Second Draw Loans for Independent Contractors and Self-Employed Persons

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Can I apply for a second PPP loan as an independent contractor or self-employed person if I received a PPP loan in 2020?

The new round of PPP loans offer a “second draw” for harder-hit businesses that received PPP funding in 2020. You may be eligible for a “second draw” provided you or your business has used or will use the full amount of the first PPP, and has experienced at least a 25 percent reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same quarter in 2019.

What is the maximum loan amount for a Second Draw PPP Loan for independent contractors or self-employed individuals?

IMPORTANT UPDATE: The SBA has announced impending updates to the PPP. Starting soon, borrowers using Schedule C will use their gross income (line 7) instead of net income (line 31). We will update our FAQ to reflect these new changes as soon as they go into effect.

 

The following methodology should be used to calculate the maximum amount that can be borrowed if you are self-employed and have no employees, and your principal place of residence is in the United States, including if you are an independent contractor or operate a sole proprietorship (but not if you are a partner in a partnership): 

  • Step 1: Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount. (If you are using 2020 amounts and you have not yet completed a 2020 return, fill it out and compute the value.) If this amount is over $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a PPP loan. 
  • Step 2: Calculate the average monthly net profit amount (divide the amount from Step 1 by 12). 
  • Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5. (Multiply by 3.5 if your business is in the Accommodation and Food Services sector (NAICS Code 72) and the business activity code reported on your most recent IRS Form 1040 Schedule C line B begins with 72.) 

 

(Note that PPP loan forgiveness amounts will depend, in part, on the total amount spent during the covered period following disbursement of the PPP loan.)

 

Your 2019 IRS Form 1040 Schedule C must be provided to substantiate the applied-for Second Draw PPP Loan amount. You must also provide a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), IRS Form 1099-K, invoice, bank statement, or book of record establishing you were self-employed in 2019 and a 2020 invoice, bank statement, or book of record establishing you were in operation on February 15, 2020.

What is the maximum loan amount for a Second Draw PPP Loan for independent contractors or self-employed individuals who are employed with employees?

IMPORTANT UPDATE: The SBA has announced impending updates to the PPP. Starting soon, borrowers using Schedule C will use their gross income (line 7) instead of net income (line 31). We will update our FAQ to reflect these new changes as soon as they go into effect.

 

The following methodology should be used to calculate the maximum amount that can be borrowed if you are self-employed with employees, including if you are an independent contractor or operate a sole proprietorship (but not if you are a partner in a partnership):

  • Step 1: Compute your 2019 payroll costs by adding the following: 
    • 2019 IRS Form 1040 Schedule C line 31 net profit amount (If you are using 2020 payroll costs and have not yet completed a 2020 return, fill it out and compute the value) 
      • if this amount is over $100,000, reduce it to $100,000; 
      • if this amount is less than zero, set this amount at zero; 
    • 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States, up to $100,000 per employee, which can be computed using: • 
      • 2019 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, 
      • Minus (i) any amounts paid to any individual employee in excess of $100,000, and (ii) any amounts paid to any employee whose principal place of residence is outside the United States;
    • 2019 employer contributions for employee group health, life, disability, vision, and dental insurance (the portion of IRS Form 1040 Schedule C line 14 attributable to those contributions); 
    • 2019 employer contributions to employee retirement plans (IRS Form 1040 Schedule C line 19); and 
    • 2019 employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax (from state quarterly wage reporting forms). 
  • Step 2: Calculate the average monthly payroll costs amount (divide the amount from Step 1 by 12).
  • Step 3: Multiply the average monthly payroll costs amount from Step 2 by 2.5. (Multiply by 3.5 if your business is in the Accommodation and Food Services sector and the business activity code reported on your most recent IRS Form 1040 Schedule C line B begins with 72.)

 

Your 2019 IRS Form 1040 Schedule C, IRS Form 941 and state quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements), along with documentation of any retirement or group health, life, disability, vision, and dental insurance contributions, must be provided to substantiate the applied-for Second Draw PPP Loan amount. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish you were in operation and had employees on that date.

 

(Note that PPP loan forgiveness amounts will depend, in part, on the total amount spent during the covered period following disbursement of the PPP loan.)

How do I submit an application for a Second Draw PPP Loan and what documentation must I provide to demonstrate eligibility as an independent contractor or self-employed person?

