PPP Loan Forgiveness Guide for Self-Employed Workers

Update, 7/6/20: The federal government has extended the deadline for new applications to the Paycheck Protection Program to Aug. 8, 2020. As of July 6, you can apply for a PPP loan through an SBA-approved lender of your choice, or start the PPP application process now through Fundera.

Update, 6/16/20: A new interim final rule issued by the SBA allows for self-employed workers to use up to 2.5 months’ worth of their loan proceeds over a 24-week covered period on owner compensation replacement. Previously, self-employed workers could not use all of their loan proceeds as compensation replacement. This article is updated to reflect that change.

In many ways, self-employed workers have had a more difficult time accessing and using Paycheck Protection Program loans than other small businesses. From the application process to forgiveness guidelines, self-employed workers have been scrambling to understand how this forgivable loan program works for them. 

The SBA made PPP loans available to self-employed workers later than business owners with employees. Also, most of the language around eligible uses of PPP loans, how to achieve full forgiveness from your lender, and other guidance is aimed at employer small business owners. That means if you’re using PPP to replace your freelancer income, or pay for home office costs, you’ve had to piece together answers from various press releases, forms, and lender advice. 

As more and more self-employed workers finish up the “covered periods” on their loans and prepare to apply for forgiveness, many have questions about how to receive full forgiveness on their PPP loans, or at least the most forgiveness possible. 

With that in mind, let’s review what every self-employed worker who took out a PPP loan should know about loan forgiveness. 

What Are the Terms of PPP Loan Forgiveness? 

If you applied for a PPP loan, you’re likely aware of the general terms of loan forgiveness. But because those terms have been updated due to the PPP Flexibility Act, it’s worth going over them again. 

In order to receive full forgiveness for your PPP loan, self-employed workers need to follow these guidelines: 

  • Use at least 60% of your loan to cover “payroll costs,” which for self-employed workers is essentially their salaries (including wages, commission, and tips), up to $100,000 on an annualized basis.
  • Use 40% or less of your loan on the remaining eligible expenses: rent, utilities, and/or mortgage interest. 
  • Use your loan within 24 weeks of receiving the proceeds in your bank account—known as your “covered period.” 

Other standard PPP forgiveness guidelines, such as not reducing headcount or salary, won’t apply to self-employed workers. 

Keep in mind that as of this writing, expenses such as health insurance premiums or retirement benefits are not eligible forgivable costs, not even under “payroll,” for self-employed workers. 

How Do You Apply For PPP Loan Forgiveness as a Self-Employed Worker? 

Just like any other small business that takes out a PPP loan, self-employed workers will return to their lender when it comes time for PPP loan forgiveness. 

Your lender will review your documentation (see below) and make an assessment on loan forgiveness within 60 days of your application. The SBA will then refund your lender the balance of your forgiven loan amount. 

For independent contractors, sole proprietors, and other self-employed workers, you can have eight weeks of your loan proceeds automatically forgiven as salary replacement. This should amount to 75% of your PPP loan, assuming you took the maximum amount available to you when you applied. 

What Documentation Do You Need?

As mentioned above, eight weeks of your loan proceeds are considered salary replacement. When you applied for your PPP loan, you needed proof of payroll, in this case salary. To do this you’ll need your 2019 Form 1040 Schedule C, as well as a 2019 IRS Form 1099-MISC detailing non-employee compensation, invoices, bank statements, or a book of record that proves you are self-employed.

When you apply for forgiveness, you’ll provide that same 2019 Schedule C to your lender. 

For your other eligible expenses—rent, utilities, and/or mortgage interest—you must have claimed (or been able to claim) a deduction for those expenses on your 2019 Form 1040 Schedule C. Proof of having paid those expenses during your covered period, such as rent or lease payments, will be required. 

In addition, you’ll also need to fill out an official PPP loan forgiveness application form. Self-employed workers with no employees can fill out SBA Form 3508EZ, which is a shortened and streamlined version of the full PPP forgiveness application. Your lender may have a digital version of the form that you can fill out as well.  

