Hey friends and Etsy sellers, did you recently get a PPP forgivable loan for your Etsy business or small crafts business? Are you a sole proprietor and wondering how the heck you go about paying yourself with your PPP loan money and using the money correctly so that it is forgivable? Then read on while I share some information that I learned about how to go about doing this.
Before I get started though, I want to say that this is not legal advice and I am not an accountant, just an artist sharing knowledge, so be sure to do your own research and check with your own accountants and financial advisors for how to go about doing what you need to do in your individual situation with your PPP loan.
Ok, to get started, a lot of us are one woman (or man) operations! We don’t have any employees except for ourselves. Using my own Etsy shop as an example, I do everything by myself from start to finish. I make my jewelry by hand, from scratch, beginning to end, all by myself. Right now I don’t have any employees or anyone else helping me out, so I am a one woman operation, aka I am a sole proprietor with one employee, that employee being me!
But I don’t give myself a regular paycheck like I would get if I were working for someone else. When you’re in business for yourself you always hear that you are supposed to “pay yourself,” but with such small operations as many of us have, all the money sometimes goes into one pot and then the bills get paid from there. After all, the idea of sitting down and writing a check out to yourself from yourself every week or two seems kind of silly, no? If anything, it’s a waste of checks, and checks are expensive!
Nowadays, I can buy 100% of my supplies to run my business online, so I literally don’t even need to write checks for purchases. All of the supplies that are used to run my business - jewelry findings such as silver, wire, jewelry components and tools, all the way down to gift boxes and mailing envelopes - all of these business supply purchases can be paid for right out of my PayPal account, or directly out of my bank account. So a huge number of artists, crafts people, and Etsy shop owners don’t even have formal business checking accounts.
(Note: a business checking account is a good thing to have for other reasons but I’m not going to get into today.) As a quick side note, I keep what I consider to be meticulous records for my business. I keep careful track of all of my expenses and income and over the years I've developed good habits of doing this automatically (and so should you if you haven't already or are just starting out - you will thank yourself down the road, I promise.) A big part of that is keeping receipts and writing things down right away as opposed to procrastinating, telling yourself you'll do it later, and then finding yourself in a mess of paperwork and confusion down the line. But enough of that for now.
So if you do not have a formal business account then how do you “payroll“ yourself? Well if you’ve gotten this far and you’ve been approved for and received the PPP forgivable loan, then you should already know most of the ins and outs of the loan. You must spend 75% on payroll, and the rest of the funds can be split between utilities, mortgage interest payments and the like. But one thing that you cannot do is that you can’t go and buy equipment or supplies with the loan, or use it haphazardly. It must be used in the ways that the loan regulations specify, and just as importantly, you must be able to prove that you used it the way you were supposed to, which means you need documentation.
Now remember, since you are paying yourself, you are free to use your pay however you like and can get your equipment that way. I would love to buy a big kiln with my PPP loan but instead the money will be going to my payroll and then once I have that pay, I can then figure out how I’m going to buy my kiln, or use it however I like. Make sense?
OK now let’s get to it. The PPP loan is for eight weeks of payroll. Any balance left over after the payroll is paid is for those other particular expenses that I mentioned earlier. Now how do you go about documenting eight weeks of your own payroll to yourself? And how do you figure out exactly how much of that loan money will be allowed toward your payroll?
When you applied for the loan you most likely had to provide your 2019 income tax document schedule C which shows your net profit. Your schedule C line 31 was used to determine how much of a loan you would get.
Simplified into a basic math problem, you take the dollar amount from line 31 on your schedule C (your net income from 2019) and you divide it by 52 (the number of weeks in a year) and then you multiply that answer that you got by eight (the loan is to cover eight weeks of payroll.) The dollar amount you end up with is your total payroll for the eight weeks. That is the exact amount you can pay yourself, and if all is done correctly, hopefully have that portion of your loan forgiven. I don’t know if it makes a difference whether you pay yourself weekly, biweekly or in two monthly payments, but I would do at least the two monthly payments, even better breaking it down into biweekly or weekly payments.
Next take your loan amount (The entire dollar amount that you were granted as a loan) and subtract your total payroll amount (that you just got from the math problem that we just did) and you will see what your left over balance is. Here is where it gets tricky. Do not go out and spend that money on supplies or business purchases. That money is only to be spent on certain things such as rent, utilities and mortgage interest payments during that same eight week period, and you must have complete documentation to prove it.
To clarify, the entire amount of the PPP loan is to be used only for that eight week time-period. So it’s for eight weeks of payroll with the remainder of the funds being used for other expenses such as utilities, rent, or mortgage interest for the duration of those same eight weeks.
