The Paycheck Protection Program officially ended on May 31, 2021. Read our PPP page for more information or visit our PPP Loan Forgiveness Guide.
As part of a larger relief package, Congress has approved $284.5 billion in new Paycheck Protection Program funding. The types of businesses and industries that are eligible for PPP loans have been expanded under the new bill. Additionally, businesses that can demonstrate at least 25% reduction in gross receipts year over year and meet other requirements may be eligible for a second PPP loan.
Can Sole Proprietors Use 100% of PPP Loans for Payroll?
The Paycheck Protection Program (PPP) has been a crucial lifeline for many small businesses during the COVID-19 pandemic. However the rules around loan forgiveness can be confusing especially for sole proprietors. This article will explain whether sole proprietors can use 100% of their PPP loans for payroll. We’ll also explore the concept of owner compensation replacement and how it allows self-employed individuals to maximize loan forgiveness.
Key Takeaways
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Sole proprietors can use 100% of PPP loans for payroll through the owner compensation replacement provision. This allows claiming monthly net profit as payroll costs.
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To get full forgiveness, sole proprietors must use at least 60% of the PPP loan on payroll and 40% on other eligible expenses.
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Owner compensation replacement is not taxable income but may be subject to self-employment taxes.
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The owner compensation replacement provision is only available for PPP loans made after June 5, 2020.
Understanding PPP Loan Rules
The PPP was created to help small businesses retain employees during the pandemic by providing potentially forgivable loans based on payroll costs. Initially, the forgiveness rules assumed all borrowers had employees and payroll. But many sole proprietors don’t have employees or traditional payroll.
The Small Business Administration (SBA) introduced owner compensation replacement so sole proprietors could still get full forgiveness. It allows claiming monthly net profit as a payroll cost, even without employees.
Calculating Owner Compensation Replacement
To calculate owner compensation replacement, use net profit from a 2019 Schedule C tax form. Divide by 12 to get the monthly average net profit. This amount can be claimed as payroll costs.
For example, with a 2019 Schedule C net profit of $60,000, the monthly average would be $5,000. That $5,000 could be claimed as owner compensation replacement.
Using Owner Compensation Replacement for Forgiveness
To claim owner compensation replacement for forgiveness, sole proprietors submit a forgiveness application with 2019 Schedule C documentation to the lender. If approved, the PPP loan is forgiven without repayment.
Important Considerations:
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Owner compensation replacement is not taxable income but may incur self-employment taxes.
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At least 60% of the PPP loan must go toward payroll, including owner compensation replacement, to get full forgiveness.
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The remaining 40% can cover other eligible expenses like rent, utilities, and mortgage interest.
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Owner compensation replacement is only available for PPP loans made after June 5, 2020.
For sole proprietors, being aware of the owner compensation replacement provision is key to maximizing PPP loan forgiveness and maintaining business viability during the pandemic. Reach out to a financial advisor with any questions.
Calculating Payroll Amounts for PPP Loan Applications
When calculating payroll costs for PPP loan applications, three main factors must be considered:
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Payroll costs are based on amounts actually paid that were subject to payroll tax, not net income. Different business structures have different accounting and tax rules. But the purpose of PPP is to maintain employment, so prioritize documented taxable payroll.
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Taxable payroll including salaries, wages and taxable benefits is key. For W-2 employees this is easy to document from payroll reports and W-2s. For sole proprietors and partnerships, guaranteed payments to partners and distributions need to be included.
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There is no one-size-fits-all solution. Consult an accountant or tax advisor for guidance on calculating payroll costs based on your business structure. Rules are complex and change frequently. Don’t rely solely on online advice. Verify with a tax professional.
PPP Loan Overview
The CARES Act established the Paycheck Protection Program (PPP) to help small businesses retain employees during the COVID-19 crisis. PPP offers potentially forgivable loans of up to 2.5 times average monthly payroll costs to cover 8 weeks of payroll and other expenses. If used on eligible expenses, the loans can be fully forgiven.
PPP Eligibility
PPP is available to small businesses, 501(c)(3) nonprofits, sole proprietors, independent contractors, and self-employed individuals. For sole proprietors and contractors, rules were added later to allow using net business income to calculate loan amounts.
PPP Loan Forgiveness for Sole Proprietors
Initially PPP required traditional payroll documentation to calculate loan amounts and forgiveness. But sole proprietors often don’t have payroll.
To address this, SBA introduced owner compensation replacement. It allows using monthly net profit from IRS Schedule C forms as a payroll cost to maximize loan forgiveness.
With owner compensation replacement, sole proprietors without employees can potentially get full PPP loan forgiveness.
Summary
The owner compensation replacement provision allows sole proprietors without payroll to use 100% of PPP loans as a payroll cost. Sole proprietors should understand the rules to maximize forgiveness. Consult a tax professional for guidance on your specific situation. Careful recordkeeping remains critical for the loan application and forgiveness process.
