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PPP Loan: How do Self-Employed & Sole Proprietors Calculate "Payroll"?

This article is a part of Revby's COVID-19 Small Business Support Series. Due to the nature of our unprecedented situation, many details are fast developing and subject to change. All efforts are given to provide accurate information according to official sources (such as and other federal and local authorities) as of the date of publication.

It's been nearly 2 weeks since the Payroll Protection Program was launched. It was designed to provide small businesses, including sole proprietors and self-employed individuals that often work as 1099 contractors, through the already established network of SBA-approved lenders across the US. As we now know, the roll out has not gone smoothly. One of several issues has been unclear guidance (to both the banks and to individuals) on how to calculate a qualified "payroll" expense for businesses that do not have traditional payroll (i.e. "W2" employees).

On April 15, 2020, the SBA has announced additional clarity on the loan amount calculation for self-employed. A link to the full update, published on April 14, can be found on the US Treasury Department website. Here is a snippet from the full report:

I have income from self-employment and file a Form 1040, Schedule C. Am I eligible for a PPP Loan?
You are eligible for a PPP loan if: (i) you were in operation on February 15, 2020; (ii) you are an individual with self-employment income (such as an independent contractor or 5 a sole proprietor); (iii) your principal place of residence is in the United States; and (iv) you filed or will file a Form 1040 Schedule C for 2019.
How do I calculate the maximum amount I can borrow and what documentation is required?
How you calculate your maximum loan amount depends upon whether or not you employ other individuals. If you have no employees, the following methodology should be used to calculate your maximum loan amount:
Step 1: Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value). If this amount is over $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a PPP loan.
Step 2: Calculate the average monthly net profit amount (divide the amount from Step 1 by 12).
Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5.
Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid). 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 to substantiate the applied-for PPP loan amount and a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that 7 establishes you are self-employed. You must provide a 2020 invoice, bank statement, or book of record to establish you were in operation on or around February 15, 2020.

An Eligibility, Loan Amount, and Loan Forgiveness Calculator (that also accounts for Self-Employed and Sole Proprietors):

In addition to the above information from the US government, we also found a helpful PPP calculation tool provided by Intuit (the Quickbooks software company).

As you move along the tool, you'll also find a great FAQ on how to calculate qualified payroll amounts for self-employed individuals and how to estimate loan forgiveness amounts.

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