Update
Updated July 28, 2021 to include the new SBA PPP Direct Forgiveness Portal.If you’re self-employed and qualified for a Paycheck Protection Program (PPP) loan, then no doubt you are hoping you can get as much of it forgiven as possible. We’ll walk through that process in this article.
This article discusses forgiveness only for those who are:
- Self-employed
- Have no (zero) W-2 employees and
- Filed (or will file) Schedule C with their Form 1040 to report their business income to the IRS.
If you have employees or otherwise don’t meet these requirements, read our full article on forgiveness here.
Please note:
The material contained in this article is for informational purposes only, is general in nature, and should not be relied upon or construed as a legal opinion or legal advice. Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. We encourage you to consult with your lawyers, CPAs and Financial Advisors.Simplified PPP Loan Forgiveness
The Economic Aid Act (the “stimulus bill”) that passed December 27, 2020 required the SBA to create a simplified one-page PPP loan forgiveness application form. The SBA met that requirement by updating and releasing a new version of the forgiveness application 3508S.
There are currently three forgiveness forms:
The latest and simplest form is 3508S and it may be used for loans of $150,000 or less. This form may be used for both first and second draw PPP loans, regardless of when you got your PPP loan, as long as it has not yet been forgiven. If you got both a first and second draw PPP loan you must use a separate form for each.
You’ll be asked for some basic questions about your business then asked to provide the following information:
- Your PPP loan amount:
- Your PPP loan disbursement date:
- Employees at time of PPP loan application:
- Employees at time of forgiveness application:
- Your covered period
- Amount of loan spent on payroll costs:
- Requested loan forgiveness amount
There are certifications you’ll need to review and sign as well. There is an optional demographic questionnaire that will help SBA and others understand who got these loans. As with all PPP loans you will submit this form to your lender.
Let’s discuss aspects that may be confusing:
Am I an employee?
The purpose of PPP loans is to keep employees on payroll. Some people who are self-employed and who don’t have any employees may think they should put “zero” in the employee fields. It is never clearly stated by the SBA but our understanding is that even if you don’t pay yourself formal payroll, you may include yourself as an employee. (Check with your lender.)
Reminder: you don’t include anyone who you pay on a 1099 basis in your payroll. If you do count other employees, they must be employees you pay on a W-2 basis.
What is the covered period?
The clock for spending your PPP money starts the day your PPP loan funds are disbursed, or deposited into your bank account. When the CARES Act first passed, the covered period was 8 weeks. When the PPP Flexibility Act passed in June 2020, the covered period was changed to 8 or 24 weeks. And now with the Economic Aid Act (the “stimulus bill”) it is any period between 8 and 24 weeks – your choice. That applies to anyone whose PPP loan has not yet been forgiven.
Many self-employed individuals will want to choose a covered period that allows them to get full forgiveness based on money they pay themselves, and that ties into the next question:
How does payroll work if I am self-employed?
Self employed individuals without employees will generally be using something called “owner’s compensation replacement,” to calculate the amount spent on payroll.
Owner Compensation is defined on the forgiveness application as:
(a) $20,833 (the 2.5-month equivalent of $100,000 per year), or
(b) the 2.5-month equivalent of the individual’s applicable compensation in the year that was used to calculate the loan amount (2019 or 2020), whichever is lower.
It sounds more confusing than it is so stick with us here.
If it’s just you in your business then you likely applied based on 2.5 times your average monthly net profit of your business as listed on your Schedule C line 31 for either 2019 or 2020. As of March 3, 2021, self-employed borrowers who filed Schedule C were given the option of applying based on Gross Income (line 7 of the Schedule C) or net profit (line 31 of the Schedule C.)
Since you had to reduce your annual net profit to $100,000 to calculate your loan amount, you already capped your potential owner’s compensation at $20,833 annually. So you should meet the first requirement. (Note that if you have multiple businesses this cap applies to all businesses. You can’t get $20,833 from one business and another $20,833 from a different business.)
The exception is businesses with a NAICS code starting in 72 who took a second draw loan based on 3.5 x net profit. See more about those loans below.
