How Independent Contractors Can Document Income for PPP Loans

How to apply for the PPP loan if you are independent contractor

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Independent contractors and self-employed individuals could begin applying for Small Business Administration loans under the Payroll Protection Program as of Friday, April 10.

The goal is to keep small business owners paying their employees so they can continue contributing to the economy, even if the business must pause operations due to shelter-in-place orders. 

But because these loans are being rolled out so quickly, many banks and even the SBA itself haven’t provided much guidance on the application process, leaving small business owners scratching their heads.

“There is still a lot of ambiguity with the language in the CARES Act,” says Scott Rawitscher, co-owner of Collaborative Business Solutions, a firm that offers accounting, marketing, and technology consulting.  

Sole proprietors vs. independent contractors vs. self-employed

First, there’s the distinction between sole proprietors versus independent contractors and self-employed individuals. Technically, someone could fit all 3 of these categories, but the SBA created separate application dates.

Sole proprietors could begin applying for a loan on Friday, April 3, while independent contractors and self-employed individuals could start applying on Friday, April 10. 

As Philip Taylor, CPA and founder of PTMoney.com, has seen it interpreted, the SBA created these separate dates based not on business entity type but whether the business produces payroll reports. Sole proprietors and other small businesses that run payroll were able to start applying on April 3, while “anyone who didn’t have a traditional payroll processor, who just paid themselves by a draw or wrote themselves a check personally” could apply the following week, he explains.

Sole proprietors and other small businesses that run payroll were able to start applying on April 3, while “anyone who didn’t have a traditional payroll processor, who just paid themselves by a draw or wrote themselves a check personally” could apply the following week, he explains.

(Anecdotally, though, he’s seen some banks start accepting applications from independent contractors and self-employed individuals prior to April 10.) 

Documenting income

Businesses that run payroll can submit payroll reports to document their payroll costs. However, as of Friday, April 10, the paperwork had not been updated to include people who don’t run payroll. Rawitscher recommends documenting it via deposits into a bank account.

“Right now, unless more clarification comes out, it looks like the SBA and banks are going to look at net income and draws because they don’t have payroll,” Rawitscher says. “It appears the proof of those amounts will need to be shown by deposits into bank accounts to prove the draws.” 

Taylor suggests submitting the Schedule C from your tax return in lieu of a payroll report.

“The actual law says net earnings, so what we’re seeing is banks and CPAs suggest taking your schedule C, line 31 which is net profit or loss,” Taylor explains.

If you file multiple Schedules Cs because you have multiple businesses, add the totals together rather than submitting separate loan applications for each business, Taylor adds. 

Emily D. Baker, a lawyer who focuses on online businesses, reminds clients that cash tips can also count towards payroll as long as they were reported somewhere.

“You will need to provide supporting documentation to your lender and taxes are an easy way to do that,” she says. “The formula that the SBA and lenders are currently using is looking at the average monthly payroll cost for the individual — capped at $100,000 per individual [per year]—then multiply that by 2.5. That number is the general amount of the loan.”

EIDL and PPP loans: Know the differences

However, the loan amount can be lower if you also received money via an Economic Injury Disaster Loan. 

“The EIDL, as it stands today because things are changing almost daily, should not affect PPP generally,” Rawitscher says. “Having said that, you can’t double dip EIDL and PPP on the same expense. For example, payroll could be covered with both options, but you have to choose one or the other.” 

To qualify for loan forgiveness on a PPP, you’ll need to spend at least 75% of the loan on payroll expenses over the 8-week period following the loan disbursement. The other 25 percent can be used on most mortgage interest, rent, and utility costs. Taylor says this can be demonstrated through deposits into a bank account. 

While the forgiven loan amount is excluded from gross income and is not taxable, there may be other tax implications of taking a PPP loan.

“If you are taking the PPP, you are limited in your ability to take the payroll tax credit,” Taylor says. “It may have an effect ton other credits and other tax benefits you might have access to. Make sure you know what you’re giving up by taking the PPP.” 

If you work with an accountant, he or she may be able to provide additional guidance on what documents to submit and what tax credits might be impacted by a PPP loan. 

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