Consultant’s Corner: The Paycheck Protection Program and the Self-Employed

Q: In regards to the Paycheck Protection Program, what is the difference between a sole proprietor, an independent contractor, and a self-employed individual? As an independent contractor or a self-employed individual, am I eligible for a PPP loan? When can I apply?

In our previous blog post, we discussed the differences between Economic Injury Disaster Loans and the Paycheck Protection (loan) Program.

Since April 3, 2020, small businesses and sole proprietorships have been able to submit applications for PPP loans.

Beginning on April 10, 2020, independent contractors and self-employed individuals will also be able to submit applications for PPP loans.

While sole proprietors and independent contractors both report business income on Schedule C and are considered self-employed, the distinctions arise from how income is received. For PPP loans purposes, a sole proprietorship is considered a business and an independent contractor is considered the opposite of an employee (receiving a 1099 to show earnings).

The term self-employed individual is used as a “catch all” and refers to any individual that pays self-employment tax.

Sole proprietors applying for PPP loans cannot use payments made to independent contractors to calculate payroll costs. Sole proprietors, independent contractors, and self-employed individuals would use their net self-employment income to determine their compensation for the purposes of calculating their average monthly payroll cost.

As a sole proprietor, independent contractor, or self-employed individual, to ensure having proper documentation when applying for a PPP loan, you should prepare your 2019 tax return if you have not done so already.

Self-employed individuals, sole proprietors, and independent contractors interested in applying for a PPP loan should contact their preferred local lender immediately to find out if the lender is participating in the program and inquire about eligibility, loan forgiveness terms, and the application process.

The Interim Final Rule posted by the Department of Treasury and the Small Business Administration (SBA) on April 2, 2020, clarifies that the PPP loans will be available through June 30, 2020, or “until funds made available for this purpose are exhausted.”

In short, time is of the essence when applying for a PPP loan. Businesses and individuals interested in applying for PPP loans that have not prepared their 2019 tax returns should make doing so a top priority regardless of the extended deadline.

The SBA’s Interim Final Rule implementing the PPP and the Department of Treasury Fact Sheets for borrowers and lenders can be found at the websites below.

Interim Final Rule 4/2/20 – SBA

PPP Fact Sheet for Borrowers – U.S. Treasury

PPP FAQ’s for Lenders 4/7/20 – U.S. Treasury

Taylor Hughes

About Taylor Hughes

Taylor Hughes is a Small Business Consultant with GoSmallBiz.com and holds a Bachelor’s degree in Business Administration and Management from the University of Alabama. He has been part of the GoSmallBiz.com team since 2017. Taylor helped launch an outdoor recreation company near Yellowstone National Park, and has worked in logistics with John Deere.