During the COVID-19 pandemic, the Paycheck Protection Program (PPP) saved the lives of many self-employed people and small business owners. These loans that could be forgiven helped pay for rent, utilities, payroll, and other business costs when sales dropped sharply. But one question that came up a lot was whether or not self-employed people had to pay back PPP loans.
The short answer is yes, PPP loans do legally have to be paid back. However, the great news is that PPP loans are eligible for full forgiveness if the funds are used appropriately on eligible expenses. Self-employed individuals can qualify for forgiveness just like any other PPP borrower.
Here is an overview of how PPP loan forgiveness works for the self-employed:
PPP Loan Calculations for the Self-Employed
For self-employed borrowers without employees, the PPP loan amount is calculated by taking their net profit amount from their Schedule C tax form and dividing by 12 to find the monthly payroll amount This monthly amount is then multiplied by 25 to arrive at the PPP loan amount they can qualify for.
For example
- Net profit on Schedule C: $100,000
- $100,000 / 12 = $8,333 average monthly payroll
- $8,333 x 2.5 = $20,832 PPP loan amount
People who are self-employed and have payroll costs have to do a few extra steps of math. To find out if you can get a PPP loan, you need to take your gross income from a Schedule C, take out your payroll costs, and then add back in your annual payroll costs from IRS forms.
PPP Loan Forgiveness for the Self-Employed
It’s necessary to spend at least 60% of the loan proceeds on payroll costs in order to get the full PPP loan forgiveness. For people who work for themselves and don’t have any employees, owner compensation replacement is their payroll cost.
This owner compensation replacement amount is calculated as 2. 5 months of their net profit for 2019 or 2020, which means they can use those funds to replace their income.
Self-employed borrowers can also spend up to 40% of the PPP loan on other eligible business expenses like rent, mortgage interest, utilities, operations expenditures, property damage costs, supplier costs, and worker protection expenditures.
To apply for forgiveness, self-employed borrowers can use the simplified Form 3508S forgiveness application if their loan amount is $150,000 or less. For loans over $150,000, Form 3508EZ can be used in most cases. Documentation of expenses will need to be provided during the application process.
What Happens If the PPP Loan Isn’t Fully Forgiven?
If the full PPP loan amount is not forgiven because funds were not spent on eligible expenses, the remaining loan balance will have to be repaid.
The good news is that PPP loans have an extremely low interest rate of only 1% fixed over a 5 year term. There are no prepayment penalties, so borrowers can pay back the loan early with no extra fees.
While PPP loans do technically need to be repaid if not forgiven, these loans provided self-employed individuals and small business owners with an incredible opportunity to cover expenses and keep their operations running when revenues dropped.
With proper documentation and spending on eligible expenses, self-employed PPP borrowers have an excellent chance at qualifying for full forgiveness. This allowed many to weather the pandemic storm and come out ready to grow their business again.
Steps for Self-Employed Individuals Seeking PPP Loan Forgiveness
Here is a summary of key steps self-employed borrowers should take regarding their PPP loan:
- Track owner compensation replacement and eligible business expenses during the covered period
- Assemble documentation of expenses
- Apply for forgiveness through their lender once their covered period ends
- If not fully forgiven, repay any remaining loan balance based on the loan terms
- Consult a financial professional for guidance if needed
The PPP provided a vital lifeline for self-employed individuals across the country. While these loans do technically need to be repaid if forgiveness criteria is not met, this program offered borrowers an opportunity to keep their business afloat during very challenging times. With proper documentation and eligible spending, the self-employed have an excellent chance at full forgiveness.
How to Apply for PPP Loan Forgiveness
When applying for forgiveness through FNBO, you will not need to upload an of your paper form. You will fill out the online application on the FNBO portal.
First Draw Forgiveness 3508S Applicants ($150,000 and under): You do not need to upload any documentation. However, FNBO and the SBA may request additional documentation as part of its loan review and audit process at a later date.
First Draw Forgiveness 3508EZ and 3508 Applicants (over $150,000): You will need to upload applicable supporting documentation.
FNBO is currently taking First Draw and Second Draw forgiveness applications. Learn more.
When applying for PPP loan forgiveness, you can learn tips to get prepared here.
Understanding PPP Forgiveness for Sole Proprietors
Author: FNBO
The Paycheck Protection Program (PPP) provided loans to small businesses across the country at a critical time of need. With millions of sole proprietorships in the U.S., many of these businesses do not have employees, however, this does not mean they are not eligible for PPP loan forgiveness.
Sole proprietorships that received PPP loans are eligible for loan forgiveness consideration. It’s important to note that if a borrower receives a PPP loan, they must apply for forgiveness of the loan through their financial institution or they will have to pay the loan back.
PPP borrowers are eligible for forgiveness in an amount equal to the sum of their eligible expenses during their chosen 8-week to 24-week Covered Period. To be considered for full forgiveness, borrowers must use at least 60% of their loan proceeds on payroll costs.
If you are a sole proprietor, you can still apply for forgiveness regardless of if you have employees or not. The PPP forgiveness guidelines on not reducing headcount or salary do not apply to self-employed owners.
Forgivable Loan for Self Employed | How to Pay Yourself PPP Money
FAQ
Do you have to pay back a PPP loan self-employed?
that if someone gets a PPP loan, they have to ask their bank to forgive the loan or they will have to pay it back.
Will a 20k PPP loan be audited?
Who will be audited? PPP loans in excess of $2 million are automatically triggered for an audit by the SBA. The SBA has set up a safe harbor for any PPP loan borrower that got less than $2 million in loans from its affiliates.
Do PPP loans have to be repaid?
… you do not receive full forgiveness of your PPP loan, you will be required to repay the remaining or full loan amount plus interest over the term of the loanJan 29, 2025.
Is PPP taxable income for self-employed?
A forgiven PPP loan is tax-exempt, meaning it does not cause you to recognize a taxable gain or income. The IRS has clarified that expenses paid for using forgiven PPP loan proceeds are still deductible as well.