As businesses continue to navigate the economic challenges caused by the COVID-19 pandemic, many have turned to government assistance programs to stay afloat. The Paycheck Protection Program (PPP) has been a popular option for business owners, offering loans to cover payroll and other eligible expenses. However, there has been some confusion around whether payments to independent contractors are eligible for PPP loans.
First, it’s important to understand the criteria for PPP loan eligibility. According to the Small Business Administration (SBA), businesses must have 500 or fewer employees and have been in operation on February 15, 2020. In addition, the loan can be used for eligible expenses, which include payroll costs, rent, utilities, and mortgage interest.
When it comes to independent contractors, the answer is yes, payments to them are eligible for PPP loans. However, there are some caveats. Independent contractors themselves do not count towards the borrower’s employee headcount for PPP eligibility purposes. Instead, they can apply for their own PPP loan as a self-employed individual.
To include payments to independent contractors in calculating PPP eligibility, businesses should include them as “payroll costs” on their loan application. “Payroll costs” under the PPP include compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
It’s also worth noting that businesses must have been paying independent contractors before February 15, 2020, in order for those payments to be eligible for PPP loans. Additionally, the loan amount for independent contractor payments may be limited by the amount of net profit reported on the contractor’s tax return.
In conclusion, payments to independent contractors are eligible for PPP loans, but there are some important considerations to keep in mind. Businesses should include these payments as “payroll costs” on their loan application, and independent contractors themselves can apply for their own PPP loan. As always, it’s important to consult with a financial advisor or accountant to determine your eligibility and ensure compliance with program guidelines.