The applicant must submit to the lender SBA Form 2483–SD (Paycheck Protection Program Second Draw Borrower Application Form) or the lender’s equivalent form including the required certifications and the documentation.

 

At the time an applicant submits its loan application form, it must submit the following unless the documentation was submitted to the lender for the First Draw PPP Loan (i.e., the applicant used calendar year 2019 figures to determine both its First Draw PPP Loan amount and its Second Draw PPP Loan amount, and the lender for the applicant’s Second Draw PPP Loan is the same as the lender that made the applicant’s First Draw PPP Loan):

  • If the applicant is self-employed and has employees, the applicant’s 2019 or 2020 (whichever was used to calculate 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 was used to calculate loan amount), as applicable, or equivalent payroll processor records, along with evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions, if applicable, must be provided. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish the applicant was in operation on February 15, 2020.
  • If the applicant is self-employed and does not have employees, the applicant must provide (a) its 2019 or 2020 (whichever was used to calculate loan amount) Form 1040 Schedule C, (b) a 2019 or 2020 (whichever was used to calculate loan amount) IRS Form 1099– MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes that the applicant is self employed; and (c) a 2020 invoice, bank statement, or book of record to establish that the applicant was in operation on or around February 15, 2020.
  • For loans with a principal amount greater than $150,000, documentation sufficient to establish that the applicant experienced a reduction in revenue must be provided at the time of application, which may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, a copy of the applicant’s quarterly income statements or bank statements.
  • For loans with a principal amount of $150,000 or less, the applicant must submit documentation sufficient to establish that the applicant experienced a reduction in revenue as provided in subsection (c)(1)(i) of this section at the time of application, on or before the date the borrower submits an application for loan forgiveness, or, if the borrower does not apply for loan forgiveness, at SBA’s request. Such documentation may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, a copy of the applicant’s quarterly income statements or bank statements.

On the Second Draw PPP Loan borrower application, an authorized representative of the applicant must make the certifications listed in the Consolidated First Draw PPP requirements, except:

  • The applicant must certify that the applicant has not and will not receive another Second Draw Paycheck Protection Program Loan; and 
  • an authorized representative of the applicant must also certify:
    • The Applicant has realized a reduction in gross receipts in excess of 25% relative to the relevant comparison time period. For loans greater than $150,000, Applicant has provided documentation to the lender substantiating the decline in gross receipts. For loans of $150,000 or less, Applicant will provide documentation substantiating the decline in gross receipts upon or before seeking loan forgiveness for the Second Draw Paycheck Protection Program Loan or upon SBA request.
    • The Applicant received a First Draw Paycheck Protection Program Loan and, before the Second Draw Paycheck Protection Program Loan is disbursed, will have used the full loan amount (including any increase) of the First Draw Paycheck Protection Program Loan only for eligible expenses.
    • The Applicant is not a business concern or entity 
      • for which an entity created in or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong, or that has significant operations in the People’s Republic of China or the Special Administrative Region of Hong Kong, owns or holds, directly or indirectly, not less than 20 percent of the economic interest of the business concern or entity, including as equity shares or a capital or profit interest in a limited liability company or partnership; or
      • that retains, as a member of the board of directors of the business concern, a person who is a resident of the People’s Republic of China. 
  • The Applicant is not required to submit a registration statement under section 2 of the Foreign Agents Registration Act of 1938 (22 U.S.C. 612). 
  • The Applicant is not a business concern or entity primarily engaged in political or lobbying activities, including any entity that is organized for research or for engaging in advocacy in areas such as public policy or political strategy or otherwise describes itself as a think tank in any public documents.

 

A lender must submit SBA Form 2484–SD (Paycheck Protection Program Lender’s Application—Second Draw Loan Guaranty) electronically in accordance with program requirements and maintain the forms and supporting documentation in its files. 

I am a self-employed farmer or rancher who reports my income on IRS Form 1040 Schedule F. What documentation must I provide in place of Schedule C and how should my maximum Second Draw PPP Loan amount be calculated (up to $2 million)?

Self-employed farmers and ranchers (i.e., those who file IRS Form 1040 Schedule F and then report Schedule F income on IRS Form 1040 Schedule 1) should use IRS Form 1040 Schedule F in lieu of Schedule C. 

 

The calculation for self-employed farmers and ranchers without employees is the same as for Schedule C filers that have no employees, except that Schedule F line 9 (gross income) should be used to determine the loan amount rather than Schedule C line 31 (net profit). 