What Self-Employed Workers Need to Know About Getting PPP Loan Forgiveness
In many ways, self-employed workers have had a more difficult time accessing and using Paycheck Protection Program loans than other small businesses. From the application process to forgiveness guidelines, self-employed workers have been scrambling to understand how this forgivable loan program works for them.
The SBA made PPP loans available to self-employed workers later than business owners with employees. Also, most of the language around eligible uses of PPP loans, how to achieve full forgiveness from your lender, and other guidance is aimed at employer small business owners. That means if youâre using PPP to replace your freelancer income, or pay for home office costs, youâve had to piece together answers from various press releases, forms, and lender advice.
As more and more self-employed workers finish up the âcovered periodsâ on their loans and prepare to apply for forgiveness, many have questions about how to receive full forgiveness on their PPP loans, or at least the most forgiveness possible.
With that in mind, letâs review what every self-employed worker who took out a PPP loan should know about loan forgiveness.
What Documentation Do You Need?
As mentioned above, eight weeks of your loan proceeds are considered salary replacement. When you applied for your PPP loan, you needed proof of payroll, in this case salary. To do this youâll need your 2019 Form 1040 Schedule C, as well as a 2019 IRS Form 1099-MISC detailing non-employee compensation, invoices, bank statements, or a book of record that proves you are self-employed.
When you apply for forgiveness, youâll provide that same 2019 Schedule C to your lender.
For your other eligible expensesârent, utilities, and/or mortgage interestâyou must have claimed (or been able to claim) a deduction for those expenses on your 2019 Form 1040 Schedule C. Proof of having paid those expenses during your covered period, such as rent or lease payments, will be required.
In addition, youâll also need to fill out an official PPP loan forgiveness application form. Self-employed workers with no employees can fill out SBA Form 3508EZ, which is a shortened and streamlined version of the full PPP forgiveness application. Your lender may have a digital version of the form that you can fill out as well.
Additionally, as of October 8, 2020, self-employed workers with a PPP loan under $50,000 (which should be the case for all self-employed PPP borrowers) can use SBA Form 3508S, which is even shorter and simpler than 3508EZ.
PPP for Sole Proprietors – EVERYTHING you need to know (independent contractors, 1099, Schedule C)
FAQ
How much of PPP loan must be used for payroll?
To be considered for full forgiveness, borrowers must use at least 60% of their loan proceeds on payroll costs. Employee and compensation levels must also be maintained.
Can a sole proprietor take payroll?
While a sole proprietor can have other employees on payroll who receive wages and salaries from the company, a business owner cannot pay themself wages or salaries from which income tax, Social Security tax, or Medicare tax are withheld. Also, sole proprietors do not receive a Form W-2 from the Sole Proprietorship.
Is PPP taxable income for self-employed?
A forgiven PPP loan is tax-exempt, meaning it does not cause you to recognize a taxable gain or income. The IRS has clarified that expenses paid for using forgiven PPP loan proceeds are still deductible as well.
What is the PPP limit for owners?
For any owner who also owns (under the SBA’s definition of “owner”) another entity which is a PPP loan borrower, the total compensation paid to that employee eligible for forgiveness is $20,833 ($15,385 if the borrower elects an 8-week covered period).
Can a sole proprietorship receive a PPP loan?
Sole proprietorships that received PPP loans are eligible for loan forgiveness consideration. It’s important to note that if a borrower receives a PPP loan, they must apply for forgiveness of the loan through their financial institution or they will have to pay the loan back.
How much of the PPP loan can be used for non-payroll expenses?
Only 25% of the loan proceeds can be used for non-payroll expenses. As you track your expenditures, make sure your payroll expenditures and owner compensation replacement total 75% of your PPP loan amount.
Can I use my PPP money for payroll?
At least 60 percent of the loan had to be used for salary, compensation, payroll. That said, self-employed individuals were legally allowed to use up to 100 percent of their PPP money on payroll for themselves if they so chose (although if you don’t run “payroll” per se, you can still be covered, see below).
Can an independent contractor be eligible for a PPP loan?
Answer: No. Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll costs. However, an independent contractor or sole proprietor will itself be eligible for a loan under the PPP, if it satisfies the applicable requirements.
Who is eligible for a PPP loan?
Any amounts that an applicant has paid to an independent contractor or sole proprietor should be excluded from the eligible business’ payroll costs. It is important to note that the independent contractor (1099) and or the sole proprietor can be eligible themselves for a PPP loan if it meets the application requirements. 15.
Are sole proprietorships eligible for PPP loan forgiveness?
With millions of sole proprietorships in the U.S., many of these businesses do not have employees, however, this does not mean they are not eligible for PPP loan forgiveness. Sole proprietorships that received PPP loans are eligible for loan forgiveness consideration.