Best Practices: PPP Loans to Sole Proprietors, Independent Contractors and Self-Employed Individuals

Paycheck Protection Program (“PPP”) loans are available to sole proprietors, independent contractors and eligible self-employed individuals.  In order to qualify for a PPP loan, a sole proprietor, independent contractor or eligible self-employed individual must “submit such documentation as is necessary to establish such individual as eligible, including payroll tax filings reported to the Internal Revenue Service, Forms 1099–MISC, and income and expenses from the sole proprietorship, as determined by the Administrator and the Secretary.”  See The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).  As with all PPP applications, the sole proprietor, independent contractor or self-employed individual must submit documentation that he or she was in business on February 15, 2020.  Additionally, a sole proprietor can qualify whether or not he or she has employees.  

The Interim Final Rule issued on April 14, 2020 clarified that individuals who are self-employed, including independent contractors, can qualify for a PPP loan if they have filed or will file a Form 1040 Schedule C for 2019 and their principal place of residence is in the United States.  Regardless of whether the sole proprietor, independent contractor or self-employed individual has filed a 2019 tax return with the IRS, the  sole proprietor, independent contractor or self-employed individual “must provide the 2019 Form 1040 Schedule C with [the] PPP loan application to substantiate the applied-for PPP loan amount and a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes [the individual is] self-employed.”  The individual also “must provide a 2020 invoice, bank statement, or book of record to establish [the individual was] in operation on or around February 15, 2020.”  It is important to note that other eligible borrowers under the PPP loan program may not include amounts paid to an independent contractor or sole proprietor in their payroll calculations.

If a self-employed individual does have employees, then the individual must also submit “2019 Form 1040 Schedule C, Form 941 (or other tax forms or equivalent payroll processor records containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions, if applicable.”  

The Interim Final Rule issued on April 14, 2020 also clarified that partners in a partnership may not submit PPP applications as self-employed individuals.  Partners in a partnership can only submit one PPP loan application and that application must be filed by or on behalf of the partnership.  “[T]he Administrator has determined, in consultation with the Secretary of the Treasury (Secretary), that limiting a partnership and its partners (and an LLC filing taxes as a partnership) to one PPP loan is necessary to help ensure that as many eligible borrowers as possible obtain PPP loans before the statutory deadline of June 30, 2020.”  

The Interim Final Rule issued on April 14, 2020 also reiterated that the PPP was enacted to maintain existing operations and payroll and not intended for business expansion.  The Second Interim Final Rule therefore clarified that all self-employed individuals’ use of PPP loan proceeds is limited “to those types of allowable uses for which the borrower made expenditures in 2019.”  This limitation is consistent with the spirit of the PPP and “will help to ensure that the finite appropriations available for these loans are directed toward maintaining existing operations and payroll, as each loan that is made depletes the appropriation.”    

The SBA continues to issue guidance on PPP loans to sole proprietors, independent contractors, and self-employed individuals as well as the use of such funds and potential forgiveness.  Lenders should ensure they review and are in compliance with the latest guidance from the SBA and Treasury.  For assistance with PPP and SBA lending matters, contact the attorneys at Starfield & Smith, PC at 215.542.7070 or visit us at www.starfieldsmith.com.