The SBA Forgiveness Interim Final Rule released in January 2021 then explains how you calculate forgiveness for owner’s compensation:
“Forgiveness is capped at 2.5 months’ worth (2.5/12) of an owner-employee or self employed individual’s 2019 or 2020 compensation (up to a maximum $20,833 per individual in total across all businesses). The individual’s total compensation may not exceed $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred. For example, for borrowers that elect to use an eight-week covered period, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at eight weeks’ worth (8/52) of 2019 or 2020 compensation (i.e., approximately 15.38 percent of 2019 or 2020 compensation) or $15,385 per individual, whichever is less, in total across all businesses. For borrowers that elect to use a ten-week covered period, the cap is ten weeks’ worth (10/52) of 2019 or 2020 compensation (approximately 19.23 percent) or $19,231 per individual, whichever is less, in total across all businesses. For a covered period longer than 2.5 months, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at 2.5 months’ worth (2.5/12) of 2019 or 2020 compensation (up to $20,833) in total across all businesses.
Note that employers with employees may include other costs for those employees in their payroll costs. Those may include amounts paid by the employer for group benefits such as health vision, dental or disability plans and retirement plan contributions. But if you are applying solely as a self-employed person with no employees, you miss out there. SBA guidance states:
Also, you must exclude any qualified sick leave or family leave amounts if you claimed a credit under sections 7002 or 7004 of the Families First Coronavirus Response Act (FFCRA).
Important
If you got a second draw PPP loan of 3.5 x average monthly payroll because your business is in an industry that starts with a NAICS code of 72, your calculation will be different. It should work out to approximately 15 weeks of owner’s compensation replacement. However, the current application and forgiveness guidance don’t mention this scenario. As soon as that guidance is available, we will update this story.Do the math for your own situation and be sure to check with your accountant or advisors if you have questions.
How do I have to pay myself?
We haven’t seen any guidance that says you must pay yourself a certain way (check or ACH, for example), or that your pay be an equal amount each week. The instructions on the 3508S form say:
For that reason, it seems it would be a good practice to write yourself a check from your business account, or use ACH transfer from your business account to your personal account to pay yourself. Whichever method you choose, keep good records in case the SBA later audits your loan.
According to the SBA, you must maintain records including “Documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered Period consisting of each of the following:
- Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
- Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period).”
Do I have to subtract an EIDL advance?
No. If you’ve already applied for forgiveness for a previous PPP loan or are looking at older versions of forgiveness applications (or articles based on the previous ones) you’ll see a reference to the fact that you must subtract your EIDL advance (grant) from your forgiveness amount. The Economic Aid Act eliminated that requirement retroactively so you won’t need to do that anymore.
Where do I send the PPP forgiveness application form?
You will file for forgiveness with your lender. If your lender has sold the loan for servicing, you will apply through the servicer. Keep in mind that ultimately your lender will process your forgiveness application so you will need to follow their instructions.
What if I want to use my PPP loan for other expenses?
To qualify for full forgiveness, payroll related expenses must account for 60% of the forgiven amount; in this case, that refers to owner’s compensation replacement. Eligible non-payroll costs cannot exceed 40 percent of the loan forgiveness amount. You may choose this method if you want to use the 8-week covered period (which will be too short to get full forgiveness based on owner’s compensation alone) or you want to use other expenses to qualify. Eligible non-payroll expenses include:
- Business mortgage interest payments;
- Business rent or lease payments;
- Business utility payments;
- Covered operations expenditures;
- Covered property damage costs;
- Covered supplier costs;
- Covered worker protection expenditures.
There are some specific requirements when it comes to forgiveness eligibility for these expenses, so if you are thinking of using them to qualify make sure you read the details in the latest forgiveness guidance.
How do I document forgiveness?
If you are applying for forgiveness just based on owner’s compensation replacement (and not including other nonpayroll expenses) the SBA states that the 2019 or 2020 Form 1040 Schedule C that the borrower provided at the time of the PPP loan application must be used to determine the amount of net profit allocated to the owner for the covered period.
If you include nonpayroll expenses you must include cancelled checks, payment receipts, transcripts of accounts, purchase orders, orders, invoices, or other documents verifying payments on nonpayroll costs.
What happens if the entire loan isn’t forgiven?
The Economic Aid Act increases the likelihood that self-employed individuals will qualify for full forgiveness based on owner’s compensation replacement. But if not, any remaining balance will become a loan at 1% interest for five years, unless the loan was made before on or after June 5, 2020. In those cases the repayment period is two years, unless the lender agrees to a longer repayment period.
