Self-Employed Contractors Can Apply for Paycheck Protection Program Loans

self employed small business owner on the phone while working on computer

On March 27, the CARES Act was signed to provide relief to businesses and taxpayers facing economic hardship due to COVID-19. Part of the Act is the Paycheck Protection Program (PPP), which provides cash-flow and capital assistance through federally insured loans to businesses that need to maintain their payroll to keep their employees working during the coronavirus pandemic.

If you were in business on February 15, 2020, you are eligible for the Paycheck Protection Program if your business was impacted by the COVID-19 pandemic. If you paid a salary, payroll taxes, reported IRS Form 1099-MISC or paid independent contractors for services, your business must fall under the employee size standards set forth by the SBA or have less than 500 employees. In specific industries, businesses that employ more than 500 employees can qualify if they meet employee-based SBA standards.

Who is Eligible for the Paycheck Protection Program?

Many sole proprietors, independent contractors, self-employed and nonprofit organizations have found themselves needing help to retain their business during the shelter-in-place order.

While many associate small businesses with brick-and-mortar establishments, you’re eligible for PPP loans if you are a sole proprietorship, independent contractor, or self-employed (even without a storefront) if you were in business and operation on February 15, 2020.

According to the SBA First PPP Interim Final Rule and a second interim final rule posted April 3, 2020, you are eligible for PPP loan proceeds if:

  1. Your primary principal place of residence is in the United States
  2. You were in business and operational on February 15, 2020
  3. You have self-employment income as an independent contractor or a sole proprietor
  4. You file IRS Form 1040, Schedule C

The caveat is you cannot file for a PPP loan for yourself as self-employed if you are a partner in a partnership because the income of active partners is generally reported as payroll on a PPP loan application by the partnership.

The paycheck protection program provides financing options for:

  • Sole proprietors that report income on a Schedule C and pay taxes on a personal tax return.
  • Independent contractors who use 1099-MISC forms.
  • Gig economy workers – anyone who takes on-call jobs such as Uber, Lyft, TaskRabbit, and Instacart.
  • Small businesses including Tribal and Veteran organizations
  • Nonprofit 501 (c)(3) that are exempt from 501 (a) taxation

You can qualify for loans for up to two and a half months of your average monthly payroll costs from the previous year, along with an additional 25% of that amount. The maximum loan amount is at a $10 million cap.

However, if you are a seasonal worker or a brand-new business, your payroll costs are capped at $100,000 annually for each qualified employee.

What Type of Business Does Not Qualify for the Paycheck Protection Program?

Businesses in specific industries cannot apply for a PPP loan. These include:

  • Multi-level marketers (MLM)
  • Banks, lending institutions, and investment companies
  • Political and policy lobbyists
  • Landlords or businesses who do not manage their own operations
  • Religion promoting businesses
  • Businesses that restrict gender patronage (e.g., men or women only health clubs)
  • Casinos or other gambling businesses
  • Marijuana businesses
  • Household Businesses that contract or employee housekeepers and nannies
  • Businesses dealing with prurient sexual material
  • Business owners convicted of a felony in the past five years or currently indicted on federal charges
  • Any business owner or partner with more than 20% stakeholder that is not a U.S. citizen or Lawful Permanent Resident

If a small business was impacted by COVID-19 between February 15 and June 30, 2020, a portion of eligible loans may qualify for forgiveness and deferred.

Generally, as long as you use the Paycheck Protection loan for only business monthly rent and utilities, payroll costs, and maintain your staff, you should qualify for loan forgiveness. Keep in mind that if you reduce your staff or if you reduce salaries, your loan forgiveness will also decrease. To take advantage of the loan forgiveness program, you will need to make a request to your PPP lender and provide documentation to verify.

How Can Paycheck Protection Loans Be Used?

Once an eligible self-employed individual or contractor receives the loan, they may use it for the following:

  • Monthly payroll and costs to keep paying employee compensation, salary, wages, tips, or commission
  • Charges related to insurance premiums, health-care benefits during periods of paid sick, medical, or family leave
  • Payments of mortgage interest or mortgage payments
  • Business rent or lease agreements
  • Business utility payments

Payroll does not include:

  • Any salary over $100,000
  • Income tax or payroll tax
  • Railroad retirement tax
  • Compensation for employees that are not U.S. residents
  • Any leave from employment that Families First Coronavirus Response Act (FFRCA) offers credit, including sick leave or FMLA leave

How can Contractors or Self-employed File for the Paycheck Protection Program Loans?

Small businesses, self-employed and other types of contractors can apply through SBA lenders and brokers, such as Kabbage. You can go here to start your PPP application with Kabbage.

Documents you need if you’re in business is a sole proprietorship, independent contractor, self-employed, single-member LLC

If you have employees, you will need to provide the following:
Note: Contractors issued a 1099 are not considered employees

  • Copy of government issued I.D. (color copy front and back)
  • 2019 1040 Schedule C
  • 2019 IRS Form W-3
  • 2019 IRS Form 940
  • W2s for any employees earning more than $100,000
  • Payroll statement covering 2/15/2020
  • If you have received or been approved for an EIDL loan, you will need the most recent statement from your outstanding Economic Injury Disaster Loan.

If you do not have employees, you will need to provide the following:

  • Color copy of a government-issued I.D. (front and back)
  • 2019 1040 Form Schedule C
  • Substantiation of self-employment
    • This is your 1099-MISC for Independent Contractors
  • 2020 invoice, bank statement or book of record to establish you were operating effectively 2/15/2020
  • If you have received or been approved for EIDL loan, you will need the most recent statement from your outstanding Economic Injury Disaster Loan.

Keep in mind; if you have not completed your 1040 Schedule C, you will need to fill it out and take the line value 31. If line 31 is zero, your business is not eligible for a Paycheck Protection Loan. Previous years of this form are not accepted.

Does a PPP Loan Affect Taxes?

Self-employed and small businesses do not need to count PPP forgivable loans as gross income on their taxes.

Kabbage is actively offering the Paycheck Protection Program loans on behalf of approved U.S. Small Business Administration lenders. Your loan approval is based on SBA approvals. There is no cost to you or your business to apply for a Program loan, and applying with Kabbage does not limit you from being able to apply with other lenders.

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