New PPP Rules for Self-Employed Individuals, Sole Proprietors, and Independent Contractors

Major changes to the Paycheck Protection Program (PPP) were announced on March 3^rd, 2021 for sole proprietors, independent contractors, and self-employed individuals. The Small Business Administration (SBA) released new guidelines and a new application form for these Schedule C businesses (those who file Form 1040, Schedule C with the IRS) which will allow them to obtain larger, forgivable PPP loans.

Known as The Interim Final Rule the revisions to loan amount calculations are detailed in a 32-page document that was published on the SBA’s website. Here are some of the most important items to note:

New Calculation Formula for Schedule C Businesses

Sole proprietors, independent contractors, and self-employed Schedule C businesses can now calculate their PPP loan amount by using gross income (line 7 of the form) instead of net profit (line 31 of the form).

→If you do not have employees, the SBA publication details that you should calculate your loan amount the following way:

Step 1: From your 2019 or 2020 IRS Form 1040, Schedule C, you may elect to use either your line 31 net profit amount or your line 7 gross income amount. (If you are using 2020 to calculate payroll costs and have not yet filed a 2020 return, fill it out and compute the value.) If this amount is over $100,000, reduce it to $100,000. If both your net profit and gross income are zero or less, you are not eligible for a PPP loan.

Step 2: Calculate the average monthly net profit or gross income amount (divide the amount from Step 1 by 12).

Step 3: Multiply the average monthly net profit or gross income amount from Step 2 by 2.5. This amount cannot exceed $20,833.

Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 that you seek to refinance. Do not include the amount of any advance under an EIDL COVID19 loan (because it does not have to be repaid).

→If you have employees, the SBA publication details that you should calculate your loan amount the following way:

Step 1: Compute 2019 or 2020 payroll (using the same year for all items) by adding the following:

a. At your election, either (1) the net profit amount from line 31 of your 2019 or 2020 IRS Form 1040, Schedule C, or (2) your 2019 or 2020 gross income minus employee payroll costs, calculated as your gross income reported on IRS Form 1040, Schedule C, line 7, minus your employee payroll costs reported on lines 14, 19, and 26 of IRS Form 1040, Schedule C (for either option, 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 period during which the payments are made or the obligation to make the payments is incurred (if this amount is over $100,000, reduce it to $100,000, or if this amount is less than zero, set this amount at zero);

b. 2019 or 2020 gross 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 (line 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 basis, 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 residence is outside the United States; and

c. 2019 or 2020 employer contributions to employee group health, life, disability, vision, and dental insurance (portion of IRS Form 1040, Schedule C line 14 attributable to those contributions); retirement contributions (IRS Form 1040, Schedule C, line 19); and state and local taxes assessed on employee compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms).

Step 2: Calculate the average monthly amount (divide the amount from Step 1 by 12).

Step 3: Multiply the average monthly amount from Step 2 by 2.5.

Step 4: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance. Do not include the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

March 3^rd, 2021 Is A Key Date

The new calculation formula went into effect on March 3^rd, 2021. Unfortunately, the new rules are not retroactive. This means that if your Schedule C business was approved for a PPP loan prior to March 3^rd, 2021, you will not be eligible to use gross income instead of net profit to calculate your PPP amount. If however, your business applied for a PPP loan prior to March 3^rd, 2021 but has not yet been approved, you may be able to withdraw your application and reapply using the new calculation formula.

Deadline

The PPP loan deadline to file your application is 3/31/21.

Still have questions?

We’ve got answers! Our COVID-19 Resource Center has up-to-date information and helpful tips for business owners like this guide to PPP FAQs and this PPP Application Checklist.