The Paycheck Protection Program (PPP) offers a free grant of 20% of your annual income for those who are self-employed.

• Are you self-employed? Do you get paid via a 1099? Are you an independent contractor? 
  • Calculate your eligibility
  • Apply for PPP
  • Request help: Send a message via email or WhatsApp, or book a free five-minute consultation.
  • If you run a business with payroll or are a partnership, visit our PPP Resource Center.

Written in collaboration with ChaiPlus1. Feeling stuck? We can help!

Step 1 – Locate Your Documents

1) Schedule C

You need to submit your Schedule C to get PPP. If you didn’t file taxes yet for 2019 or 2020, you can make a draft Schedule C for PPP.

• The Schedule C is a tax form that self-employed people complete every year as part of their tax return.
• The Schedule C can be found a few pages into your federal tax return. It will show your eligibility for PPP.
• If you file a joint return, the Schedule C should have just one name on it. If your spouse also has a Schedule C, then you are each eligible for a separate PPP.

2) February 2020 bank statement

This proves that you were “in operation” by February 15th. If you don’t have a bank statement to use, an invoice or other proof of being “in operation” can also be used.

3) Photo ID

For example license (front and back) or passport.

Step 2 – How Much Will You Get?

*** Use our exclusive easy-to-use eligibility calculator to easily see how much PPP you can get! ***

Schedule C reports your “gross income” (line 7) and your “net income” (line 31). “Gross Income” is the amount you earned before expenses and “Net Income” is the amount you earned after all expenses, kind of like your profits. Line 31 is considered your “salary”.

The new rules (03/03/2021) are that you can get approximately 20% of your line 7 (gross income). The exact amount is Line 7÷ 12 x 2.5.

You can use your Line 7 from either 2019 or 2020. Use whichever one is higher – you will get a larger PPP 🙂

The old rules were that you get your PPP based on your net income (line 31). This new change giving people the option to use their gross income (line 7) makes many people eligible for lots more PPP.

The maximum counted amount from line 7 or line 31 is $100,000, so the maximum PPP is $20,833.33

Unfortunately, it looks like the new rules (of using gross income) will only apply to applications processed after the rules were finalized (03/03/2021) and not retroactive to PPP applications that were already processed.

Food and Accommodation: If your work/business involves the food/accommodation industry, check if one of the “72” codes is applicable to you. If yes, for Second Draw you could get approximately ~30% of your line 31 (instead of ~20%). The exact amount is Line 31 ÷ 12, then × 3.5. The maximum would then be $29,167 ($100k / 12 x 3.5)

Step 3 – Two Rounds of PPP

There are two rounds of PPP, aka First Draw and Second Draw. If you get both, you get double the amount.

If you already got First Draw PPP, apply for Second Draw. If you didn’t yet get any PPP, then first get First Draw, and you may very well be eligible for Second Draw as well.

Step 4 – Apply Now – First Draw

Apply Now! – with one of our recommended partner banks

Step 5 – Apply Now – Second Draw

Apply Now! – with one of our recommended partner banks

Keep in mind that there are two additional conditions that apply to Second Draw:

1. Used First Draw Funds
   If you already received the First Draw, you must have used all your funds from that loan correctly and expect to receive 100% forgiveness, to be eligible for a Second Draw loan. For most self-employed individuals this step takes 2.5 months, but if you have other eligible expenses,  you can use it in as quickly as 6.5 weeks. See ‘How to get the PPP twice‘ for more.
2. 25% Reduction
   • In order to be eligible for Second Draw, you need to have had a 25% loss in gross income in at least one quarter of 2020 compared to the same quarter in 2019. For example, if your gross income in the second quarter of 2019 (April-June) was $10,000 and in the second quarter of 2020 your gross income was $7,000, that means you had a 30% reduction, thus making you eligible.
   • If your annual 2020 “gross income” (Schedule C line 7) and “Cost of Goods Sold” (Schedule C line 4) is at least 25% less than lines 4 + 7 on your 2019 Schedule C, you are automatically eligible, because an annual 25% reduction automatically means at least one quarter with a 25% reduction.
   • Use our eligibility calculator to easily check for your 25% reduction.

Notes

• Unemployment and First Draw PPP funds do not count as income for the purpose of the 25% reduction.
• You do not need to provide proof of the 25% reduction when applying for the PPP. You will need to provide proof when you complete the forgiveness form 8+ weeks after you receive the PPP.
• There are two different types of accounting methods: Cash and Accrual. You calculate the 25% reduction based on whichever method you normally use. If you work via a 1099, you are most likely using the cash method.
  • Cash: You calculate everything based on when you actually paid for something and when you actually received money, and not for which time period the money is for.
  • Accrual: You calculate based on when the expense happened, so for example when someone owes you money, in Accrual method the money is considered to have come in as soon as the person owed the money and not when the person actually paid.

Step 6 – Forgiveness

PPP starts out as a 1% interest loan and then once you use the funds correctly (super simple!), you can apply for forgiveness, thereby turning the loan into a grant (free money)! You must apply for forgiveness within 10 months from the end of your “covered period”.