If you can’t spend the leftover funds on those particular expenses, there are two things you can do. You can give the remaining balance of the funds back, or you can use it as a loan which is at 1% interest for 24 months.
Please note that you will need to apply for a loan forgiveness because it is not automatic. You will need to prove to your lender with careful documentation that you used the money for payroll and those other expenses to have the loan forgiven. The forgiveness is not guaranteed so be sure to document everything and cross your t's and dot your i's.
From what I have heard the payroll forgiveness (the 75% of the total loan) in some cases may be proven just by submitting your Schedule C from your 2019 taxes, so you don’t explicitly have to show canceled checks that you wrote out to yourself and deposited back into your account. But a smart thing to do is to not put the loan money in your personal account but to open up a separate new online banking account, put the loan money in there, and then pay yourself in the form of deposits from the new account into your personal account. This separate account will help to keep everything in order, help to avoid confusion, and to make documentation simple. Make sense?
Just remember that you will have to provide documentation for how the remainder of the monies were spent to apply for that forgiveness.
So if you do not have a formal business account then how do you “payroll“ yourself? Well if you’ve gotten this far and you’ve been approved for and received the PPP forgivable loan, then you should already know most of the ins and outs of the loan. You must spend 75% on payroll, and the rest of the funds can be split between utilities, mortgage interest payments and the like. But one thing that you cannot do is that you can’t go and buy equipment or supplies with the loan, or use it haphazardly. It must be used in the ways that the loan regulations specify, and just as importantly, you must be able to prove that you used it the way you were supposed to, which means you need documentation.
Now remember, since you are paying yourself, you are free to use your pay however you like and can get your equipment that way. I would love to buy a big kiln with my PPP loan but instead the money will be going to my payroll and then once I have that pay, I can then figure out how I’m going to buy my kiln, or use it however I like. Make sense?
OK now let’s get to it. The PPP loan is for eight weeks of payroll. Any balance left over after the payroll is paid is for those other particular expenses that I mentioned earlier. Now how do you go about documenting eight weeks of your own payroll to yourself? And how do you figure out exactly how much of that loan money will be allowed toward your payroll?
When you applied for the loan you most likely had to provide your 2019 income tax document schedule C which shows your net profit. Your schedule C line 31 was used to determine how much of a loan you would get.
Simplified into a basic math problem, you take the dollar amount from line 31 on your schedule C (your net income from 2019) and you divide it by 52 (the number of weeks in a year) and then you multiply that answer that you got by eight (the loan is to cover eight weeks of payroll.) The dollar amount you end up with is your total payroll for the eight weeks. That is the exact amount you can pay yourself, and if all is done correctly, hopefully have that portion of your loan forgiven. I don’t know if it makes a difference whether you pay yourself weekly, biweekly or in two monthly payments, but I would do at least the two monthly payments, even better breaking it down into biweekly or weekly payments.
Next take your loan amount (The entire dollar amount that you were granted as a loan) and subtract your total payroll amount (that you just got from the math problem that we just did) and you will see what your left over balance is. Here is where it gets tricky. Do not go out and spend that money on supplies or business purchases. That money is only to be spent on certain things such as rent, utilities and mortgage interest payments during that same eight week period, and you must have complete documentation to prove it.
To clarify, the entire amount of the PPP loan is to be used only for that eight week time-period. So it’s for eight weeks of payroll with the remainder of the funds being used for other expenses such as utilities, rent, or mortgage interest for the duration of those same eight weeks.
If you can’t spend the leftover funds on those particular expenses, there are two things you can do. You can give the remaining balance of the funds back, or you can use it as a loan which is at 1% interest for 24 months.
Please note that you will need to apply for a loan forgiveness because it is not automatic. You will need to prove to your lender with careful documentation that you used the money for payroll and those other expenses to have the loan forgiven. The forgiveness is not guaranteed so be sure to document everything and cross your t's and dot your i's.
From what I have heard the payroll forgiveness (the 75% of the total loan) in some cases may be proven just by submitting your Schedule C from your 2019 taxes, so you don’t explicitly have to show canceled checks that you wrote out to yourself and deposited back into your account. But a smart thing to do is to not put the loan money in your personal account but to open up a separate new online banking account, put the loan money in there, and then pay yourself in the form of deposits from the new account into your personal account. This separate account will help to keep everything in order, help to avoid confusion, and to make documentation simple. Make sense?
Just remember that you will have to provide documentation for how the remainder of the monies were spent to apply for that forgiveness.
Anyway, I hope this information was of help to anyone who is in this situation and like I said earlier, please check with your accountant and/or your financial advisor or loan representative for how to go about your documentation because this information may not apply to every person since all of our situations are exactly the same. Good luck!
Have a great week!
Laura
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