If you’ve lost income or expect to lose income due to coronavirus, you may be able to take advantage of the SBA’s Paycheck Protection Program. This could replace up to 8 weeks of lost profits.
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Who can apply?
Any type of self-employed individual, independent contractor 1099 contractor, gig worker, etc. can receive assistance. This includes the following types of work:
- Shipt and Instacart shoppers
- Uber and Lyft drivers
- Sports officials and referees
- Virtually anyone else who works as an independent contractor and receives a 1099
Other types of small businesses with employees can also use the program. However, this post covers the special rules for independent contractors without employees who are seeking assistance only for themselves.
Is this a loan?
The Paycheck Protection Program is a special type of SBA loan to provide economic relief due to coronavirus. However, if you use the money for its intended purpose, the SBA will forgive the loan, and you won’t have to pay it back.
What are the eligibility requirements?
Independent contractors without employees seeking relief for themselves need to meet four requirements.
- You were in operation on February 15, 2020
- You have self-employment income
- Your principal place of residence is in the United States
- You filed or will file a Schedule C for 2019*
*The SBA intends to release guidelines for those who were not in business or did not have to file at a later date.
What is the most you can borrow?
The most you can borrow is 2.5 months of net profits. You can only count $100,000 in annual net profits. Therefore:
- Take the smaller of your 2019 net profit or $100,000
- Divide by 12
- Multiply by 2.5
- That’s your maximum loan amount
What proof of income do you need to give the lender?
You will need to provide the following documents:
- 2019 Form Schedule C from your tax return (showing your business profit).
- A 2019 Form 1099-MISC, invoice, bank statements, or other records showing you are self-employed. This does not necessarily need to be for every dollar of income since you file your tax return under penalty of perjury. The rule states that it’s to verify that you were self-employed.
- A 2020 invoice, bank statement, or other records showing you were still self-employed on or around February 15, 2020.
How can you use the money from the loan?
You can use the funds for:
- Your own compensation (what you transfer to your personal bank account)
- Interest on business (not personal) loans
- Business rent or mortgage (claimed as a business expense not personal bills)
- Business utility bills
How much of the loan will be forgiven?
The loan will be forgiven if you use the funds for the above purposes. Otherwise, you will need to pay it back. You must use at least 75% of the loan for owner compensation, or your forgiveness may be reduced.
The maximum amount of forgivable owner compensation is your 2019 net profit divided by 52 times eight. That’s eight weeks of net profits based on your 2019 tax return.
How do you document how you used the money?
It’s best to deposit the money into your business checking account. If you don’t have one, now is a good time to get one. Spend the money from that account and keep receipts. For owner compensation, it may be best to write yourself 8 weekly checks and write owner compensation on it.
Do you need to pass a credit check?
There are no credit requirements for this program. The loans are government-guaranteed.
What are the terms of the loan?
You will need to pay back any portion of the loan that isn’t forgiven within two years. The interest rate is 1%. You can defer your first payment for up to six months to give time for the crisis to pass.
Where can I get a loan?
Many banks are offering these loans with mixed reviews. If you have an existing formal business banking relationship, call that bank first. PayPal and Intuit (the owner of QuickBooks) have also received approval to partner with banks to issue these loans. The advantage of going with PayPal or Intuit is that they’re used to working with independent contractor and gig economy income, so the process should go more smoothly.
The SBA (and banks) are literally making up the rules as they go with constant changes as they discover new problems. Check with your lender and SBA press releases for the latest updates. Do not rely on the information in this post except as a starting point for additional research. This post is largely based on this guidance issued April 14, 2020: https://home.treasury.gov/system/files/136/Interim-Final-Rule-Additional-Eligibility-Criteria-and-Requirements-for-Certain-Pledges-of-Loans.pdf