New SBA Guidance Brings Changes for Independent Contractors and the Self-Employed

4 min read • Mar 09, 2021 • Lendio

The SBA recently released new guidance outlining changes for self-employed individuals and independent contractors seeking Paycheck Protection Program (PPP) loans. These changes may allow qualifying individuals to access larger PPP loans. Here’s what you need to know about the updates to the program:

Changes for Self-Employed and Independent Contractors

Self-employed individuals and independent contractors can now choose to calculate their PPP loan amount based on gross income rather than net profit. This change enables many self-employed folks and independent contractors to secure larger PPP loans as their total loan amount will not be affected by tax deductions the individual has taken. 

Where can you find the gross income amount if you choose to calculate your loan this way? The gross income amount is reported on line 7 of your Schedule C

How to Calculate Your Loan

With this new guidance comes a new methodology for calculating your loan amount. What you need to do depends on whether or not you have employees. 

If You Have No Employees

Follow these steps to calculate your loan amount:

  1. Retrieve either your 2019 or 2020 Schedule C. If you are using 2020 to calculate payroll costs and have not yet filed a 2020 return, fill out the Schedule C and compute the value. 
    1. Choose the number you will use to calculate payroll: gross income (found on line 7) or net profit (found on line 31). 
    2. If this amount is more than $100,000 annually, reduce it to $100,000/year. 
    3. If both your net profit and gross income are $0 or less, you do not qualify for a PPP loan. 
  2. Calculate the average monthly amount by dividing either the gross income or net profit, whichever you chose in Step 1, by 12. 
  3. Multiply the total from Step 2 by 2.5. This amount cannot exceed $20,833.
  4. Only applies if you have an EIDL that will be refinanced with the loan: 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. Do not include the amount of any advance under an EIDL COVID19 loan (because it does not have to be repaid).

If You Have Employees

Follow these steps to calculate your loan amount:

  1. Add the following:
    1. From either your 2019 or 2020 Schedule C, choose the number you will use to calculate payroll: gross income (found on line 7) or net profit (found on line 31). 
      1. Subtract employee payroll from:
        1. Line 14 (employee benefit programs)
        2. Line 19 (pension and profit-sharing plans)
        3. Line 26 (wage (less employee credits))
      2. The maximum total is $100,000. If more than $100,000, reduce to $100,000. If less than $0, set the amount to $0. 
    2. 2019 or 2020 gross wages and tips paid to employees who live principally in the US (found on line 5c, column 1). 
      1. Subtract any amounts paid to any individual employee in excess of $100,000 on an annualized basis and any amounts paid to any employee primarily living outside of the US.
    3. 2019 or 2020 employer contributions to employee group insurance (found on line 14), retirement (line 19), and state and local taxes assessed on employee compensation. 
  1. Calculate the average monthly amount. Divide the total from Step 1 by 12. 
  2. Multiply the total from Step 2 by 2.5.
  3. Only applies if you have an EIDL that will be refinanced with the loan: 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. Do not include the amount of any advance under an EIDL COVID19 loan (because it does not have to be repaid).

Are There Any Drawbacks to Using the Gross Income Calculation? 

Loans greater than $150,000 may be audited by the SBA to determine whether or not the borrower experienced an economic necessity for the loan. This is an additional aspect you may want to consider if using gross income pushes your loan amount over $150,000. 

Ready to Apply for Your PPP Loan?

You can apply here now.

Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice. All information, content, and materials available in this post are for general informational purposes only. Readers of this post should contact their attorney, business advisor, or tax advisor to obtain advice with respect to any particular matter.

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