There is no prepayment penalty if you want to pay it back right away. A small amount of interest may have accrued in the meantime and, if so, you’ll need to also pay that. If you keep the loan, the guidance suggests you should still spend those funds for authorized purposes.
I’m still confused and need help. Where can I get it?
If you are still confused about the PPP forgiveness application process, here are a few suggestions that may help:
- Download the 3508EZ form and follow the instructions for filling it out. It provides more detailed instructions than Form 3508S.
- Consult the latest forgiveness guidance from the SBA. It may feel overwhelming, but it includes answers to many common questions.
- Talk to an accounting professional with experience with these forms. Many have access to professional guidance and tools that may help. This can be money well spent.
This article was originally written on May 19, 2020 and updated on July 28, 2021.
I’m self-employed as a day care provider I was mailed out getting paper checks from BANK OF THE WEST but do not have an account with them I just cashed my pay checks there and in July 1st 2020 I was approved for 505.93 in SSI and I have an account for direct deposit thru BANK OF KANAS CITY.WILL I BE ABLE TO APPLY FOR THE FORGIVENESS PPP LOAN IF I DONT HAVE AN ACCOUNT FOR CHECKING OR SAVINGS AND CANT SHOW ANY PROOF OF TRANSACTIONS.
It helps to have a business bank account but it may not be required. You’ll need to contact the lender that gave you your PPP loan for instructions.
I working for one of the salon, but We are independent contractor they paid us 1099 commissions. Can I qualify for ppp? Because I don’t have a business name.
Thanks
1099 contractors may apply.
I need help completing the application
Lida – This article provides resources for help with PPP. In particular, the agencies in section 3 may be able to help.
hello I don’t know if I qualify I didn’t receive pandemic unemployment I am self-employed for babysitter I do have a regular job but just want to know if I qualify for the PPP loan and I just found out about this program that helps little businesses and if somebody could reach back to me thank you
Unfortunately PPP has been closed to new applications for some time now.
We’re a fairly new none-profit registered in Missouri as a Not-For-Profit Domestic Corporation. We do not have income from 2020 and we have 2 employees. We are currently purchasing business equipment: computers, video and photography equipment. I understand that we qualify for the PPP, but are there specific forms, and information that is required?
Robin – Your business (in your case nonprofit) must have been operational by February 15 2020. If so you can simply apply.
on line one Payroll Cost: for companies that have full payroll (not self-employed) and pay the officers and employees of the company, should the total payroll for the time period be entered on line 1? if the total payroll for that time period is more than the loan amount, do I enter the total payroll paid to employees or do I enter the amount of the loan if the payroll amount is more than the loan amount. (the total gross payroll for the time period is 40,000.00, but the loan was only 35,000.00) so on line 1, do I enter 40,000.00 or 35,000.00?
and then do I divide the answer by .60?
I don’t work for the SBA so I cannot provide specific advice. And yes it’s confusing! If you read the instructions they state to enter the total payroll costs for the covered period. (More detail in the instructions here.) The divide by .60 part is also confusing but you literally just hit divide on your calculator then enter .60. (Everyone wants to multiply and I get that – I did too at first.)
You can’t get more than the total loan amount forgiven so the most you can have forgiven is 100% of your loan. If that’s what you come up with then you’re probably in good shape. But I wouldn’t hesitate to work with an accountant or financial advisor if you are stuck. It can be worth it to get as much forgiven as possible.
As a sole proprietor without employees can we receive full forgiveness if we pay ourselves the full PPP amount in 11 weeks and return to PUA the remaining 13 of our 24 week period? Does that count as a reduction in employee pay or is that only for people who are regular employees not sole proprietors?
Abby – I have not seen clear guidance on how PPP and PUA intersect under the 24 week period and I agree it’s confusing. (You didn’t apply for PPP based on 24 months of income so…) I’ll have to suggest you reach out to the SBA or an accounting professional familiar with these programs for your specific questions.
How do you submit the form?
Contact the lender who gave you your PPP loan. You’ll apply through them for forgiveness. If they have sold the servicing of your loan they should provide you with that information.
This guide is great, especially with the clarifications to items like Payroll Schedule (I don’t have one), and the documentation section — I just moved money around within my own (non business) bank accounts, but think I will just resubmit the schedule C I used to calculate initially.
