[1]New rules to the Paycheck Protection Program (“PPP”) were announced [2] that raised loan limits for sole proprietors and independent contractors. In an Interim Final Rule announcement on Wednesday, March 3, 2021, the SBA issued new rules which provided a number of important changes for independent contractors and sole proprietors, as Schedule C and Independent Contractors can now use Gross Income (which is defined as Gross Revenue) as the loan amount (up to $100,000) for the owner’s payroll costs instead of Net Income. Sole proprietors and independent contractors who did not initially qualify for a PPP loan due to having shown a net loss (or very little profit) may now qualify!
Sole proprietors without payroll costs:
If you aren’t running payroll, your PPP loan amount will be calculated using your gross income as reported on line 7 of a 2019 or 2020 Schedule C.
To find your average monthly payroll expense, take your gross income (up to a maximum of $100,000) and divide it by 12. Take your average monthly payroll expense and multiply it by 2.5. This will be your PPP loan amount.
Sole proprietors with payroll costs:
If you are running payroll costs, your PPP loan calculation requires a few more steps.
Start by taking your gross income as reported on line 7 of a 2019 or 2020 Schedule C. You will then need to subtract any payroll costs as reported on lines 14, 19, and 26. The value you find after subtracting the payroll costs is capped at $100,000. Keep this number handy, it will be used to calculate your owner compensation share or proprietor costs later.
Add in your annual payroll costs for 2019 or 2020 (the same year of the Schedule C you are using). This can be found through your payroll provider or on IRS forms 941, 944, or 940. Remember that you can only include employees whose primary residence is in the United States and their earnings must be capped at $100,000 annualized.
Once you’ve added your annual payroll costs to the amount taken from your Schedule C, divide by 12 to find your average monthly payroll expense. Multiplying this number by 2.5 will give you your PPP loan amount.
Unfortunately, this new calculation does NOT apply to applications already approved. For assistance in the PPP application or forgiveness process, contact a ShindelRock tax professional [3].