 3/9/2021
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Individuals who file Form 1040 Schedule C may be affected by the SBA’s revision to rules for calculating the size of PPP loans.

Key insights

  • For Schedule C filers, gross income can now be used as the basis for PPP loan sizing
  • Schedule C Filers with employees will calculate their maximum PPP loan amount differently than those without employees
  • Several forms of supporting documentation are required with an applicant’s submission
  • Loan necessity for first-draw borrowers may be subject to review by the SBA

The Small Business Administration (SBA) released a revision to rules implemented under the Economic Aid Act applicable to sole proprietors and independent contractors who file Form 1040 Schedule C. The revision redefines what constitutes payroll costs — the basis for PPP loan sizing — for these individuals.

How Have the Calculations Changed?

Previously, PPP rules defined payroll costs for individuals who file Form 1040 Schedule C as net earnings from self-employment. Many Schedule C filers without employees had net profits less than $100,000 and were ineligible to receive the maximum PPP amount, and those with $0 net earnings were ineligible to receive a PPP loan.

To reduce barriers to accessing PPP funding, the revised SBA guidance changes the calculation for sole proprietors and independent contractors by allowing them to use gross income as the basis to size their loan.

Calculating the Maximum PPP Loan for Schedule C Filers Without Employees

If a Schedule C filer does not have employees, the borrower can elect to calculate its loan amount using either net profits or gross income. The gross income is the amount reported on line 7 of Form 1040 Schedule C. The borrower will then take the lesser of gross income or $100,000, divide it by 12, and then multiply it by 2.5 — not to exceed the maximum allowed of $20,833.

Calculating the Maximum PPP Loan for Schedule C Filers With Employees

Owner Compensation: If a Schedule C filer has employees, the borrower will first calculate the owner compensation share of its payroll costs based on either net profits or gross income.

If using gross income, the borrower will subtract expenses on lines 14 (employee benefit programs), 19 (pension and profit sharing plans), and 26 (wages net of any employment credits) from Form 1040 Schedule C. The borrower will use the lesser of the calculated amount or $100,000 as owner compensation.

Employee Compensation: Using all four quarterly Forms 941, the borrower will add the gross wages paid to its employees by combining taxable Medicare wages on line 5c column 1 plus any pre-tax medical or fringe benefits paid by employees (not in excess of $100,000).

The borrower can then add employer group health, life, disability, vision, and dental insurance (line 14 employee benefit programs), retirement contributions (line 19 pension and profit sharing plans), and state and local taxes assessed on employee compensation such as state unemployment, family leave, and disability.

The borrower will then divide the owner and employee compensation by 12, and then multiply it by 2.5. Owner amounts may not exceed the maximum allowed of $20,833.

What Supporting Documentation is Required?

The borrower can use either 2019 or 2020 IRS Form 1040 Schedule C, and must include an IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes you are self-employed. A draft of 2020 is acceptable.

Forms 941 (or equivalent payroll processor records containing similar information) are also required, along with state quarterly wage unemployment insurance tax forms, and evidence of any retirement and health insurance contributions.

A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish you were in operation on February 15, 2020.

Final Considerations

Schedule C filers using gross income in their calculation can file for a PPP loan using SBA Form 2483-C, (first draw) or SBA Form 2483-SD-C (second draw), which were released on March 3, 2021. This application is only available for borrowers who apply after March 3, 2021. Borrowers whose PPP loans have already been approved prior to this ruling and release of SBA Form 2483-C and SBA Form 2483-SD-C are not allowed to increase their PPP loan based on the new definitions.

If a Schedule C filer elects to use gross income in calculating its first draw loan amount — and has more than $150,000 of gross income — the SBA may review the certification of loan necessity to support ongoing operations. Second-draw borrowers may not be subject to a economic necessity review, since they will be required to demonstrate a 25% reduction in gross receipts to qualify.

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