loan forgiveness

As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.

Topic: Two of the most common questions small business owners continue to have are (1) how much money can they dedicate to salary if they are self employed, (2) which of the PPP forgiveness forms should they use when applying for forgiveness, (3) and what supporting documentation they will need to apply. When it was passed by Congress in late March, one of the most noteworthy elements of the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act)—at least to small business owners—was the Paycheck Protection Program. The Paycheck Protection Program is an emergency loan program designed to provide financial support to small businesses navigating the fallout from COVID-19. Administered by the U.S. Small Business Administration (SBA), the program, which has overseen approximately $610 billion in PPP loans, was particularly attractive to small businesses for a few reasons. First, unlike other types of loans (like traditional SBA loans or Economic Injury Disaster loans, more commonly known as or EIDL loans), if borrowers used the loan proceeds on eligible expenses during the 24-week covered period, up to 100 percent of the amount of the loan would be eligible for loan forgiveness. And second, in addition to more traditional small businesses (like S-corporations or LLCs), a variety of people and business types were eligible for PPP loans—including sole proprietors, independent contractors, and other self-employed individuals. But as 2020 comes to a close—and the end of the covered period approaches for most borrowers—many self-employed workers have questions about how to qualify for loan forgiveness. For example, what forms do they need to fill out? What documentation do they need to submit? And how much of their PPP funds can they dedicate to owner compensation—and still qualify for full forgiveness? Let’s take a look at everything self-employed individuals need to know in order to qualify for PPP loan forgiveness:

A Review of PPP Loan Forgiveness Requirements

First things first—before we jump into how to qualify for loan forgiveness as a self-employed worker, let’s quickly review the general requirements for PPP loan forgiveness. Eligibility requirements for PPP loan forgiveness include:
  • The loan amount was used to cover approved expenses. Expenses that qualify for loan forgiveness include eligible payroll costs—which, for self-employed individuals, would just be salary and/or hourly wages, unless their business employs other workers (unlike other small businesses, which can use PPP loan proceeds to cover employee benefits like retirement benefits, sick leave, employer contributions to employee retirement plans, or employee health insurance, currently, self-employed business owners can not include those costs towards qualifying for PPP loan forgiveness) as well as eligible nonpayroll costs (including utility payments, business rent or lease payments, and business mortgage interest payments).
  • The PPP loan proceeds were used to cover expenses during the covered period. Again, only expenses that are incurred during the 24-week period after originating the loan qualify for forgiveness. (Self-employed workers with irregular payroll schedules, including seasonal workers, may qualify for an Alternative Payroll Covered Period, which would begin the first payroll date following the loan disbursement date.)
  • At least 60 percent of loan funds were used for payroll costs. In order to qualify for the total loan forgiveness amount, businesses must use at least 60 percent of the loan proceeds on payroll costs (the other 40 percent can be used to cover eligible nonpayroll costs).
In addition to the above eligibility requirements, in order to for the full PPP loan amount to qualify for loan forgiveness, businesses must maintain their workforce, which includes:
  • Maintain their number of full-time equivalent employees (FTEs or FTE employees); and
  • Maintain employee compensation for their workers that is consistent with pre-COVID compensation levels
Businesses that reduced their number of employees or employee compensation will have their amount of loan forgiveness reduced proportionately. There are exemptions for businesses that had to lower headcount; for example, under the FTE Reduction Safe Harbor, businesses have until December 31, 2020 to restore their workforce before facing reduced loan forgiveness. In addition, further FTE exemptions were passed with the Paycheck Protection Program Flexibility Act, which allow employers to qualify for full loan forgiveness if they can document, in good faith, that they’ve been unable to return to their standard level of business activity due to COVID-19 safety protocols or they’ve been unable to rehire former employees and are unable to find qualified workers to fill open positions. While many self-employed workers work alone and/or don’t have employees, some employ other workers on their team—in which case, the above workforce requirements and exemptions would apply.

How Do Loan Forgiveness Requirements Apply To Self-Employed Workers—And Can Self-Employed Workers Use All Of Their Loan Proceeds For Owner Compensation?

One of the biggest loan forgiveness FAQs for self-employed workers has to do with how their loan proceeds can be allocated in order to qualify for full loan forgiveness. Unlike other small businesses, many self-employed workers and owner-employees don’t have any relevant nonpayroll costs, like rent or business utility payments—and if they don’t employ anyone else, the only eligible payroll costs they have is their own salary and wages. So, the question is—can self-employed workers use the total of their loan proceeds to cover their own compensation? And the answer is yes—as long as the total owner compensation falls under the currently stated limits. A new interim final rule, issued in June 2020, self-employed workers using the 24-week covered period can apply up to 2.5 months of their 2019 net profit (up to $20,833) of their loan proceeds as owner compensation replacement. (For borrowers using the eight-week covered period, they can apply up to eight weeks of their 2019 net profit—for a max of $15,385). So, what does that mean? You can use the entirety of your PPP loan proceeds for owner compensation and still qualify for loan forgiveness—as long as your owner compensation doesn’t exceed $20,833 for the 24-week covered period (or $15,385 for the eight-week covered period).

How To Apply For Loan Forgiveness As A Self-Employed Worker

Now that you understand the requirements for PPP loan forgiveness—and, more specifically, how those requirements apply to self-employed workers—let’s jump into how self-employed individuals should proceed with filing their loan forgiveness application and getting their PPP loan forgiven. The first step in the process is choosing the right loan forgiveness application form. Self-employed individuals have two loan forgiveness application options: SBA Form 3580S or SBA Form 3508Z. In early October, SBA Form 3580S was released specifically for borrowers with PPP loans of $50,000 or less. Under the new interim final rule, borrowers who received $50,000 or less in PPP loan funds and spent their loan proceeds on qualified expenses—including self-employed workers—automatically qualify for full loan forgiveness. In addition to a completed SBA Form 3580S, borrowers will also need to submit the following documentation to their lender:
  • Payroll documentation (including bank statements, payroll reports, and/or Form 1040 Schedule C)
  • Tax forms (including state business and individual wage tax filings, state unemployment tax filings, and payroll tax filings reported during the covered period)
  • Documentation verifying eligible nonpayroll costs (for example, copies of utility invoices)
If you took out a larger PPP loan, you’ll want to fill out SBA Form 3508EZ, which is the form for self-employed borrowers with PPP loan amounts of more than $50,000. Similar to form 3508S, borrowers will have to submit the following documentation to their lender:
  • Payroll documentation (including bank statements or third-party payroll provider reports);
  • Tax forms (including state business and individual wage tax filings, state unemployment tax filings, and payroll tax filings reported during the covered period)
  • Documentation verifying eligible nonpayroll costs (for example, copies of utility invoices)
Borrowers will also have to use the Forgiveness Amount Calculation on the application form to calculate the amount of their loan proceeds that qualify for loan forgiveness. Once you’ve filled out your loan forgiveness application and submitted it to your lender with any necessary supporting documentation, your lender will review your application and, if approved, will get reimbursed by the SBA for the total of your forgiven loan amount. And, at that point, your PPP loan (or however much of your PPP loan qualified for loan forgiveness) is officially forgiven—and you no longer have to worry about if and how much you’ll have to repay to your lender.

Follow The Steps To Get Your PPP Loan Forgiven

Navigating PPP loan forgiveness can be overwhelming and confusing—especially for self-employed individuals dealing with self-employment income. But now that you know how PPP forgiveness applies to self-employed workers, you can get started on the path of getting your loan forgiven.

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