What Independent Workers Need to Know About Paycheck Protection Program (PPP) Loans in 2021
There are millions of gig workers across the U.S. who are seeking financial relief due to the coronavirus pandemic. If you are an independent contractor or a sole proprietor who has experienced a reduction in income due to the pandemic, there’s good news! A Paycheck Protection Program (PPP) loan might be the right solution to keep your business afloat in 2021.
The program has been simplified to help gig workers apply for and get the forgivable funds (meaning you don’t have to pay them back!) you need in 2021. Read on for information about the PPP, how to apply for one, forgiveness details, and next steps.
What is the Paycheck Protection Program?
The PPP is a coronavirus relief measure for small businesses put in place by the federal government to provide funds to help weather the coronavirus outbreak. The first round of funding ended in 2020 but new applications for PPP loans are now available. The deadline to apply for this new PPP round is March 31, 2021; however, keep in mind that these funds are limited and may be all used up before then so it’s important to apply ASAP.
The Paycheck Protection Program Requirements to Apply
PPP loans are designed to reach as many small business owners as possible, including the self-employed. That means gig economy workers (who work for Uber, Lyft, DoorDash, Instacart, Grubhub, and more) and independent contractors can apply for the PPP loan if they meet the following criteria:
Must show a need based on the current economic downturn due to the continuing pandemic.
Must have been in operation before February 15, 2020
Must have income from self-employment, sole proprietorship, or as an independent contractor
Must live in the United States
Must have filed a Form 1040, Schedule C for 2019 or 2020
If you haven’t filed your 2020 taxes yet, download a 2020 Schedule C from the IRS website here, complete the form with what you will be filing, and upload the Schedule C to your PPP loan application
Some applicants that fund their loan on or before March 15th will be eligible to apply for a 2nd PPP loan if funds are not yet exhausted before the March 31st application deadline. Business owners should apply ASAP.
As mentioned earlier, this round of funds for PPP loans is expected to be all used up far ahead of the 3/31 application deadline. If you are thinking about applying, the time to do so is now!
How Much PPP Funding Can I Apply For?
Generally, the PPP loan amount that businesses qualify for is based on their average payroll expenses. However, since independent contractors and sole props usually don’t have payroll, their loan is calculated the following equation:
Determine your 2019 gross profit (Line 7 Schedule C)
Divide that number by 12, giving you your average gross profit.
Your average net profit times 2.5 equals your PPP loan amount.
For example, if your gross profit in 2019 was $24,000, your PPP loan amount would be $5,000 ($24,000 / 12 = $2,000 and $2,000 x 2.5 = $5,000).
If you received a first PPP loan in 2020, the requirements are a bit more precise: you’ll need gross receipts from any calendar quarter in 2020 that show at least a 25% reduction in gross revenue from the same quarter in 2019 to qualify for a second draw PPP loan.
If you collect 1099s or work in the gig economy, you are eligible to apply for a PPP loan in this 2021 rollout if you met the criteria outlined earlier in this article (see “The Paycheck Protection Program: Requirements to Apply” section to review the criteria again. People who have 1065s or 1120s with no employees are also eligible to apply for a PPP loan in this 2021 rollout.
Independent contractors and sole proprietors are also required to show proof of being in business in February 2020. You can use a Schedule C (Form 1040) or other documents that show business activity like bank statements, invoices, ride share activity, etc.
Start an application with SmartBiz Loans and they will help you calculate your PPP loan amount.
What Can You Use Your PPP Funds For?
In order to qualify for forgiveness (meaning so you don’t have to pay the money back), your funds must be used for approved expenses. Approved expenses have been expanded for this round of PPP loans and include:
Payroll costs
Insurance benefits
Employee salaries and/or commissions
Rent payments and/or mortgage payments
Utilities
Software or cloud computing costs for business operations (NEW)
Costs related to property damage and vandalism or looting due to public disturbances not covered by insurance or other compensation (NEW)
Costs of the supply of goods that are essential to business operations (NEW)
Covered worker protection expenditures that help adapt business activities to COVID safety requirements (NEW)
You cannot use your PPP funds for buying property, any expenses that you can’t claim on your Form 1040 Schedule C, mortgage payments (principal), purchasing inventory, and other debt payments. Additionally, you can’t use more than 25% of your PPP on non-payroll costs.
Applying for PPP Loan Forgiveness as a 1099 Worker
Self-employed individuals can use a simplified forgiveness application called the ‘EZ Form’ from the Small Business Administration (SBA): PPP Loan Forgiveness Application Form 3508EZ Revised January 19, 2021. This form applies to you as long as you don’t have employees on payroll.
What If I Don’t Receive PPP Loan Forgiveness?
If you do not receive full forgiveness, you will have to repay any amount of the PPP loan that is not forgiven at a 1% interest over a 5 year term. Loan payments will be deferred for six months but will start incurring interest immediately. PPP loans have no fees and no prepayment penalties.
How To Apply For A PPP Loan
As mentioned before, it’s important to start an application for a PPP loan ASAP. The program ends March 31, 2021 or sooner if funds run out ahead of the deadline. .
To help you get started quickly, we’ve teamed up with SmartBiz Loans. During the earlier funding rounds of the Paycheck Protection Program (PPP), SmartBiz Loans helped process $2 billion in PPP loans for the banks in its network, helping protect more than 200,000 paychecks for businesses like yours.
Determine if a PPP loan is right for you or start a streamlined application now.
For additional guidance, check out this short video from the financial professionals at SmartBiz Loans that will help walk you through the steps easily and quickly.
What You Need to Know
The availability of PPP loans remains subject to SBA guidance and other factors, including the amount of funding available to banks and the quantity of eligible applicants considered on a first-come, first-served basis. The information provided above is for educational purposes only. Please consult the SBA’s website for actual rules and the most current guidance.