I think it would help clarify the 24 week extension if there were language explaining that your ‘8 weeks’ of pay could now essentially be considered ’10 weeks’ of average pay (aka 2.5 months) and that the extended ‘covered’ period means you essentially have more weeks to use the loaned money for ‘payroll’ or ‘average profit’. It took me a while to understand this.
Finally, I think it would be useful to include the repeated caveat about the .60 being a division and not a multiplication in the body of the article. It *IS* confusing, and I do understand it in theory but, because so many SE won’t be adding the other expenses, it would be helpful to reinforce the math. Or make note that the figure should be a higher number than the full amount of the loan/full amount of the payroll (which should be the same number in this case).
All in all, so helpful. Thank you!
Thanks for the feedback. Yes the divide by .60 instructions mixes people up! I’m not sure how to emphasize it more but hopefully comments like this will help.
I have a feeling the government is going to screw us. It should be simple, cut and dry but there’s so many rules and changes that even the financial institutions are not too sure of the process.
I got a PPP loan (independent contractor with no employees)and my main question is since the loan is 2.5 times our average monthly income, can we transfer the full amount to a personal account or do we have to transfer it in increments to match what we would have been paid ( which varies)? Thanks for your help
Kay – I haven’t seen anything about transferring $ in specific ways. Have you seen the brand new application that came out? It may apply to you: New Paycheck Protection Program (PPP) Loan Forgiveness Application 3508S: Will It Help You?
When I filled out my daughter’s PPP application, we opted for the option 2 timeframe for calculation the annual income from her business because she had a strong first quarter in 2020. We provided her 2019 Schedule C along with a spreadsheet showing the quarterly amounts of income and expenses for the period 4/1/2019 through 3/30/2020 as well a breakdown of the income and expenses by quarters in calendar 2019. She received funds based on the spreadsheet total for the period covered by option 2 rather than based on her 2019 Schedule C.
When she applies for forgiveness, should she just provide the spreadsheet of her 4/1/2019 through 3/30/2020 income or her Schedule C from 2019, or both as we did with her application?
Irwin – you’ll want to keep that full documentation for sure in case she is ever audited on it. But if she is self employed and files Schedule C the new 3508S form may apply to her.
Hi Gerri,
Today I got approved for a PPP loan of $15,600 which is great but I’ve been receiving $1050 a week for unemployment since March.
Before the pandemic, I used to make around $1900 a week, since unemployment is only paying me $1050 a week, Can I use some of the money from PPP to bump my salary from $1050 to $1900? If so, Will that amount qualified for forgiveness? If so, do I need to let the EDD know that I received a PPP loan? What if I let EDD know and they cut the $1050 they are providing me and later I found out that I don’t qualify for PPP forgiveness and I have to pay the full amount back?
My main concern is to get my EDD cut off because I received PPP but later have to pay it back in full. I have so many questions and doubts.
Thanks in advance for any insight on your part.
Best,
J
I haven’t seen great guidance from Treasury/SBA or Dept of Labor on these questions. It’s my understanding that you do need to disclose PPP to unemployment if you pay yourself from those funds. But in terms of how to break it up, that would be a question for unemployment. I wish I could be of more help!
Great, helpful, and straightforward guide for self employed people who haven’t had a lot of guidance or clarity. Very appreciated! I have a few questions and would love to hear your suggestions/ advice.
-if I know I will not have the full loan amount forgiven, can I pay back the unforgivable portion of the loan immediately? Or do I need to wait and for the SBA’s decision on my forgiveness application?
-Can I apply for forgiveness right away or do I need to wait the 8 weeks?
-Will I be able to go back on unemployment after 8 weeks if needed, or will I need to now wait the extended 24 weeks (now that the newest legislation gives people the flexibility of 24 weeks to use their ppp loan)?
Again, thank you so much for creating this very useful guide. I appreciate any insight or advice you have to offer.
Grace – with the new PPP Flexibility Act you may qualify for full forgiveness. This article has been updated with the new application and information. You will need to wait until the lender provides the new application to apply for forgiveness. I’d suggest you ask them about when you can apply.
Your question about unemployment is a great one and I don’t know the answer but I’ll see what I can find out!
Thank you Gerri for replying to all the comments! You’re amazing! I read the updated version and am I correct in my understanding that if you receive your PPP loan after June 5, you cannot elect to have the PPP cover only 8 weeks of owner compensation replacement? Instead it must be the 24 weeks?
