Sole proprietors and the PPP
If you run a business on your own, your business is a sole proprietorship— even if you haven’t formally let the IRS know.
Since you don’t have employees, you won’t be reporting your payroll costs for the PPP loan. Instead, you’ll be reporting your net business income, which will be reported on a Schedule C. As long as your business was operational prior to February 15 of this year, you can apply to the Paycheck Protection Program.
According to the U.S. Treasury, “regardless of whether you have filed a 2019 tax return with the IRS, you must provide the 2019 Form 1040 Schedule C with your PPP loan application.”
If you’ve already filed your taxes, this should be easy: just submit your filled-out Schedule C to your lender. If you haven’t filed your taxes yet, you will likely need to get retroactive bookkeeping done so you can calculate your net income and fill out your Schedule C properly.
If your business was not operational prior to June 30, 2019, you will not have to provide a 2019 Schedule C, rather you will complete one for January to February 2020. It will be completed similarly to a Schedule C for the year with the exception of Line 13 where you will only include ⅙ of the amount of any depreciation deduction normally claimed. Bank statements will need to be provided for January and February 2020 to back up your claimed net profit.
If you don’t have bookkeeping or a tax return, we strongly recommend that you get caught up with your bookkeeping. Without a payroll service, bookkeeping is the best way to determine your net profit as a sole proprietor (which is what the PPP will ask for).
Your monthly average payroll expense will be your annual net profit divided by 12. If your annual net profit is over $100,000, you may only claim up to $100,000 divided by 12.
Sole proprietors who are married
If you run a sole proprietorship informally with a spouse, you will only apply to the PPP once, and your spouse would not be considered to have a salary through the business unless he or she was paid as a contractor prior to February 15, 2020.
Sole proprietors with more than one business
If you own more than one sole proprietorship, you may apply separately for each - but only if these sole proprietorships have separate EINs. The general rule of thumb is that you can apply separately for as many businesses you own that have separate identification numbers, or separate tax reportings. You may apply for the PPP once with your SSN as a sole proprietor, and then separately for any other businesses you own using their EINs. Your owner compensation will be capped at $20,833 across all businesses. For example, if you received $10,000 in compensation from one business, you would be able to take a maximum compensation of $10,833 from all other businesses.
Independent contractors and the PPP
If you work as a 1099 independent contractor, you are by default considered to be a sole proprietor in the eyes of the IRS. This means your freelance income gets reported annually on a Schedule C within your personal tax return. You will have a Schedule C even if you pick up odd jobs or do freelance work, and this Schedule is based on the 1099-MISC forms you collect from the companies or individuals who have hired you as a contractor.
Your salary is most easily determined by looking at the net profit listed on your Schedule C. If you have already filed your 2019 taxes, or prepared a 2019 return, this will be reported on line 31 of the Schedule C. If you have not filed your 2019 taxes, you will still need to fill out a Schedule C in order to qualify for the PPP.
Proof of income
The lender will want to see all documents related to any wage, commission, income, or net earnings from self-employment that you have received. This means that you’ll need to collect any earnings reports, pay stubs, or invoices you have.
Sole proprietorship and independent contractors will need to submit a Schedule C from their 2019 tax return (filed or yet-to-be-filed) showing income and expenses from the sole proprietorship.
All self-employed individuals will need to submit 2019 payroll tax filings reported to the Internal Revenue Service.
Rent, mortgage, and utilities expense
The Paycheck Protection Program funding can cover your office lease, rent, or mortgage interest, provided that you had it before February 15 2020. If you have a home office, you can claim a portion of the expenses (the percentage of your home that’s used as a home office).
Again, collect any paid invoices, statements, lease agreements, or cancelled checks that will help prove you had these expenses.
However, if you want to have your loan forgiven, you must spend 60% of the loan funds on payroll costs (and the remaining 40% on rent, mortgage interest, and utilities).
If you’re a sole proprietor with no employees, you’re eligible to take your full PPP loan as compensation for your lost profits. You can read more in our guide on owner compensation replacement here.
When does the application open?
Sole proprietorships can apply starting April 3.
Independent contractors and self-employed individuals can apply starting April 10.
You are encouraged to apply early as there is a funding cap for this program. You have until August 8 to submit an application.
Get a dedicated bookkeeper to track your expenses
Bench gives you a professional bookkeeper to keep your bookkeeping and financials up to date remotely—so you can apply for loan-forgiveness without the stress.