Do Freelancers Qualify for PPP Loans?
Let's get straight to the point - YES, they do!
You don’t have to have a monthly payroll or sign anyone else’s paycheck to receive a Paycheck Protection Program Loan. The program also covers YOUR paycheck. So yes, freelancers, independent contractors, sole proprietors and single-member LLCs can qualify for a PPP Loan.
In talking with some colleagues recently about how 2020 went, I realized that many freelance translators didn't realize they could qualify for a PPP Loan, or didn't think it was worth it because they figured they'd have to pay it back. After writing out this information and answering questions in multiple emails, I decided to put the information in a blog post.
This information is based on my own experience and information collected from internet sources, and does not constitute professional financial advice. You should consult with your accountant, lender, or tax professional regarding your PPP Loan application.
So, first things first:
What is a PPP Loan?
PPP loans are designed to help small businesses keep their employees (even if the business consists of only one employee) and stay in business during the COVID-19 Pandemic.
“The Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll.
SBA will forgive loans if all employee retention criteria are met, and the funds are used for eligible expenses.”
Sba.com (not affiliated with Sba.gov) provides a good breakdown of PPP Loans as they stand today.
Do I have to pay my PPP Loan back?
Answer: No, probably not!
The loan is up to 100% forgivable if used for qualifying expenses.
“The SBA will forgive the portion of the loan used for payroll, rent, mortgage interest or utility payments for up to 24 weeks after the loan is issued.” -K Servicing
In my case, I received a first draw PPP loan in eary May 2020. I used 100% to cover payroll costs (my own). 100% of the loan was forgiven by the SBA in early December 2020. I was not required to make any payments on the loan prior to that (payments are deferred until you've received a decision on your loan forgiveness application).
Honestly, when I first applied, I wasn't really sure if I was going to need the loan. Business was still going pretty well, although it was already down about 20%. I felt guilty that maybe other people needed it more than I did, but I was encouraged to apply anyway, given that we didn't know how long the pandemic would last, how long that 20% reduction would continue, or whether it would get worse.
Turns out, the pandemic is still going, the 20% reduction has lasted 9 months so far, and that 20% did get worse. So in retrospect, I'm glad I took the leap and applied despite my own doubts. Ultimately, small businesses like ours are exactly what these PPP Loans were designed for, and if we can qualify, we should take advantage - the bigger players sure are!
How Much Can I Get with a PPP Loan?
As an independent contractor or sole proprietor, you qualify for a loan equal to 2.5 months of your 2019 income.
So, let’s say you had $50,000 in 1099-MISC income in 2019.
$50,000/12 = $4166.66 average monthly salary.
$4166.66 x 2.5 = $10,416.66
You can qualify for a forgivable PPP Loan worth $10,416.66.
Not too shabby, eh?
More information on calculating your loan amount here, but your lender will tell you what line from your Schedule C to enter as your 2019 income and will calculate the amount for you.
How to Qualify for a PPP Loan:
If you have not yet received a PPP loan, you can qualify for a first draw starting January 11, 2021 based on the original requirements.
You were in operation on February 15, 2020,
Your primary place of residence is the United States,
You filed or will file a Form 1040 Schedule C for 2019 showing self-employment income.
First draw PPP Loans did not require applicants to show a 25% decrease in revenue compared to 2019, and I believe this still applies if you are applying for your first PPP Loan in 2021. For the 2nd round, you do need to show a 25% reduction in income for your loan to be forgiven.
For the business types Sole Proprietorship, Independent Contractor, Self-employed, or Single member LLC, you will need the following to apply (may vary by lender):
Color copy of government issued ID (front and back)
2019 1040 Schedule C**
Substantiation of self employment
1099-MISC for Independent Contractors
2020 invoice, bank statement or book of record to establish you were operating effective 2/15/2020 - K Servicing
If you received a first draw PPP loan in 2020, you can receive a second draw PPP loan starting January 13, 2021 if you can demonstrate a 25% reduction in revenue and you have used the full amount of the first draw loan prior to receiving the second draw.
The eligibility requirements for second draw PPP loans are as follows:
“Previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses;
Has no more than 300 employees; and
Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.” -Channele2e
If you apply for the second draw through the same lender as the first, the SBA says they will not require additional paperwork for your application, though the lender may.
How to apply for a PPP Loan:
You can apply for a first or second draw PPP Loan through the bank or credit union where you have a business checking account, if they are a qualifying lender. Check with your bank to find out if they are processing PPP loans. Some lenders will also accept applicants who do not hold accounts with them - Max Maher provides a full list of these lenders to download here.
K Servicing, previously Kabbage, is an online platform that also processed the first round of PPP Loans, connecting applicants with qualifying lenders. You can sign up at the link above to be notified when they start accepting applications (my guess is this week).
I used Kabbage for my first draw PPP loan, as did several colleagues and friends. The application process was straightforward and simple. I was very happy with them and will use the for the second draw as well. I will say that it’s not easy to get through to someone there over the phone or by email, so if you’re looking for a lender to walk you through the process, I wouldn’t recommend this option.
Some lenders (such as First Bank of the Lake) are already accepting applications and will submit them as soon as the SBA allows. Others have sign up forms on their websites so you can be notified when they start accepting applications.
PPP Loan Forgiveness for Independent Contractors/Sole Proprietors:
A PPP Loan will be forgiven if it was used for qualifying expenses within the covered period. Qualifying expenses include payroll, rent, mortgage interest, and utility payments.
You won't need to start making payments on the loan until after the covered period ends and you have applied for and received a decision on loan forgiveness; however, the interest (1%) will accrue during this time. If it's forgiven, you won't ever have to make any payments. Any part of the loan that is not used for qualifying expenses and thus not forgiven will need to be repaid plus 1% interest.
The "covered period" refers to the 8 or 24 weeks following the date on which you receive your PPP loan. You get to choose which period to use. Personally, I chose 24 weeks. My logic is that the loan was for 2.5 months of income - that's 10 weeks. So if I chose the 8 week covered period, I would have to repay 2 weeks of the loan, because I can't use the loan to pay myself for 10 weeks in 8 weeks, and I don't have other qualifying expenses for my business. You need to use the loan within the covered period.
Once it’s time to apply for forgiveness, your lender should let you know and tell you what information you need to provide to request forgiveness.
With K Servicing, the forgiveness application was extremely simple and I was not required to submit any additional documents (although some people I know were). The amount of my loan qualified for the streamlined forgiveness application and I only had to attest that I used the full amount for payroll.
For this second draw, loans under $150,000 will have to provide documentation of a 25% reduction in income compared to the same quarter in 2019 (you choose which quarter of 2020 to compare to the same quarter in 2019) to receive forgiveness. Loans over %150,000 will have to provide this documentation up front to qualify for the loan.
What questions or concerns do you have about the PPP Program? Leave them in the comments and I'll do my best to answer them!
References and Resources:
Paycheck Protection Program, Sba.gov
PPP Loans for 1099 Independent Contractors
Second PPP Loan Funding Round for SMBs
How to Calculate Your Paycheck Protection Program Loan Amount
Guide to Independent Contractors' CARES Act Relief