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How the Self-Employed can apply for a PPP Loan in Five Easy Steps

By Bill Cunningham

If you are an individual entrepreneur or self-employed person with no other employees and have been negatively impacted by the COVID-19 pandemic, we are going to cut through the piles of Paycheck Protection Program (PPP) regulations and tell you how to apply for a PPP loan in five easy steps. We will show you exactly how to apply for either a First Draw PPP Loan if you don’t already have a PPP loan, or a Second Draw PPP Loan if you already have one.

Who’s eligible? While this isn’t a complete list of eligibility requirements, it reflects most of the requirements that will impact an individual entrepreneur.

  • You were in business on February 15, 2020.
  • You are still in business.
  • You are a sole proprietor, independent contractor, self-employed individual, or single-member LLC. Here are some examples: a gig worker, contract musician, self-employed taxicab driver, freelance photographer, 1099 compensated worker, independent contractor, sole proprietor, independent real estate broker, and many more.
  • You are not eligible if you are a self-employed lobbyist or self-employed political consultant, nor a business engaged in any activity that is illegal under Federal, state or local laws.

First Draw PPP Loan 

If you don’t already have a PPP Loan and you meet the above eligibility requirements, you should be able to apply by following these five steps.

Step One: Check with your bank to see if they are issuing PPP loans. If not, contact the SBA or SCORE RI and we’ll help you find a bank.

Step Two: Scan a copy of your Schedule C from your 2019 or 2020 Tax Returns. If you have not completed your 2020 Tax Return, create a draft of your Schedule C. You will probably want to use your 2019 Tax Return if you were in business during the entire year of 2019. You should use your 2020 Tax Return if you started your business in 2020.

Step Three: If Line 31 of your Schedule C (Net Profit) is more than $100,000, the Average Monthly Payroll amount is $8,333 and the amount of your PPP loan is limited to $20,833. If your Net Profit is less than $100,000, then you can calculate the Average Monthly Payroll amount by using the Net Profit from Line 31 and dividing it by 12. The loan amount is equal to the Average Monthly Payroll amount times 2.5.



For example, let’s say my Net Profit for 2019 was $85,000. I’ll divide that number by 12 to calculate my Average Monthly Payroll amount. Then I’ll take the Average Monthly Payroll amount times 2.5 or $17,708 to calculate the PPP loan amount.

Step Four: Depending on your bank, you will complete your PPP loan application using their online form or submit the SBA Form 2483 Borrower Application Form Revised January 8, 2021. Make sure that you complete each field, read carefully and initial each certification, and sign the application. The number of employees for an individual entrepreneur is 1 and you’ll only need to check the Payroll Costs box, which represents your compensation or Net Profit.

Step Five: Submit your application and a copy of your Schedule C to your bank. Your bank may ask for additional documentation depending on their procedures.

Your bank will notify you when the loan has been approved. Once you sign the loan documents, the funds will be placed in your bank account.

You can only apply for one First Draw PPP Loan.

Second Draw PPP Loan 

If you already have a First Draw PPP Loan and will use 100% of your loan proceeds on eligible expenses, you may apply for a Second Draw PPP Loan. This should not be a problem for individual entrepreneurs since 100% of your loan will be used for your compensation. Here are the five steps to apply for a Second Draw PPP Loan.

Step One: Check to see if you have experienced a 25% or more decrease in revenues in a quarter in 2020 compared to the same quarter in 2019 OR your 2020 tax returns show a 25% decline in revenue compared to your 2019 tax returns. If you meet either of these criteria you should be eligible for a Second Draw Loan.

You can use a quarterly income statement showing both 2020 and 2019 from your accounting system or Schedule C for both 2020 and 2019.

For example: Let’s assume that my revenues in second quarter of 2019 were $100,000 and my revenues in second quarter of 2020 were $50,000, which represents a decrease of $50,000 or 50%. I’m eligible for a Second Draw PPP Loan.

Step Two: Check with the bank that issued your First Draw PPP Loan to see if they are issuing Second Draw PPP loans. If not, contact the SBA or SCORE RI and we’ll help you find a bank.

Step Three: Scan a copy of your Schedule C from your 2019 or 2020 Tax Returns. If you are using the same bank and the same year as your First Draw PPP Loan to calculate your loan amount, you can skip this step.

Step Four: Depending on your bank, you will complete their online form or submit the SBA Form 2483-SD Second Draw Borrower Application Form.

You will probably want to use the same Average Monthly Payroll amount that you used to apply for your First Draw PPP Loan. If you are in the accommodations or food service industries (check if your NAICS code begins with 72 by clicking here), you can multiple the Average Monthly Payroll amount by 3.5 times. Otherwise the loan amount should be the same as your First Draw PPP Loan.



In the Reduction in Gross Receipts section, enter the quarter that you’ve selected (Q1, Q2, Q3, or Q4) and the amount of revenue or sales for 2020 and 2019.



Make sure that you complete each field, read carefully and initial each certification, and sign the application. The number of employees for individual entrepreneurs is 1 and you’ll only need to check the Payroll Costs box, which represents your compensation or Net Profit.

Step Five: Submit your application to the bank and if you are submitting your application to a new bank, then you should include a copy of your Schedule C. Your bank may ask for additional documentation depending on their procedures.

Your bank will notify you when the loan has been approved. Once you sign the loan documents, the funds will be placed in your bank account.

You can apply for only one Second Draw PPP Loan.

Conclusion

If you would like more information on how to apply for PPP loan forgiveness, please click on this link.  These PPP forgiveness instructions may be revised by the SBA in the near future. If they are, the SBA and SCORE RI will offer webinars explaining the changes.

Remember that filing for loan forgiveness will turn your PPP loan into a non-taxable grant. You can file for forgiveness as soon as you have used your loan funds.

For more than 50 years, SCORE has helped more than 11 million aspiring entrepreneurs and small business owners through mentoring and business workshops. More than 11,000 volunteer business mentors in more than 300 chapters serve their communities.

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About the Author(s)

 Bill  Cunningham

Bill Cunningham is a SCORE Rhode Island mentor and workshop instructor, focusing on business models, business planning, and QuickBooks Online. He is a CPA with more than 30 years of working in the television industry.

PPP Loan in Five Easy Steps