As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.
The Paycheck Protection Program (PPP) is back, with applications open through March 31, 2021, for first-draw and second-draw loans. However, a lot of the information we’ve been seeing so far has been focused on small- and medium-sized businesses (SMBs) while sole proprietors and other single-person businesses are a large number of PPP applicants. Biz2Credit is one of the top PPP lenders for small businesses, having disbursed over $1 billion of 2021 PPP so far, so we wanted to walk through PPP funding for single-person businesses.
Focusing on the recent guidelines issued by the Small Business Administration (SBA) in their Interim Final Rule (IFR) documents, we’re going to look at:
- the paycheck protection program,
- single-person business eligibility,
- determining what paperwork you need to file,
- calculating your loan amount as a single person business,
- the covered period and eligible expenses,
- and loan forgiveness.
Paycheck Protection Program
In March, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed and established the first round $350 billion forgivable loan program: the Paycheck Protection Program. The program was designed to help certain small businesses, self-employed workers, sole proprietors, certain nonprofit organizations, and tribal businesses continue to pay their workers and their related bills while shut down due to local and state COVID-19 guidance.
The December 21, 2020, passage of the $908 billion Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act included $284 billion for the Paycheck Protection Program and $20 billion for targeted economic injury disaster loans (EIDLs). (The Act was passed within the Consolidated Appropriations Act.)
The relief bill also introduced a second draw program, which allows “smaller and harder-hit businesses” who have already used (or plan to use) the full amount of their original PPP loan to apply for a second PPP loan. To be eligible for a second draw PPP loan (PPP2) as a single-person business, you must have already spent your first-draw PPP loan and demonstrate “at least a 25 percent reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter,” according to the House Appropriations Committee.
The December legislation is focused on small and medium-sized businesses (SMBs) and equitable distribution of funds by the SBA and financial institutions to a variety of businesses. After Congress approved the package, the Treasury Department and SBA worked out the details, which were published in January as IFRs before the enactment of the new PPP.
Eligibility as a Single-Person Business
The most important thing before applying for a PPP loan is determining your eligibility. For starters, according to the most recent SBA IFRs, an eligible single-person business – or single-employee business – includes:
- sole proprietors,
- independent contractors,
- and self-employed individuals.
There are four basics tenets of eligibility that are required for all single-person businesses, as laid out in the SBA’s IFR on the Paycheck Protection Program:
- You were in operation on February 15, 2020.
- You are an individual with self-employment income (such as an independent contractor or a sole proprietor).
- Your principal place of residence is in the United States.
- You have/had no employees.
Beyond that, a single-person business is eligible based on filing taxes using IRS Form 1040, which can show income and expenses for the past fiscal year and prove the business was in operation on February 15, 2020.
The IRS states that a sole proprietor is “someone who runs an unincorporated business by himself or herself.” (If you are a single-person business with an LLC, see below.) Sole proprietors will use Form 1040 or a Form 1040 Schedule C to:
- report income,
- note profit or loss from the business,
- and pay taxes.
IRS Form 1099 shows independent contractors’ income and expenses and proves they were in operation before February 15, 2020. If they are independent contractors who were not full-time W-2 employees of a business during the 2019 fiscal year, then they are eligible as a single-person business.
Independent contractors file taxes using Form 1040 as a self-employed individual, which will be used when applying for PPP funding.
Self-Employed Individuals and LLCs
The most recent SBA IFR on the PPP says self-employed individuals are eligible for a PPP loan if they filed a Form 1040 Schedule C.
If you are self-employed and have formed an LLC, the IRS notes that single-member LLCs are reflected as a “disregarded entity” and do not hinder the borrower’s ability to apply for PPP funds. As long as a single-member LLC does not elect to be treated as a corporation, then the individual (single-employee) owner can file taxes with a Form 1040, like other self-employed individuals, which qualifies them for the Paycheck Protection Program.
The IRS states this does not apply “if the single-member LLC is owned by a corporation or partnership.” The LLC must be for a self-employed single-employee enterprise.
Once you know if your business is eligible, the next step is to gather the documentation to file for a Paycheck Protection Program loan. The basics you’ll need are:
- Date your business started.
