Can Owners Pay Themselves with PPP Loan?

by

Understanding Owner Compensation and PPP Loan Forgiveness

The Paycheck Protection Program (PPP) was established to provide financial assistance to businesses and self-employed individuals impacted by the COVID-19 pandemic. While the program initially allowed for flexibility in using loan funds, the rules regarding owner compensation and loan forgiveness have since been clarified.

Eligibility for Owner Compensation Forgiveness

The eligibility of owner compensation for PPP loan forgiveness depends on the business structure and the individual’s role within the organization.

C & S Corporations

  • Owner-employees (owners who are also employees) are eligible for forgiveness up to 2.5/12 of their 2019 employee cash compensation.
  • Payments for employer state and local taxes and employer retirement contributions are also eligible for forgiveness, subject to certain caps.

Self-Employed Schedule C or F Filers

  • Sole proprietors, self-employed individuals, and independent contractors are eligible for forgiveness up to 2.5/12 of their 2019 net profit reported on IRS Form 1040 Schedule C or F.
  • Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional forgiveness.

General Partners

  • General partners are eligible for forgiveness up to 2.5/12 of their 2019 net earnings from self-employment that is subject to self-employment tax.
  • Separate payments for health insurance, retirement, or state or local taxes do not count towards additional forgiveness.

LLC Owners

  • LLC owners follow the guidance based on how their LLC is structured for federal taxes.
  • If the LLC is structured as a corporation, the rules for C & S Corporations apply.
  • If the LLC follows a self-employed or partnership structure, the rules for Self-Employed Schedule C and F filers or General Partners apply.

Common Issues with Owner Compensation

  • Owners who did not pay themselves payroll in 2019: Some owners received PPP loans based on owner compensation, but if they did not pay themselves payroll in 2019, the banks may have mistakenly considered other forms of compensation. This could result in a portion of the loan not being eligible for forgiveness.
  • Self-employed individuals who used gross receipts instead of net income: Some self-employed individuals received PPP loans based on gross receipts rather than net income. This could lead to issues with loan forgiveness if the net income reported on their 2019 tax return does not support the loan amount.

Seeking Professional Assistance

If you have questions about your eligibility for PPP loan forgiveness, it is recommended to consult with a qualified professional, such as a tax advisor or accountant. They can help you understand your options and strategize the appropriate next steps.

How Much Can I Pay Myself With PPP Loan Funds as Owner of S Corporation or C Corporation

FAQ

Can owners use PPP to pay myself?

You can use the PPP funds to pay yourself through what’s called owner compensation share or proprietor costs. This is to compensate you for a loss of business income. To take the full amount of owner compensation share, you will have to use a covered period of at least 11 weeks weeks.

What is the maximum owner wage limit for PPP?

Owner-Employee or Self-Employed Individuals or General Partner: Forgiveness is capped at 2.5 months’ worth (2.5/12) of an owner-employee or self-employed individual’s 2019 or 2020[2] compensation (up to a maximum $20,833 per individual in total across all businesses.)

How do I spend my PPP loan for self-employed?

The 60/40 rule states that 60% of your PPP loan must be used on payroll costs, and the remaining 40% can be used on other eligible expenses (rent, mortgage interest, utilities, etc.). However, as a self-employed worker, you can claim all 100% of your PPP loan as payroll under compensation replacement.

Do owners count as employees for PPP?

Question: “Are any individuals with an ownership stake in a PPP borrower exempt from application of the PPP owner-employee compensation rule when determining the amount of their compensation that is eligible for loan forgiveness?” Answer: “Yes, owner-employees with less than a 5 percent ownership stake in a C- or S- …

Can a PPP loan be used as personal income?

Yes, essentially! You can treat the Owner Compensation Replacement as personal income and use it however you want. With guidance allowing for 2.5 months’ worth of net or gross profit as OCR, that means your entire PPP loan could be used for personal purposes.

Are PPP loans based on owner compensation?

There are businesses that received PPP loans based on owner compensation, but if the owner didn’t pay themselves payroll in 2019, the banks mistakenly took into consideration other forms of compensation such as 1099s and gross receipts. What Does This Mean For You?

How much is a PPP loan capped?

For borrowers that received a PPP loan before June 5, 2020 and elect to use an eight-week Covered Period, this cap is $15,385. If their total compensation across businesses that receive a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across different businesses.

Can a PPP loan be forgiven if you don’t pay yourself?

The Problem: If your LLC is structured as a corporation and received a PPP loan despite having not paid yourself payroll in 2019, the owner compensation paid during the covered period may not be eligible for forgiveness, based on the definition of owner-employees for C & S Corporations described above.

Related posts:

  1. Understanding the IRS 5071C Notice: Verifying Your Identity and Tax Return
  2. Understanding Investment Properties: An In-Depth Guide
  3. Should You Always Have Cash on Hand?
  4. What Bank is Intuit?

Leave a Comment