Are independent contractors and sole proprietors eligible for loans through the Paycheck Protection Program?

The US Small Business Administration (SBA) has published rules on how Paycheck Protection Program (PPP) loans will be administered for individuals that have self-employment income (such as independent contractors and sole proprietors). These rules apply to many brokers and some of their small group clients. 

See below an abridged summary of the new PPP loan rules.

Those considering applying for a PPP loan (especially in anticipation of loan forgiveness) are recommended to consult with their financial advisor.

(The full PPP rules, along with other helpful information, can be found on the US Department of the Treasury’s webpage: The CARES Act Provides Assistance to Small Businesses.)

SBA Paycheck Protection Program Rules, April 14, 2020
Individuals with Self-Employment Income who File a Form 1040, Schedule C
Abridged Summary

I have income from self-employment and file a Form 1040, Schedule C. Am I eligible for a PPP Loan?
(Pages 4-6)

Yes. Individuals with self-employment income (such as an independent contractor or a sole proprietor) generally are eligible for Paycheck Protection Loans.

Specific requirements are outlined in the full rules, including for those individuals that are also a partner in a business.

How do I calculate the maximum amount I can borrow and what documentation is Required?
(Pages 6-8)

It depends on whether or not you employ other individuals. If you have no employees, the general calculation for the maximum loan amount is:

The net profit amount in your 2019 Schedule C (up to a maximum of $100,000), divided by 4.8.

(Rationale for this calculation: For sole proprietors with no employees, the maximum loan amount is 2.5 times average monthly net profit. See the full rules for more detail.)

There are also further rules if you have employees, or if you have also received an EIDL loan.

How can PPP loans be used by individuals with income from self-employment who file a 2019 Form 1040, Schedule C?
(Pages 7-11)

The proceeds of PPP loans can generally be used to replace your income, any employee costs, business mortgage and other debt interest payments, and business rent and utility payments.

At least 75 percent of the PPP loan proceeds must be used for payroll costs (which includes sole proprietor net profit).

What amounts shall be eligible for forgiveness?
(Pages 11-13)

Generally, the amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. There are a couple of important qualifications:

Firstly, there is a limit for the amount of forgiveness available for owner compensation (sole proprietor net profit). The calculation is:

The net profit amount in your 2019 Schedule C (up to a maximum of $100,000], divided by 6.5.

(Rationale for this calculation: For sole proprietors, the amount of forgiveness available for owner compensation is eight weeks of net profit. See the full rules for more detail.)

Note that this calculation is different than that used to calculate the total amount that can be borrowed. The full rules provide background on the rationale for this calculation.

Secondly, at least 75 percent of the amount forgiven must be attributable to payroll costs (which includes sole proprietor net profit).

Claremont Insurance Services and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.