- Annual revenue (can use Form 1040).
- Business mailing address.
- You may need a NAICS code for your industry.
As a self-employed individual in a single-person business, the lender will need to see all wage, commission, income, and net earnings documents you have to establish proof of income. This would include:
- Earnings reports
- Pay stubs
- Form 1099-MISC
- Income and expenses using IRS Form 1040 Schedule C.
- You can also use bank records to prove payroll and income.
- If you use a payroll processor or have payroll tax filing records, those may be needed too.
An invoice, bank statement, bookkeeping record, or payment record may be required to prove your business was in operation on or before February 15, 2020.
All of this documentation is only for businesses that do not have employees or payroll expenses. It is for single-employee businesses.
If you own more than one business, you will need to ensure that your finances and documentation are separate. Otherwise, you could run into trouble securing a PPP loan and loan forgiveness.
Calculating Loan Amount
Determining the amount of the loan is done in four steps:
- Determine your annual payroll
- Refer to your tax return for how much you made in the past calendar year
- Subtract any annual compensation in excess of $100,000
- The SBA allows annual compensation up to $100,000.
- Calculate your average monthly payroll costs
- Divide annual payroll by 12
- Multiply average monthly payroll costs by 2.5
As a single-employee business, you’ll be reporting your net business income, which can be found on Form 1040 Schedule C.
As a single-employee business, the maximum loan amount you can receive is $20,833. (This is based on a maximum annual salary during the past year of $100,000.)
Eligible Expenses and the Covered Period
Single-person small businesses are able to follow the same guidelines for eligible expenses and covered periods as other small businesses applying for PPP loans, regardless of the number of employees and physical locations they have. However, due to the loan amount, having fewer employees may mean that single-person businesses will only be able to cover payroll costs with the PPP loan proceeds.
Borrowers have to use 60 percent of the loan on payroll costs and 40 percent on non-payroll costs. Spending the PPP loan on these covered expenses ensures that the loan will be forgiven.
- Payroll costs are:
- Wages and salary as well as any insurance or benefits.
- Non-payroll costs include:
- Covered mortgage interest payments.
- Covered business rent and lease obligations.
- Covered utility payments.
- Covered operations expenditures: business software, cloud computing service, or other human resources and accounting needs that help the business function.
- Covered property damage costs relating to 2020 protests that were not covered previously or by insurance.
- Covered supplier costs include purchasing essential goods for the business and purchases made pursuant to a contract prior to taking out the PPP loan.
- Covered worker protection expenditure: personal protective equipment and adaptive investments to comply with health regulations.
Eligible non-payroll expenses must be incurred during the borrower’s covered period. These expenses must also be paid before the next billing date to maintain eligibility for full forgiveness.
Borrowers can choose when their covered period ends, with the option for an 8 or 24 week period beginning after the loan’s disbursement. Covered periods can extend beyond the March 31, 2021 PPP deadline.
PPP Loan Forgiveness
The SBA says loan forgiveness will be provided for the sum of documented payroll and non-payroll costs with a PPP loan. As long as your ratio is 60 percent (or more) payroll and 40 percent (or less) non-payroll, then your loan is applicable for full forgiveness of the principal amount and accrued interest.
The borrower must submit a loan forgiveness application to its lender within 10 months after the end of the covered period.
For a single-person small business, the Treasury and SBA introduced the concept of Owner Compensation Replacement. This program allows self-employed individuals to claim a portion of the PPP loan to make up for lost income due to COVID-19. Depending on if your PPP loan claim included other payroll expenses, this could be the full amount of your loan, which would be fully forgivable.
To claim Owner Compensation Forgiveness, fill out the loan forgiveness application (Form 3508) and report the amount claimed – the full PPP loan amount – on Line 1.
Applying for Your PPP Loan
If you are an eligible single-person business and have your documentation ready, Biz2Credit can help you get started now on applying for your Paycheck Protection Program funding. The deadline to apply is March 31, 2021, but the sooner you apply, the faster you can receive money for your business.
As the coronavirus pandemic continues to shutter businesses across the United States, it is more important than ever before for PPP borrowers to apply during this second round of funding. Using the information above about eligibility and documentation, you can begin the process of applying today!