My concern is that if I cannot start my business up again within the 8 weeks it may be better for me to go back on unemployment versus getting the remainder (full) amount of my loan forgiven.
I know that when you receive the PPP loan you must stop any unemployment benefits, but I haven’t found any information about when/if you can start your benefits again.
Thanks again for your time and or putting together this great guide!
I’m sorry I missed this comment before Grace. The short answer is I don’t know how you must allocate the PPP over the 24 week period and how that impacts unemployment. It doesn’t seem you would need to allocate it over the entire period since you didn’t apply based on 24 weeks of net profit. But I have not found clear guidance on that question (specifically how it intersects with PUA). If you did find a good resource on this please do share.
Great article, Gerri! Very helpful. Have you seen any recent guidance related to self-employed businesses that were formed late in 2019? For example, my business was formed in Oct’19, so my schedule C net profit shows only 1/4 of my expected 2020 full-year net profit. With the current guidance, I would only be eligible for forgiveness of 3.8% (8/52 x 1/4) of my expected 2020 full-year net profit.
Patrick – Treasury and SBA promised that some time back but it hasn’t come out unfortunately.
I am self employed with 3 people I hire on a as needed basis to setup wedding decor for booked weddings.
I pay them in Cash.
Due to COVID-19, I had $18,000 in weddings cancel from March 2020 through May 2020, and Client cancellations continue throughout 2020 to December.
Due to cancellations I had no weddings from March 2020-May 2020 (and continues) so my 3 contract employees did not receive pay during this time and continues.
I received $3,000 for EIDL & listed I had 3 contract employees.
Based on this information do I qualify PPP Loan Forgiveness?
Thank you.
Lydna,
PPP forgiveness is for Paycheck Protection Program loans not EIDL. They are two separate programs. The EIDL grant (sounds like you got $3000) does not have to be repaid.
If you haven’t applied for PPP you may want to do so asap as it will be closing. You can apply here.
I am an owner-employee. I have followed the instructions accordingly.
I have completed the steps as outlined for pages 3 and 4 only but there are 11 pages total.
What is to come of the other pages of the application?
John,
This article has been updated with the new application. I recommend taking a look at the new instructions as they should be easier.
I am having a hard time understanding how Line 11 – “forgiveness amount” makes since for the sole proprietor/contractor The rules indicate the sole proprietor/contractor forgiveness requested amount does not exceed eight weeks worth of 2019 compensation, and is capped at $15,385. So if your net income places you at the capped amount and this the allowable for reimbursement, why does this application form reduces you to 75% of that amount (by using the smallest number of lines 8, 9, 10 = 75% of the cap)?
Brad – I’d recommend you read this article again as it’s been completely updated with the new information. (Remember to divide by .60 not multiply in line 7).
This article was incredibly helpful as a guide to fill out my PPP forgiveness application. Thank you!
Thanks Carrisa! But be sure to read it again. New application is out.
Line 10 on the Loan Forgiveness application for self-employed people who are only asking for forgiveness for payroll costs is a bit awkward because the calculation for forgiveable payroll costs is Net Earnings (2019 Schedule C)/52*8. That is 73.8% of the loan amount not 75%. So the number entered on line 10 will not equal the PPP loan amount (it will be slightly lower). A person in this situation is not in fact having 75% of their PPP loan forgiven, but slightly less.
What are we supposed to do about this?
You’re right. But the new application will hopefully help. This article has been revised accordingly.
Gerri, thank you so much for this step by step guide for filling out the PPP Loan Forgiveness Application. This was perfect for those of us that are self employed and trying to navigate the maze of forms and calculations.
I’m so glad it helped! Now version 2…!
Using your formulas I have a question. Based on a $50,000. line 31 Sch C form, then an applicant should receive a loan of approx. $10,416. which $7812. (75%) could be used for self employed payroll. When following your guidance on the Loan Forgiveness Calculation Form, I inserted LN. 1 – $7692., LN 2 – $1000., LN 4 – $300.. When I got down to LN 10, (divided LN 1 by .75) the forgiveness came to only $5769.. I was under the impression my forgiveness would be all of lines 1-2 and 3, ($8992.). Did I misunderstand something?
Thank you.
Richard,
Rather than review the math I’ll suggest you read this article again as I updated it today with the new application. Hopefully it makes sense!