Covered Period

You need to use the funds within the “covered period”. Your covered period starts when you receive funding, and continues for a period between 8 and 24 weeks. You can choose how many weeks you need in excess of 8 weeks, but not more than 24 weeks.

How To Use The Funds?

As you are self-employed, you don’t actually have to do anything to “use” the money. After 2.5 months, you can automatically be considered to have used the full amount on your own “salary”. Again, you don’t need to do anything to pay yourself this “salary” and you don’t need to pay any taxes on this salary either.

There is also the option to spend at most 40% of the PPP towards expenses, as long as they are deductible on your Schedule C. For example, if you get a $10,000 PPP, you can either use all $10,000 on your salary, or you can use up to $4,000 on eligible expenses.

Eligible Expenses

• Rent or lease (e.g. warehouse, office – including home office, storefront, vehicle, and equipment)
  • The agreement was in place before February 15, 2020
• Mortgage interest (real property and personal property)
  • Signed agreement before February 15, 2020
• Utilities (E.g. Electricity, gas, phone, internet, water, and transportation)
  • Service began before February 15, 2020
• Operation (software that helps the business function)
• Property damage (vandalism or looting due to 2020 public disturbances)
• Supplier costs (owed to a supplier of goods)
  • For orders in effect prior to taking out the loan, or perishable items, during the covered period.
• Worker protection expenditures (expenses to help comply with Covid regulations)

Apply For Forgiveness

After completing your covered period and using all your funds correctly, apply for forgiveness with your bank.

Scenarios

Second Draw with More Profits in 2020

You can be eligible for the Second Draw even if your net income (line 31) in 2020 is higher than it was in 2019.

How? The 25% reduction is only required in one quarter (every three months is a quarter) of 2020. The other three quarters in 2020 can have a substantially higher income than 2019 and you would still be eligible.

Didn’t file your 2019 or 2020 taxes

You can use a Draft Schedule C. This basically means you (or your accountant) enter the information onto the Schedule C form without actually filing it with the IRS. You can still change the Schedule C before filing it.

You received PPP based on a draft Schedule C and when you actually file taxes, your line 31 is lower because you added more expenses, thus lowering your net income.

We have not seen guidance from the SBA on this point. They may only forgive the amount that’s on your line 31 of your filed tax return (and you will have to return the extra) or perhaps you will still have the PPP fully forgiven, as long as your line 31 is at least 60% of your PPP amount and you spent 40% of the PPP on other eligible expenses. We will update when there is more guidance.

More Than One Schedule C in your tax return

If you have more than one Schedule C in your tax return, first check if one is for you and one for your spouse. If that’s the case, then as above you can both separately get a PPP.

If you have two Schedule Cs and both are yours, add the amounts from line 31 on both Schedule Cs together to check for how much PPP you are eligible for. Add both line 7s together if you want to check for a 25% reduction.

You work for a company as an employee and get a W2 (tax form for employees) and separately work via a 1099 or are otherwise Self-Employed.

Your boss can apply for PPP because he has employees (you!) and you can separately get your own PPP based on your 1099/self-employed earnings.

You started working  on a 1099 late in 2019 or early 2020

• First Draw: If you were “not operational” between February 15, 2019, and June 30, 2019, you can compute your First Draw loan using January and February 2020. Complete a 2020 draft Schedule C for those two months only (be sure to cap line 31 at $16,667, to comply with the $100k/annualized cap), divide the amount by 2, and multiply by 2.5.
• Second Draw: If your started operations between 02/16/2010 and 02/15/2020, sum both your 2019 and 2020 Schedule C line 31, divide by the number of months you were in operation (in 2019 and 2020), and then multiply by 2.5. You must ensure that compensation does not exceed $8,333 on a monthly basis (which is $100,000 annualized).

Seasonal Business

A “seasonal business” is open for less than 7 months each calendar year or was open more than 7 months in the most recent year and earned in any 6 months more than 3 times the other six months of the year. To be considered a “seasonal business”, you must have been open for at least 12 weeks between February 15, 2019 and February 15, 2020.

Calculate the average total monthly payroll for any 12-week period (use a calculator!) between February 15, 2019 and February 15, 2020, and multiply by 2.5. Calculating this way can be very valuable to those who only operate for part of the year.

Why Am I Eligible For PPP if I am Not a Business?

If you are self-employed, including if you are paid via a 1099, you are actually considered a “business”. So in a sense, there are two separate entities: “you the business” and “you the person”.

When you work and get paid, “you the business” is paid.

When you file taxes (Schedule C), you report how much money “you the business” earned. This is called your gross income (line 7 of Schedule C). You also report all expenses “you the business” had to spend in order to do business (think: traveling, computer, supplies, office space, etc), and the leftover money is then passed from “you the business” to “you the person”.

This money that is passed from “you the business” to “you the person” is called your net income (line 31 on Schedule C).

Note, the leftover money does not actually have to pass anywhere, as the money was already in your account – the above is just explaining the concept of how it works tax-wise 🙂