Editor’s note: On Tuesday, May 4th the PPP ran out of general funds and the SBA stopped accepting new PPP loan applications. A reserve of funds is still available for community financial institutions that lend to businesses run by women, minorities, and underserved communities. Additionally, a reserve of funds remains for applications previously submitted but not yet reviewed by the SBA. If you have already submitted your loan application, however, this does not guarantee you funding.
What’s changing for the Paycheck Protection Program?
Previously, the self-employed calculated their PPP loan amounts based on their net income. Monthly payroll expenses were calculated by taking net income (as reported on a Schedule C) and dividing by 12. This left entrepreneurs running businesses that were not yet profitable without relief funds.
To make the PPP more widely available to self-employed small business owners, the loan calculation amount is now based on gross income. Businesses that were ineligible—due to not being profitable—can now apply. Loans that were already processed are not eligible for an increase in their amount.
How to calculate your PPP loan amount using gross income
With the latest guidance released on March 3, the SBA provided clarification on how to calculate gross income for the PPP.
There are two calculations: one for sole proprietors with payroll and one for sole proprietors without payroll. For now, only the self-employed who file a Schedule C will be eligible to use gross income for their PPP loan amount calculation.
Sole proprietors without payroll
For sole proprietors without payroll, you will use your gross income as reported on line 7 of your Schedule C.
Here are the steps to calculating your PPP loan amount as a sole proprietor without payroll:
- Take your gross income as reported on line 7 of your 2019 or 2020 Schedule C. If this value is greater than $100,000 (the maximum allowed amount), use $100,000.
- Divide this value by 12 to get your average monthly gross income (this is considered your average monthly payroll expense).
- Multiply the number from step 2 by 2.5 to find your PPP loan amount.
Sole proprietors with payroll
If you are running payroll for either yourself or employees, you will need to subtract payroll costs from your gross income. All of this information can still be found on your Schedule C.
Here are the steps to calculating your PPP loan amount as a sole proprietor with payroll: Take your gross income as reported on line 7 of your 2019 or 2020 Schedule C.
- Subtract any payroll costs as reported on lines 14, 19, and 26 of your 2019 or 2020 Schedule C. If this value is greater than $100,000 (the maximum allowed amount), use $100,000.
- Add in the gross wages and tips paid to employees based in the United States for 2019 or 2020. This can be calculated using line 5c, column 1 of IRS Form 941.
- Add in any pre-tax employee contributions for health insurance. Subtract any values in excess of $100,000 per employee.
- Add in employer contributions to employee group health, life, disability, vision, dental insurance, retirement contributions, and state and local taxes. (Note: Some payroll providers have reports available that will provide all the information needed for steps 3 and 4).
- Divide by 12. This is considered to be your average monthly payroll expense.
- Multiply the number from step 5 by 2.5 to find your PPP loan amount.
What is gross income?
Gross income—also called gross profit—is the revenue you make from your business minus any direct costs of making the product (called cost of goods sold or COGS).
Gross income is important because it shows how much profit you make before paying your operational expenses. Operational expenses include costs like rent, office supplies, and web hosting. These are expenses that don’t scale with production.
Think of gross income as the money you make on just the sale of a product alone. For example, if you sell ceramic mugs for $20 and the clay you use to make them costs $5, you would make $15 gross income on each sale.
Net income is what you have after paying your operational expenses.
Let’s say your ceramic mugs business sold 100 mugs for a gross income of $1,500 (100 x 15). Once you pay rent worth $500 and the $200 for web hosting, you’re left with $800 net income ($1500 - $500 - $200).
Because gross income does not include any operational expenses or taxes paid, your gross income will always be greater than your net income. So when thinking how to calculate gross income, know that your result should be bigger than your net income.
Where can I find my gross income?
Gross income can be found on your income statement. An income statement shows all of a business’s incomes and expenses over a period of time. It will look something like this:
You can also check past tax returns to see what you reported your gross income to be in the past. Gross income can be found on line 7 of your Schedule C.
How to calculate gross income
Gross income is calculated using two numbers: your net sales and your cost of goods sold.
The formula for how to calculate gross income is:
Gross Income = Net Sales - Cost of Goods Sold (COGS)
Net sales is your total sales minus any returns, discounts, damaged goods, and sales you failed to collect payment on.
An example of calculating gross income
Terry makes terrariums and sells them for $40 each at a local farmers market. Each terrarium has two inputs: a glass case and plants to fill them. Terry buys glass cases for $10 each and then uses $5 worth of plants in each terrarium.
Terry is trying to figure out how to calculate gross income for his last week of business. He sold 10 terrariums for a total of $400. But one customer had to return their terrarium after they noticed a crack. Terry’s net sales for the week was $360. That’s his total sales of $400 minus the $40 for the return.
Terry’s cost of goods sold is $150, or the sum of $100 from glass cases (10 x $10) and $50 from plants (10 x $5).
This makes Terry’s gross income from that week equal to $210 ($360 in net sales minus $150 in COGS).
What are the next steps?
Get ready to apply by collecting the documents you will need. For the self-employed, this will mean finding your 2019 Schedule C or completing one for 2020 (which can then be filed before the April 15 deadline). If you’re running payroll, check your provider to see if they have a PPP report available. If not, you will need to collect any IRS forms 941, 944, or 940.
Once you’re ready to apply, choose a lender you want to work with (see our list of PPP lenders). You have until May 31, 2021 to apply.
If you have any lingering questions about the PPP, check out our Paycheck Protection Program (PPP) Loans Resource Hub for Small Business for all the info you need.
How Bench can help
At Bench, we’re aiding businesses with all their PPP questions from applying for the loan to getting it forgiven. Our team of experts will make sure you have the correct numbers to apply for the PPP loan and receive the right amount. You will also gain access to our helpful webinars and resources so you have advocates on your side throughout the process.