Paycheck Protection Program: What self-employed people should know

Female small-business owner applying for a loan through the paycheck protection programImage: Female small-business owner applying for a loan through the paycheck protection program

In a Nutshell

The Paycheck Protection Program helps self-employed people and small businesses meet payroll and other expenses while so many businesses are shut down due to COVID-19. Even better: Many borrowers will be able to have their loans forgiven, and they won’t have to pay income tax on the forgiven amount.
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Self-employed workers who have been hit hard by coronavirus shutdowns may be able to find some relief from the federal government’s Paycheck Protection Program.

The PPP is designed to help small businesses — including self-employed people — meet critical expenses like payroll, mortgage and rent over an eight- to 24-week period.

Measures like social distancing and stay-at-home orders in cities and states across the country have left thousands of business owners and self-employed people calculating exactly how the coronavirus pandemic will affect their finances. PPP loans are intended to help them make it through the financial crisis — but the last day to apply is March 31, 2021. And funds are limited, so if you plan to apply, do it as soon as possible.

Let’s explore who’s eligible for PPP and how it works.



What is the Paycheck Protection Program?

The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, signed into law on March 27, 2020, created the Paycheck Protection Program, which is a federal loan program administered through the U.S. Small Business Administration, or SBA.

The program specifically intends to help small businesses keep workers on the payroll and meet essential expenses needed to keep their doors open. Borrowers can apply for 1% fixed-rate loans through any participating federally insured bank, credit union or Farm Credit System institution.

The SBA reopened the program on January 11, 2021.

Who can apply?

The Paycheck Protection Program is open to small-business owners, solopreneurs, independent contractors, self-employed workers and other small organizations affected by COVID-19. Private companies, nonprofits and veterans’ organizations all qualify.

You may qualify for PPP if your business was operating as of Feb. 15, 2020, and you …

  • Have 500 or fewer employees
  • Work as an independent contractor
  • Work in the gig economy
  • Are a sole proprietor
  • Are self-employed

Restaurant, hotel or other hospitality company owners with multiple locations can qualify if each individual location employs fewer than 500 people.

If your company has more than 500 employees, you may still qualify for the program if you meet SBA criteria for your industry. You can check online using the SBA’s “Size Standards” tool.

Federal loans offered through PPP are highly specialized and targeted for short-term relief, and there may be different rules if you received a PPP loan in 2020. You’ll want to read the terms carefully before applying to make sure you’re eligible and that the program offers what you need.

How much can I borrow?

PPP loans are intended to help eligible borrowers cover up to 24 weeks of payroll costs and debt payments. If you’re eligible, you may be able to borrow up to two and a half months of your average monthly payroll costs from either 2019 or 2020 — up to a maximum loan amount of $10 million. Rules are slightly different for seasonal businesses.

When calculating a loan amount, businesses may count the following as payroll costs:

  • Employee compensation, including salaries or wages, commissions and tips
  • Vacation, parental, family, medical or sick leave pay
  • Dismissal or separation allowances
  • Group healthcare benefit payments, including insurance premiums
  • Payments to provide retirement benefits
  • State or local taxes assessed on employee compensation

If you’re an independent contractor or a sole proprietor, you can include the following as payroll costs:

  • Wages
  • Commissions
  • Income
  • Net earnings from self-employment or similar compensation

Note that you can’t count the following as payroll costs:

  • Compensation for employees living outside of the U.S.
  • Salary amount in excess of $100,000 for each employee
  • Federal employment taxes
  • Sick or family leave wages for which you received a credit under the Families First Coronavirus Response Act

What can I use the money for?

You can use your loan for any business expense. But if you use it for anything other than payroll costs, mortgage interest, rent, utilities or other eligible expenses during the eight to 24 weeks of coverage after getting the loan, you’ll have to pay the loan back.

What are the terms of the loan?

The CARES Act stipulates that the maximum interest rate lenders can charge is 4%. And the SBA has said that loans will be at 1%.

For loans issued after June 5, 2020, payments are deferred for 10 months after the initial coverage period and the full loan amount will be due in five years — though there’s no prepayment penalty if you repay the money sooner. And keep in mind that if you meet all the requirements, you’ll be able to have the loan fully forgiven.

How does loan forgiveness work?

Your PPP loan can be forgiven, but only the portion used for the purposes outlined in the CARES Act.

Your loan can be forgiven if you use the money for …

  • Payroll, including salaries, wages, tips and paid leave
  • Health insurance group benefit premiums
  • Mortgage or lease payments
  • Utility payments
  • Worker protection costs related to the coronavirus
  • Uninsured property damage costs resulting from looting or vandalism in 2020

If you use your loan for a mix of approved and nonapproved purposes, only the money spent on approved uses will be forgiven. You’ll need to pay the rest back. And at least 60% of the forgiven amount must go toward payroll costs.

What’s more, the amount forgiven may be reduced if you lay off workers or reduce their salaries.

How will loans be repaid?

The loan agreement with your SBA lender will determine how you repay any portion of the loan not forgiven. For a PPP loan issued after June 5, 2020, the maximum loan term for portions of the loan not forgiven is five years and the maximum interest rate is 1%.

How can I apply?

Paycheck Protection Program loans will be made through existing SBA lenders and other federally insured banks and credit unions that choose to participate in the program. Check with your local lender to see if it’s taking part. You can also find SBA lenders through the Small Business Administration’s website.

You’ll fill out a loan application specific to the program. You can download the application form on the SBA website to see the information that a lender will request.

To apply, you’ll need to certify that …

  • Your qualifying business was operating on Feb. 15, 2020
  • You had employees that you paid a salary or hired (and paid) independent contractors
  • You need the loan due to current economic uncertainties
  • You’ll use the money to keep workers on the payroll or for other qualifying expenses

You’ll also need to provide documentation showing how many full-time employees you have on payroll and the amount of payroll costs, mortgage interest, rents or utilities for the eight- to 24-week period covered by the loan.

How could this affect my taxes?

Luckily for self-employed workers and small businesses, the CARES Act specifies that forgiven loans don’t need to be counted as gross income for tax purposes.


Bottom line

If you’re self-employed, the Paycheck Protection Program can help tide you over while the U.S. hunkers down during the coronavirus pandemic. And if you make less than $100,000, you can use this loan to pay yourself or qualifying employees for up to 24 weeks and earn loan forgiveness.

The SBA and U.S. Treasury Department are urging would-be borrowers to apply as soon as possible — funds are limited, many businesses are expected to apply and lenders need time to process applications. The last day to apply for the program is March 31, 2021.


About the author: Andrew Dunn is a veteran journalist with more than a decade of experience as a reporter and editor at North Carolina news organizations, including the Charlotte Observer and the StarNews in Wilmington. In those roles,… Read more.