Can I Use the PPP Loan to Pay Myself? A Comprehensive Guide for Self-Employed Individuals

Paycheck Protection Program (PPP): This program provides business owners with forgivable loans that are primarily used for payroll maintenance. Small business owners, however, are often confused about how their own payments, such as the owner’s draw or distributions, may affect their eligibility for PPP.

Here’s the issue. Many business owners don’t pay themselves through formal payroll. Instead, whenever possible, they withdraw funds from their company for personal use. (Some people even use company funds to cover personal expenses, which is never a good idea.) This haphazard method of paying the business owner could cause issues for them in terms of being eligible for PPP.

Treasury published guidelines on April 24, 2020, and we are providing this information here. The guidelines are for determining the maximum loan amount by business entity. Unfortunately, after numerous businesses had already applied, it was released later in the process. But it could be useful if you’re still thinking about requesting a PPP loan. Remember that the maximum loan amount for a PPP loan is $10 million, regardless of the type of business entity.

Please remember that this information is based on our current understanding of the programs and is subject to change at any time. It can and likely will change. We will keep an eye on this and update it as new information becomes available, but please don’t use it as your only source of information when making financial decisions. We advise you to speak with your financial advisors, CPAs, and attorneys. Please get in touch with us to discuss your real-time funding options with one of Nav’s lending specialists.

Owners of S Corporations may choose to pay themselves a salary, distributions (also known as the “owner’s draw”), or a combination of the two when paying themselves or other shareholders. Payroll taxes apply to salary payments, but owner draws or distributions are not taxable as salary. The latter may pose issues in terms of being eligible for PPP.

The most recent guidelines, which apply to S and C corporations as well, provide the following formula for determining the maximum loan amount:

Step 2: Divide the sum from Step 1 by 12 to determine the average monthly payroll costs.

Step 4: Deduct the amount of any advance under an EIDL COVID-19 loan (since it is not repayable) from the outstanding balance of any EIDL made between January 31, 2020 and April 3, 2020 that you wish to refinance.

Documentation: The filed business tax return (IRS Form 1120 or IRS 1120-S) or other documentation of any retirement and health insurance contributions, together with the corporation’s 2019 IRS Form 941 and the state quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements), must be provided to substantiate the applied-for PPP loan amount. To prove you were operating and employing people on February 15, 2020, you must present a payroll statement or comparable documentation from the pay period that covered that date.

This guidance noticeably lacks any instructions for S Corporation owners who deduct their own expenses from owner’s draw or distributions. Regarding the question of whether owner’s draw counts toward the payroll calculation for PPP eligibility, the SBA Administrator and Treasury have not yet issued formal guidance. However, an April 6, 2020 email from the SBA states that “only payroll costs in the form of salary, wages, tips, etc.” are eligible for the PPP program. Owner distributions, draws, and amounts shown on a K-1 are not allowed under the PPP scheme. The same information was presented in an SBA webinar that I recently attended, so it seems to be an official SBA position.

Sole Proprietors and Independent Contractors

When filing their personal tax returns, sole proprietors who do not have a formal business structure are required to disclose their business’s revenue and outlays. Most will use Schedule C to do that. According to guidelines released by the SBA, individuals filing Form 1040 Schedule C should utilize the data from their 2019 Schedule C in order to be eligible. They ought to specifically utilize the net profit from Line 31 of their Schedule C for 2019. (The 2019 return should be completed even though it is not required to be filed.) ).

For companies filing Schedule C without any employees (including independent contractors, but not partnerships), the following is a step-by-step guide:

Step 1: Locate the net profit amount on line 31 of IRS Form 1040 Schedule C for 2019. (If you haven’t filed a 2019 return yet, fill it out and calculate the value) If this amount is over $100,000, reduce it to $100,000. Should this sum be zero or less, a PPP loan is not available to you.

Step 2: Divide the sum from Step 1 by 12 to determine the average monthly net profit amount.

Step 3: Divide Step 2’s average monthly net profit amount by two. 5.

Step 4: Deduct the amount of any advance under an EIDL COVID-19 loan (since it is not repayable) from the outstanding balance of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 that you wish to refinance.

Documentation: To support the requested PPP loan amount, your 2019 IRS Form 1040 Schedule C is required. An invoice, bank statement, or book of record proving you were self-employed in 2019 and a 2020 invoice, bank statement, or book of record proving you were in business on February 15, 2020 are also required. 2019 IRS Form 1099-MISC describing nonemployee compensation received (box 7)

The Treasury’s guidelines for determining the maximum loan amount for partnerships are available here. According to Treasury, “individual partners may not apply for separate PPP loans; partners’ self-employment income should be included on the partnership’s PPP loan application”:

Step 1: Compute 2019 payroll costs by adding the following:

• 2019 Schedule K-1 (IRS Form 1065) Individual U.S. taxpayers’ net earnings from self-employment S. calculated from box 14a (less any claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion on oil and gas properties) multiplied by 0 for general partners who are subject to self-employment tax. 9235* up to $100,000 per partner (please fill out the 2019 schedules if they haven’t already);
• 2019 IRS Form 941 Taxable Medicare wages can be used to calculate the gross wages and tips paid to your employees whose primary place of residence is in the United States, if applicable. S; .
• 2019 employer contributions (the part of IRS Form 1065 line 19 attributable to health insurance) for employee health insurance, if any;
• 2019 employer matching contributions to employee retirement plans (IRS Form 1065, line 18), if applicable; and
• State unemployment insurance tax (derived from state quarterly wage reporting forms) is the primary state and local tax that employers must pay in 2019 on employee compensation, if any.

