SBA Issues Guidance on Independent Contractor Eligibility for PPP Loans

Today, the U.S. Small Business Administration (SBA) issued an Interim Final Rule clarifying how independent contractors and other self-employed taxpayers can take advantage of the Paycheck Protection Program (PPP).

Individuals with self-employment income are eligible for a Payroll Protection Loan (PPL) if they:

  • were in operation on February 15, 2020,
  • are an individual with self-employment income (i.e.: an independent contractor or a sole proprietor),
  • have a principal place of residence in the U.S., and
  • have or will file a 2019 From 1040, Schedule C.

The SBA issued separate guidance for self-employed individuals who were not in operation in 2019 but who were in operation on February 15, 2020, and will file a 2020 Form 1040 Schedule C.

The rule clarifies that partners who earn self-employment income cannot submit a separate PPL application for themselves. Their payroll costs are included in the PPL application of the partnership from which they earn their self-employment income.

If a self-employed person has no employees, their maximum loan amount is:

  • their net 2019 Schedule C earnings, not less than zero and not exceeding $100,000;
  • divided by 12, multiplied by 2.5;
  • plus the amount of any Economic Injury Disaster Loan (EIDL) made between January 31 – April 3, 2020, less the amount of EIDL grant.

Regardless of whether a self-employed person has filed a 2019 tax return with the IRS, they must provide a 2019 Form 1040 Schedule C with their PPL application to substantiate the PPL amount and 2019 IRS Forms 1099-MISC, detailing nonemployee compensation received (box 7), and a 2019 invoice, a bank statement, or books of record establishing they are self-employed. A self-employed person must also provide a 2020 invoice, bank statement, or books of record to establish they were self-employed on February 15, 2020.

If the self-employed person has employees, their maximum loan amount is:

  • their net 2019 Schedule C earnings, not less than zero and not exceeding $100,000;
  • plus 2019 employees’ compensation, including tips, health insurance premiums, and retirement plan contributions (i.e.: employee payroll costs);
  • plus state and local taxes paid on wages (e.g.: state unemployment tax and MCTMT);
  • divided by 12, multiplied by 2.5;
  • plus the amount of any Economic Injury Disaster Loan (EIDL) made between January 31 – April 3, 2020, less the amount of EIDL grant.

A self-employed person must supply their 2019 Form 1040 Schedule C, Forms 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.   A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish the self-employed person was in operation on February 15, 2020.

Interestingly, self-employed health insurance premiums and the self-employed person’s share of the employer’s portion of retirement plan benefit are not included in the loan amount calculation.

PPL proceeds can be used for:

  • owner compensation replacement, based on 2019 Schedule C net profit,
  • employee payroll costs,
  • business property rent, and interest payments including mortgage interest and interest on a vehicle used in the business,
  • business utility payments including gas used in driving a business vehicle,
  • interest payments on any other debt obligations that were incurred before February 15, 2020, and
  • refinancing an EIDL loan

Our interpretation is home office rent, interest, and utilities are not included as eligible PPL expenditures. 75% of PPL proceeds must be used to cover owner compensation replacement and employee payroll costs.

The amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness depends, in part, on the total amount spent over the eight-week period after receiving the loan on:

  • employee payroll costs;
  • state and local tax paid on wages,
  • owner compensation replacement, calculated based on 8/52 of 2019 Schedule C net profit; and
  • to the extent deducted on Schedule C:
    • payments of mortgage interest on obligations incurred before February 15, 2020,
    • rent payments on lease agreements in force before February 15, 2020, and
    • utility payments under service agreements dated before February 15, 2020.

Documentation to support the amount of loan forgiveness will need to submitted to the lender.

For assistance with your PPP loan application, please contact our Emergency Loan Consulting professionals on our Crisis Response & Recovery Hotline at 212.223.6216 or

Lou Pizzileo An assurance and advisory Partner at Grassi, Lou Pizzileo plays a key role serving the firm’s clients in the manufacturing and distribution, technology and specialty finance practices. Entrepreneurial minded, Lou recently led the firm’s efforts in assisting companies with capturing available stimulus provided by the CARES Act, including the Paycheck Protection Program. He also recently created and leads the firm’s IT assurance practice. Lou... Read full bio

Robert L. Tobey Robert L. Tobey, CPA is a Partner in the Tax Services practice at Grassi, where he guides clients through the complexities of tax planning and compliance on the federal, state and international levels. He specializes in helping pass-through entities, multi-state corporations, high-net-worth individuals and investors meet their business, tax savings and wealth preservation goals. Robert advises clients in a wide range of industries, with... Read full bio