Loan Forgiveness PPP for Self-Employed Workers

Loan Forgiveness PPP for Self-Employed Workers

Jesus Morales-Grace, EA
August 21, 2023
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Tax guide
Loan Forgiveness PPP for Self-Employed Workers
Jesus Morales-Grace, EA
August 21, 2023
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Reviewed by

The Paycheck Protection Program (PPP) is a loan created to give small businesses an incentive to retain their employees during the COVID-19 pandemic that could be forgiven if used for payroll, business mortgage interest payments, rent, or utilities. While they usually have no employees, the self-employed, freelancers, sole proprietors, and independent contractors are still eligible for PPP loans and loan forgiveness.

The PPP loan program was included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March 2020. The act appropriated $349 billion for forgivable loans to assist small businesses by helping them maintain their payroll and pay some of their overhead during the pandemic.

The deadline to apply for a PPP loan was in August, but in December 2020, Congress began discussions on a new COVID-19 relief bill that is expected to provide additional PPP loans (often referred to as PPP2). The measure is still being negotiated and the terms for PPP2 have not been finalized. Here is how to get loan forgiveness PPP for self-employed workers.


How much of your PPP loan will be forgiven?

Under the the terms of the Paycheck Protection Program Flexibility Act that became law in June, self-employed individuals such as freelancers (be sure to check out our 1099 PPP loan steps to apply), independent contractors, and sole proprietors who took out a PPP loan are ensured that their loan will be fully forgiven if they qualify.

To qualify for forgiveness, your business must have been harmed by the pandemic. If you are operating a business without employees, you must certify that it was could not operate from February 15, 2020, until the end of the period covered by the loan at the same level of business activity it had previously been operating at because the business was complying with work or customer safety requirements related to COVID-19. You must also meet the following requirements:

  • You filed, or will file, a 2019 Form 1040 Schedule C that shows you received self-employment income.
  • Your business was in operation on February 15, 2020.
  • Your primary residence is located in the United States.

The amounts that will be forgiven are those used to either pay your compensation or salary as the business owner or cover non-payroll expenses, including the following:

  • Rent for office space and equipment
  • Utilities for the business, such as electric, water, cable, and internet
  • Mortgage interest for mortgages on business property that were closed before the pandemic
  • Required business services that support your services or product production.

Since PPP funds cannot be used to pay for benefits like health insurance premiums or retirement plans, payments for those expenses cannot be forgiven. Additionally, if you employ contract workers, you cannot pay for them using PPP funds, which are only reserved for Form W-2 employees. However, because the IRS has no rules on how owner compensation replacement funds must be allocated, a portion of those funds used to pay yourself may be used to pay contractors.


Loan forgiveness for economic injury disaster loan recipients

Businesses that had previously received an Economic Injury Disaster Loan (EIDL) are also eligible for PPP loans. But if the borrower received an EIDL advance, the Small Business Administration (SBA) must reduce the borrower’s loan forgiveness amount by the amount of the advance. If the EIDL advance amount is larger than the business’s PPP loan, the borrower will have none of its PPP loan forgiven and must repay the full loan balance by its maturity date.

How are PPP loan amounts set for the self-employed?

The amount a business with employees is eligible to receive through a PPP loan is usually calculated based on the average payroll expenses of eligible businesses. However, since most self-employed individuals have no employees, the U.S. Treasury Department and the SBA introduced “owner compensation replacement” to allow the self-employed to take advantage of the Paycheck Protection Program.

For the self-employed, the PPP loan amount is based on their 2019 monthly average net profit, which is calculated by taking their net profit for the year and dividing it by 12. If you are self-employed, your net profit amount should be listed on your Form 1040 Schedule C for 2019.

Your PPP loan amount will be 2.5 times your average monthly net profit for 2019, which covers roughly 10 weeks. The maximum loan amount using this method is $20,833 across all of your businesses. If your loan amount was calculated using this method, the amount borrowed must be spent during the 24-week period immediately after the loan disbursement.

If you received your PPP loan before June 5, 2020, you had the option of an eight-week covered period where the loan amount was based on eight weeks’ of your net profit for 2019, instead. The maximum amount for loans with the eight-week covered period was $15,385. Finally, if you did not file a Schedule C in 2019 because you have a new business, you could use the net profit from January and February 2020 to calculate your net profit, but your net profit will be capped at $16,677.

PPP loans are only intended to cover the compensation of employees earning less than $100,000 annually. Because the self-employed are eligible for the program due to their status as employees of their own business, the $100,000 cap also applies to them. This means the maximum loan amounts for the eight- and 24-week covered periods are calculated based on the $1,923 weekly earnings of an employee earning $100,000 annually.