Step 2: Divide the sum from Step 1 by 12 to determine the average monthly payroll costs.

Step 3: Divide the average monthly payroll expenses by two from Step 2. 5.

Step 4: Deduct the amount of any advance under an EIDL COVID-19 loan (since it is not repayable) from the outstanding balance of any EIDL made between January 31, 2020 and April 3, 2020 that you wish to refinance.

documentation: To support the requested PPP loan amount, the partnership’s 2019 IRS Form 1065 (including K-1s) and any pertinent supporting documents, if any, if it employs people, such as the 2019 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), as well as records of any contributions made to retirement or health insurance, must be produced. In order to prove that the partnership was operational and employed on February 15, 2020, if it has workers, a payroll statement or comparable paperwork from the pay period covering that date must be submitted. In the event that the partnership is employee-free, it is necessary to submit an invoice, bank statement, or book of records attesting to the partnership’s existence on February 15, 2020.

* According to the guidance, “This treatment eliminates the “employer” share of self-employment tax and computes self-employment tax using IRS Form 1040 Schedule SE Section A line 4, in line with how payroll costs for partnership employees are calculated.” ”.

LLCs may report their business income in various ways. Generally, sole member LLCs file Schedule C and are regarded by the IRS as single proprietorships. Treasury’s advice is succinct: “LLCs should adhere to the guidelines that are specific to their tax filing circumstances, such as whether they file as corporations, partnerships, or sole proprietors. ”.

“The following methodology should be used to calculate the maximum amount that can be borrowed for eligible nonprofit organizations (eligible nonprofit religious institutions, see the next question),” according to Treasury guidance released on April 24, 2020.

Step 1: Compute 2019 payroll costs by adding the following:

• Your employees whose primary residence is in the United States will receive 2019 gross wages and tips, which can be calculated using 2019 IRS Form 941 Taxable Medicare wages. S;.
• 2019 contributions made by employers toward health insurance (the portion of IRS Form 990 Part IX line 9 that is related to health insurance);
• 2019 employer contributions to retirement plans (line 8 of IRS Form 990, Part IX); and
• 2019 employer state and local taxes, mostly the state unemployment insurance tax (derived from state quarterly wage reporting forms), levied on employee compensation

Step 2: Divide the sum from Step 1 by 12 to determine the average monthly payroll costs.

Step 3: Divide the average monthly payroll expenses by two from Step 2. 5.

Step 4: Deduct the amount of any advance under an EIDL COVID-19 loan (since it is not repayable) from the outstanding balance of any EIDL made between January 31, 2020 and April 3, 2020 that you wish to refinance.

Documentation is required to support the requested PPP loan amount. This includes the nonprofit organization’s 2019 IRS Form 941, the state quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements), the filed IRS Form 990 Part IX, or other documentation of any retirement and health insurance contributions. To prove you were operating and employing people on February 15, 2020, you must present a payroll statement or comparable documentation from the pay period that covered that date. Typically, eligible nonprofits with gross receipts under $50,000 should see the following question as they are not required to file an IRS Form 990.

How do I pay myself with PPP 2021 – Self-employed

FAQ

Can you use PPP loans to pay yourself?

Can I use PPP loan for personal use?

What can you use the PPP money for?

Can PPP be used for payroll?

Can I use a PPP loan to pay myself?

If you have W2 employees: IRS Form 941 from Q1 2020 or a third-party processing report from February 2020. If you have employees, you’ll need to provide proof of payroll costs. Choose one: Can You Use a PPP Loan to Pay Yourself? Yes, you can use your PPP loan for payroll-related expenses, including paying yourself.

How much can you Pay Yourself for a PPP loan?

To qualify for loan forgiveness, individual payroll amounts cannot exceed the calculation limits, meaning you can pay yourself a maximum of $8,333/month ($100,000/year) to be eligible for forgiveness. What Can You Use PPP For? The allowed uses for PPP loans have been expanded.

What can I do with my PPP loan?

There are only two things you can do with your PPP loan: spend it on authorized expenses or pay back the money to your lender. You can’t spend any PPP money on expense categories that aren’t specified as an authorized category. The SBA’s rules say “At least 60 percent of the PPP loan proceeds shall be used for payroll costs.”

Can self-employed borrowers get PPP loan forgiveness?

PPP loan forgiveness is pretty easy for self-employed borrowers with no employees. Rather than spending on payroll, self-employed individuals get their compensation reimbursed and forgiven without having to spend it on anything. This is called “owner compensation replacement.”