Self-employed & businesses with less than 20 employees LISTEN UP! New PPP updates are in your favor.

If you are self-employed or a small business owner with less than 20 employees, like most of us here in Maine, you may have thought that you were not eligible for the PPP loans, or been discouraged from applying due to the low loan amount you wold have received with the previous SBA income formula. Great news!! The Small Business Administration announced new guidelines yesterday, March 3, 2021, which will work for your benefit. Before, your "payroll" amount was based on your profit after expenses, divided by 12, and then that number was multiplied by 2.5. For self-employed folks, that's typically a small number.


As stated by the SBA, previously, PPP rules defined payroll costs for individuals who file an IRS Form 1040, Schedule C as payroll costs (if employees exist) plus net profits, which is net earnings from self-employment. SBA is aware of significant concerns with this definition, because it does not take into account fixed and other business expenses that a small business must cover to stay in operation and therefore keep the owner employed. Thus, the support for employment for sole proprietors includes covering business expenses as well as net profits.


This change would affect many sole proprietors who have been effectively excluded from the PPP, especially those with very little or negative net profit, many of which are located in underserved communities. Businesses that file Schedule C have higher concentrations of ownership by members of underserved groups. An analysis by the SBA Office of Advocacy of Census data found that firms with no employees are 70 percent owned by women and minorities, compared to 40 percent for businesses with employees.


SBA has determined that changing the calculation for sole proprietors, independent contractors, and self-employed individuals will reduce barriers to accessing the PPP and expand funding among the smallest businesses.

How you calculate your maximum loan amount depends upon whether you employ other individuals.


If you have no employees, use the following methodology to calculate your maximum loan amount:

  1. Step 1: From your 2019 or 2020 IRS Form 1040, Schedule C, you may elect to use either your line 31 net profit amount or your line 7 gross income amount. (If you are using 2020 to calculate payroll costs and have not yet filed a 2020 return, fill it out and compute the value.) If this amount is over $100,000, reduce it to $100,000. If both your net profit and gross income are zero or less, you are not eligible for a PPP loan.

  2. Step 2: Calculate the average monthly net profit or gross income amount (divide the amount from Step 1 by 12).

  3. Step 3: Multiply the average monthly net profit or gross income amount from Step 2 by 2.5. This amount cannot exceed $20,833.

  4. Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 that you seek to refinance. Do not include the amount of any advance under an EIDL COVID- 19 loan (because it does not have to be repaid). This step will basically transfer your previous EIDL balance into your new PPP loan because the SBA will pay off your EIDL loan and roll it into your PPP loan.

You must provide the 2019 or 2020 (whichever you used to calculate your loan amount) IRS Form 1040, Schedule C with your PPP loan application to substantiate the applied-for PPP loan amount and a 2019 or 2020 (whichever you used to calculate your loan amount) IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes you are self-employed. If using 2020 to calculate your loan amount, this is required regardless of whether you have filed a 2020 tax return with the IRS. You must provide a 2020 invoice, bank statement, or book of record to establish you were in operation on or around February 15, 2020.

If you have employees, use the following methodology to calculate your maximum loan amount:

  1. Step 1: Compute 2019 or 2020 payroll (using the same year for all items) by adding the following:

  2. At your election, either (1) the net profit amount from line 31 of your 2019 or 2020 IRS Form 1040, Schedule C, or (2) your 2019 or 2020 gross income minus employee payroll costs, calculated as your gross income reported on IRS Form 1040, Schedule C, line 7, minus your employee payroll costs reported on lines 14, 19, and 26 of IRS Form 1040, Schedule C (for either option, if you are using 2020 amounts and have not yet filed a 2020 return, fill it out and compute the value), up to $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred (if this amount is over $100,000, reduce it to $100,000, or if this amount is less than zero, set this amount at zero);

  3. 2019 or 2020 gross wages and tips paid to your employees whose principal place of residence is in the United States, computed using 2019 or 2020 IRS Form 941 Taxable Medicare wages & tips (line 5c, Column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips; subtract any amounts paid to any individual employee in excess of $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred, and any amounts paid to any employee whose principal place of residence is outside the United States; and

  4. 2019 or 2020 employer contributions to employee group health, life, disability, vision and dental insurance (portion of IRS Form 1040, Schedule C line 14 attributable to those contributions); retirement contributions (IRS Form 1040, Schedule C, line 19); and state and local taxes assessed on employee compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms).

  5. Step 2: Calculate the average monthly amount (divide the amount from Step 1 by 12).

  6. Step 3: Multiply the average monthly amount from Step 2 by 2.5.

  7. Step 4: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance. Do not include the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid). This step will basically transfer your previous EIDL balance into your new PPP loan because the SBA will pay off your EIDL loan and roll it into your PPP loan.

You must supply your 2019 or 2020 (whichever you used to calculate your loan amount) IRS 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 2020 (whichever you used to calculate your loan amount) or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions, if applicable. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish you were in operation on February 15, 2020.


Additional guidelines are available for how to spend the PPP loan, and it is forgivable if 60% is used for payroll.


How can you apply?

Many banks are approved PPP lenders, so your best bet is to contact your bank as most are prioritizing current customers. You can easily find an approved Paycheck Protection Plan lender near you by clicking here.

If you have additional questions, check out the SBA website. They are keeping it updated and offer tools to help.


Don't forget, self-employed and those with less than 20 employees are the only ones who can apply now until March 9, 2021. You can still apply after that, but so can everyone else.


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