Applying for PPP loan forgiveness

According to the interim final rules published by the SBA in June, self-employed individuals who received a PPP loan may apply to have their loan forgiven at any time on or before the loan’s maturity date if you have used all of the PPP loan proceeds from the loan for which you are seeking forgiveness. Loans that were disbursed on or after June 5, 2020, mature five years from the date issued. Those issued before that date mature in two years unless an agreement is reached with the lender to extend the loan period.

Despite the fact you can seek forgiveness at any time before the loan matures, you will need to begin making payments on your loan 10 months after the covered period ends. Since most borrowers would like their loan forgiven before they are required to make payments, you should file for forgiveness before the grace period ends. Borrowers can even ask for forgiveness during the covered period if they have already spent the loaned funds. If you chose an eight-week covered period and took the loan when the program began, you could be required to begin making payments as early as August 2021.

If you are self-employed and seeking PPP loan forgiveness, you can file the SBA’s simplified Form 350EZ, Paycheck Protection Program PPP Loan Forgiveness Application, with the lender that issued your loan. You will also need to submit the Schedule C from your 2019 individual income tax return that shows your business’s income and expenses. Finally, you must file your IRS Form 1099-MISC for 2019 that details all of your non-employee compensation, bank statements, invoices, or other records showing that you are self-employed.

If you do not qualify to have your PPP loan forgiven, you must repay the loan balance in two or five years at a 1% interest rate.


Lender review and decision on forgiveness

Lenders are responsible for reviewing applications and deciding whether PPP loans should be forgiven. The lender usually has 60 days from the time it receives the PPP loan application to issue its decision to the SBA. Should it find that the borrower is entitled to have some, or all, of the loan amount forgiven, the lender must seek payment from the SBA at the same time it issues its decision.

After receiving the lender’s decision, the SBA will review the loan and remit the amount to be forgiven to the lender, plus interest, within 90 days. Any EIDL advances made to the borrower will be withheld from the amount the SBA remits to the lender. If the SBA finds that the borrower was not eligible for the PPP loan under the CARES Act, SBA rules, or the loan terms, the loan will not be forgiven.

It is the lender's responsibility to notify the borrower of the amount forgiven. If the SBA has determined that the full loan amount is forgiven, the lender must mark the PPP loan note as having been paid in full. When only part of the loan is forgiven, or forgiveness is denied, the loan’s remaining balance must be repaid on or before its maturity date.

Will I pay taxes on my PPP loan forgiveness?

While the IRS usually treats forgiven loans as taxable income, the CARES act specifies that the forgiven loan amount is not to be included in taxable income. This means that you will not pay independent contractor taxes on the loan when it was received or forgiven. This provision was included because the PPP loans were intended to ensure businesses stayed open and paying employees, not impose an additional tax burden on those businesses. As a result, the PPP loan amounts you received as owner compensation replacement will not be subject to tax on your personal federal income tax return.

However, the IRS has released a notice stating that if the forgiven loan is not included in your taxable income, expenses paid with that loan are not eligible for a tax deduction. In other words, you cannot claim a deduction for expenses paid with money you never paid self-employment tax on in the first place. Additionally, the IRS has issued guidance stating that if you have a reasonable belief that your PPP loan will be forgiven, regardless of the tax year it is forgiven, any expenses paid using your PPP loan proceeds cannot be deducted. These provisions will only impact those self-employed individuals who utilized the 24-week coverage period because those with an eight-week coverage period can claim the entire loan amount as owner compensation replacement.

Incorporated businesses with one owner-employee

There are situations where a self-employed individual may want to incorporate his or her business, despite the fact there is only one owner and no employees. These businesses with owner-employees may incorporate as S corporations or C corporations. The owners of businesses operating as corporations are also entitled to PPP loan forgiveness, but the amounts that may be forgiven are calculated a bit differently because the business treats owner-employees as employees..

For S corporations, the cap on loan amounts and forgiveness are calculated based on the owner-employee’s cash compensation and employer retirement contributions made on their behalf. Contributions for employer health insurance are not added separately because they have already been included in the employee’s cash compensation.

C corporations' loan and forgiveness caps are calculated based on the owner-employees cash compensation for 2019, plus employer health insurance contributions and contributions to a retirement plan made on their behalf.  

The maximum PPP loan amounts and forgiveness for owner-employee corporations are also subject to the $20,833 cap for 24-week covered periods and the $15,385 cap for eight-week covered periods.

Jesus Morales-Grace, EA

Jesus Morales-Grace, EA


Jesus Morales is an Enrolled Agent and has 7 years of bookkeeping and tax experience. He enjoys hiking, traveling, and studying tax law.

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