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PPP Loans Coming for Independent Contractors and Self-Employed Individuals

April 08, 2020

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Last week, the SBA issued guidance concerning the rights of independent contractors with respect to Paycheck Protection Program (PPP) forgivable loans. First, the SBA clarified that employers cannot include compensation paid to independent contractors in calculating their own loan amount. Second, the SBA announced that independent contractors and self-employed individuals will be eligible to apply for a PPP loans starting April 10, 2020.

The SBA has not yet provided any guidance with respect to how to calculate the amount of an independent contractor's PPP loan. SBA guidance also appears to indicate that self-employed individuals, such as service partners, may be eligible for PPP loans even if their partnerships are not. This alert explores both these issues in preparation for the April 10, 2020 application date for independent contractors and self-employed individuals.

PPP Loan Calculation for Independent Contractors

The current form of the PPP loan application is geared towards corporate borrowers, as it requests "average monthly payroll," and then multiplies that sum by 2.5 to determine the eligible loan amount. The SBA has not yet issued an application form geared towards independent contractors. It seems likely that independent contractors will therefore need to rely upon an estimate of their average monthly earnings for the preceding 12 month period (as supported by 1099-MISCs), and multiply that sum by 2.5 to determine their eligible loan amount. Based upon the SBA’s guidance, any cash compensation in excess of $100,000.00 annually may not be included in determining the loan amount. Therefore, the maximum monthly cash compensation that an independent contractor may claim is $8,333.33 (or $100,000.00 ÷ 12). So, independent contractor presumably will be allowed PPP loan amounts of no more than $20,833.33 ($8,333.33 x 2.5).

In order to qualify for loan forgiveness, a borrower must demonstrate that 75% of the loan proceeds were used for "payroll costs," while the remaining 25% of the loan proceeds may be used to pay rent, utilities or interest on existing business debt within the eight week period following loan funding. We assume that independent contractors will be subject to these same restrictions and will need to properly document how the loan proceeds were used to pay general expenses, rather than rent, utilities, or interest.

PPP Loans for Eligible Self-Employed Individuals

Section 1102 of the CARES Act makes clear that independent contractors and "eligible self-employed individuals" may receive a PPP loan.  The CARES Act, by reference to the Families First Coronavirus Response Act, simply indicates that an "eligible self-employed individual" means an individual who regularly carries on any trade or business within the meaning of section 1402 of the Internal Revenue Code and is subject to self-employment tax. In other words, partners in a service partnerships appear to be entitled to obtain a loan to cover their own payroll costs.

Such a reading of the CARES Act could lead to unusual results. Assume that a law firm is organized as a limited liability partnership. The law firm has more than 500 employees, including staff, associates, and other W-2 employees. Such a firm is not eligible for a PPP loan, given the number of employees.

However, the partners of the law firm appear to be eligible for PPP loans given that they are subject to self-employment tax and, therefore, are "eligible self-employed individuals." The result is that the law firm's W-2 wage earners will not receive the indirect benefit of the PPP loans to cover their compensation, while the equity partners will. This benefit would apply to most service industries, including law firms, accounting firms, and other service partnerships where owners are subject to self-employment tax.

If Congress intended such partners to be eligible for PPP loans, we hope the SBA guidance provided in advance of the April 10, 2020 application date will clarify this issue.

PPP loan applicants can contact Eric Clarke, Christopher Karachale, or the Hanson Bridgett Coronavirus (COVID-19) Resource Center with any PPP loan questions, including the treatment of independent contractors and self-employed individuals.

For more information, please contact:

Eric Clarke

925-746-8470 Direct Phone
925-746-8491 Fax

Email Attorney


Christopher Karachale

415-995-5863 Direct Phone
415-995-3407 Fax

Email Attorney


COVID-19 Resource Center

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