Q: I am counting on Congress to add new funding to the Paycheck Protection Program (PPP) under the Cares Act. Once that happens, I will apply as a "self-employed" person, which is what the PPP rules call an independent contractor (IC). I like that most or all of the loan can be forgiven. How, exactly, do I figure out how much I can get, and how do I figure how much can be forgiven? What if I have my own limited liability company (LLC)?
A: Four days after self-employed persons, including ICs, became eligible to apply for PPP loans, the Small Business Administration (SBA) issued rules covering what constituted "payroll" for ICs, what information ICs need to submit to their banks and how forgiveness would be calculated. The rules are bad news for many ICs because the loan will be based on your net income after business expenses, not your 1099.
If you are a sole proprietor (i.e., ICs who are self-employed and not partners in partnerships or members of LLCs that file tax returns), the loan amount will be determined by the net income, if any, on the bottom line of your Schedule C for 2019. If you have not yet filed your federal tax return for 2019, the SBA requires you to submit a Schedule C for 2019 anyway, as part of the loan application.
Net income on your Schedule C takes into account all of your business expenses. If, like many ICs, you include travel expenses, your net income could be zero or a negative amount, in which case you cannot get a PPP loan, no matter how big your 1099 from your host agency may have been.
Assuming that your Schedule C's net income is a positive amount, the maximum loan will be calculated as one-twelfth of that net income times 2.5 (plus any Economic Injury Disaster Loan proceeds that you may have received from the SBA). If your net income was over $100,000, just $100,000 will count, so that the maximum loan will be $8,333 times 2.5 plus any EIDL loan.
To apply for the loan, you will need the Schedule C, one or more 1099s to prove your gross income and evidence that you were in business as of Feb. 15, 2020, such as a utility bill.
For ICs who have their own LLCs but choose to continue to file taxes as self-employed persons, the same rules apply. If your LLC files its own tax return, use your K-1 instead of Schedule C.
The amount of the loan that can be forgiven is what you spend on "payroll" for yourself during the first eight weeks after you get the loan plus up to 25% more for rent, utilities and mortgage. However, your "payroll" is limited to your average weekly net Schedule C income for 2019 (up to $100,000) times eight weeks.
Since many ICs have already applied to their banks before knowing the rules, they will probably have to start all over again if their applications didn't comply with the SBA rules.