Can You Use Your Whole PPP Loan as Compensation Replacement? 

One of the biggest questions surrounding PPP loan usage for self-employed workers is whether they can use 100% of their PPP loan as owner compensation replacement. 

Theoretically, a small business with employees could use 100% of their loan on payroll costs and 0% on rent, utilities, or mortgage interest. Do self-employed workers have that same choice? 

In the wake of the PPP Flexibility Act and new guidance from the SBA, the answer to that question is now yes: Assuming you will use a covered period of 24 weeks, you can use 2.5 months’ worth of 2019 net profit (up to $20,833) as owner compensation replacement.

What Happens If You Don’t Qualify for Full Loan Forgiveness? 

If at least 25% of your PPP loan must go towards costs like rent, utilities, and mortgage interest, but you don’t have these expenses, what are your options? 

At this point, you won’t qualify for full loan forgiveness when you apply for it if you use an 8-week covered period. Assuming you have zero other expenses that are eligible for forgiveness, and that you took the maximum PPP loan available to you, you’ll have 25% of your total loan proceeds left unforgiven. 

(Remember, now that a 24-week covered period is an option, you can achieve full forgiveness under that covered period by putting all of your loan proceeds towards compensation replacement.)

Another possibility here is that you actually do have expenses such as rent and/or utilities, but not enough to reach 100% of your loan; or, you spend more than 40% of your loan on these other expenses (this is unlikely, but it is another way that you would reduce your forgiven amount). 

Therefore, you’ll have two paths forward: 

  • Immediately repay your outstanding loan amount: Whatever money wasn’t forgiven, you can simply repay the difference to your lender. There are no prepayment penalties or other fees associated with paying off your loan early. 
  • Repay your loan at 1% over the next two to five years: If you took out your loan before the passage of the PPP Flexibility Act on June 5, 2020, you have two years to pay off your loan balance. If you took out your loan after that date, you’ll have five years. PPP loans accrue 1% interest over that time period. 

After your 24-week “covered period” is over, you’ll have 10 months to either apply for forgiveness or start making loan payments—whether you decide to pay off your loan in one lump sum right away or over the next few years.  

What Is the Maximum Amount of Loan Forgiveness You Can Get? 

As discussed above, compensation through the PPP for any worker is capped at $100,000. Therefore, for self-employed workers, your loan amount is based on a maximum compensation of $100,000. 

Previously, assuming that loan amount with an eight-week covered period, $15,385 was automatically eligible for forgiveness as owner compensation replacement, as that’s 75% of the loan proceeds. Now, thanks to the new interim final rule, you can have your entire loan forgiven as income replacement if using the 24-week covered period. You can also abide by the 60-40 rule and use up to 40% of your loan on other business expenses like rent and still receive total forgiveness. 

You can use this same formula to calculate your forgiveness no matter what your loan size. 

The Bottom Line

The PPP is not a perfect program, and nowhere is that more obvious than for self-employed workers, who are unable to receive total loan forgiveness as easily as small business employer firms. 

That being said, the PPP doesn’t require borrowers to hold on to their debt, and the ability to have owner compensation replacement automatically forgiven is likely a welcome break from paperwork for many self-employed workers out there. 

If you have further questions about PPP loan forgiveness, check out our PPP loan forgiveness FAQ page, or join one of our experts for a PPP webinar.

Partnerships Editor at Fundera

Eric Goldschein

Eric Goldschein is the partnerships editor at Fundera with nearly a decade of experience in digital media. He covers entrepreneurship, finance, business lending, marketing, and small business trends. He has written for a number of outlets including Business Insider, HuffPost, Men’s Journal, BigCommerce, Volusion, Square, RetailNext, and Keap. He graduated from the University of Pittsburgh with degrees in history and English writing. Email: eric@fundera.com.
Read more