 

The calculation for self-employed farmers and ranchers with employees is the same as for Schedule C filers that have employees with several exceptions. First, in place of Schedule C line 31 (net profit), the difference between Schedule F line 9 (gross income) and the sum of Schedule F lines 15, 22, and 23 (for employee payroll) should be used. Second, employer contributions for employee group health, life, disability, vision and dental insurance (portion of Schedule F line 15 attributable to those contributions) and employer contributions for employee retirement contributions (Schedule F line 23) should be used in place of those respective lines on Schedule C. 

 

The documentation requirements are the same as for Schedule C filers except the 2019 IRS Form 1040 Schedule 1 and Schedule F must be included with the Second Draw PPP Loan application in place of IRS Form 1040 Schedule C. Additionally, for farmers and ranchers with employees, IRS Form 943 should be provided in addition to, or in place of, IRS Form 941, as applicable.

I am self-employed (or a partnership) and was in operation on February 15, 2020, but was not in operation for the full one-year period preceding February 15, 2020. I have filed or will file a Form 1040 Schedule C or Schedule F (or Form 1065) for 2020. What reference period should I be using to compute my Second Draw PPP Loan amount?

In this case, your maximum Second Draw PPP Loan amount is the average monthly payroll based on the number of months in which you were in operation from 2019 through the end of calendar year 2020, excluding costs over $100,000 on an annualized basis. 

  • Step 1: Compute total applicable owner compensation across 2019 (if in operation that year) and 2020 income tax returns: (If you have not completed your applicable 2020 return, fill it out.) 
    • For self-employed Schedule C filers, it is the sum of the value of Form 1040 Schedule C line 31 net profit. 
      • If this amount is less than zero, set this amount to zero; 
    • For self-employed farmer or rancher with no employees, it is the sum of the value of Form 1040 Schedule F line 9 gross income. 
    • For self-employed farmer or rancher with employees, it is the sum of difference between the gross income amount on Form 1040 Schedule F line 9 and employee payroll costs from the sum of Form 1040 Schedule F lines 15, 22, and 23. 
      • If this amount is less than zero, set this amount to zero. 
    • For partnerships, it is the sum of Schedule K-1 (IRS Form 1065) net earnings from self-employment of individual U.S.-based general partners that are subject to self-employment tax, multiplied by 0.9235. 
      • Compute the net earnings from self-employment of individual U.S.- based general partner that are subject to self-employment tax from box 14a of IRS Form 1065 Schedule K-1 and subtract (i) any section 179 expense deduction claimed in box 12; (ii) any unreimbursed partnership expenses claimed; and (iii) any depletion claimed on oil and gas properties. If this amount is less than zero, set this amount to zero. 
  • Step 2: If the amount from Step 1 is greater than the product of $8,333 and the number of months in operation from 2019 through the end of 2020, set it to this value.
    • For partnerships, this cap applies separately to each general partner. 
  • Step 3: If the entity has employees, enter the amount computed from following the instructions from Step 1 from the answer to: “How is the maximum Second Draw PPP Loan amount calculated for a corporation or nonprofit not in operation for the full one-year period preceding February 15, 2020?”, otherwise enter 0. 
  • Step 4: Calculate the average monthly payroll costs (add Step 2 and Step 3 together and then divide that sum by the number of months in operation from 2019 through the end of 2020). 
  • Step 5: Multiply the average monthly payroll costs from Step 4 by 2.5. (Multiply by 3.5 if your business is in the Accommodation and Food Services sector and the business activity code reported on the most recent income tax return [IRS Form 1040 Schedule C line B for self-employed who are not farmers or ranchers and Form 1120-S item B for partnerships] begins with 72.) 

 

Your applicable income tax return (Form 1040 Schedule C, Form 1040 Schedule F, or Form 1065 (including K-1s)) from 2019 (if applicable) and 2020 must be provided to substantiate the applied-for Second Draw PPP loan amount. If you had employees, your IRS Form 941s and state quarterly wage unemployment insurance tax reporting form from each quarter the entity was in operation (or equivalent payroll processor records or IRS Wage and Tax Statements), along with documentation of any retirement and group health, life, disability, vision, and dental insurance contributions must be provided to substantiate the applied-for Second Draw PPP Loan amount. Additionally, a payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish you were in operation and had employees on that date. If you did not have employees, an invoice, bank statement, or book of record establishing you was in operation on February 15, 2020 must instead be provided.