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PPP for the self-employed and independent contractors

IMPORTANT NOTE:  The PPP and EIDL programs are now replenished for round two. We encourage all eligible small businesses to apply now through their financial institution or through an online lender as the funds will quickly run out.

Here’s what self-employed individuals and independent contractors need to know about PPP loans:

  • When and where can I apply? The PPP says self-employed individuals and independent contractors can start applying on April 10. You can apply through an SBA lender, a federally insured credit union, or a participating Farm Credit System institution. The SBA has a searchable database of approved lenders here.
  • What can I use these loans for? Payroll costs (including benefits), rent, mortgage interest, and utilities over an eight-week period. For a sole proprietor or independent contractor, that means wages, commissions, income, or earnings from self-employment ($100,000 a year max for each employee).
  • Do I have to pay the loan back? Maybe not. More details here.
  • How do I get started? Start by filling out the application (which you can find on the SBA’s website) and then taking it to an eligible lender.  We recommend that you work with your current bank if they are participating.
  • How long will this take? As of May 10th, 2/3 of the PPP Round 2 funding was awarded. sooner you get started, the better chance you will have of participating.
  • Fine print? You can find the terms and conditions here.

How sole proprietor PPP loans are calculated

Generally, the PPP loan amount that businesses qualify for is based on their average payroll expenses. However, since sole props and contractors usually don’t have payroll, their loan is based on 2019 net profit divided by 12, to get a monthly “average” net profit. This number times 2.5 equals your PPP loan amount. Which means your PPP loan is roughly ten weeks worth of net profit.

How does forgiveness work for self-employed and independent contractors?

PPP forgiveness works differently for sole proprietors and independent contractors, the biggest difference being the concept of “owner compensation replacement” which simplifies the loan forgiveness process.

Owner compensation replacement

Instead of spending your funds on payroll, you can automatically get eight week’s worth of net profit forgiven. This is called “owner compensation replacement.” However, you are not entitled to use the full amount to replace pay. Eight weeks worth of your 2019 net profit will be eligible for forgiveness.

The remaining PPP funds will need to be spent on utilities, rent, and mortgage interest expenses in order to be forgiven.

The amount of “owner compensation replacement” you’re eligible to claim for forgiveness is calculated by multiplying your reported net income in 2019 on your Schedule C by 8/52 (or 0.154).


You filed your Form 1040 and Schedule C for 2019, where you reported $27,300 in net income.

Your monthly “payroll cost” would be $2,275, so you qualified for $5687.50 in PPP funding.

To calculate your maximum owner compensation replacement, you would multiply $27,300 by 8/52.

$27,300 * 8 / 52 = $4,200

The $4,200 would be fully eligible for forgiveness. The remaining amount of your PPP loan ($1487.50) would need to be spent on eligible expenses such as utilities, rent, and mortgage interest.

If you have mortgage interest, rent, or utilities expenses, you must have claimed or be entitled to claim a deduction for those expenses on your 2019 Form 1040 Schedule C in order to claim them for forgiveness.  For example, if you worked in an office space in 2019 and did not have a home office, you could not have claimed a deduction on your home mortgage interest. Even if you are currently working at home now, you are not eligible to claim home mortgage interest payments for forgiveness.

Frequently asked questions

What is the maximum size loan I can receive?

The PPP limits compensation to $100,000. For sole proprietors or independent contractors with no employees, the maximum possible PPP loan is therefore $20,833, with $15,384 automatically eligible for forgiveness as owner compensation replacement. The remaining $5,449 can be forgiven if spent on the approved expenses over the 8 weeks of the PPP.

Do I need any documentation to prove my expenses for forgiveness?

You will need to prove your expenses for utilities, rent, and mortgage interest. However, for the owner compensation replacement, you just need to provide your 2019 Schedule C to be able to claim the eight weeks of net profit for forgiveness.

Can I get PPP expenses forgiven and deduct them from my taxes?

No. Any expenses that you claim for forgiveness under the PPP cannot then be deducted from your expenses. A forgivable PPP loan is already tax-free, so the IRS wants to prevent double-dipping (getting free money from the same source twice).

I wasn’t in business for all of 2019. Do I still need a Schedule C?

The SBA hasn’t made this clear yet. They will be providing further guidance for businesses that were not in operation in 2019, but were in operation before February 15, 2020. You will likely need some form of documentation, such as accurate bookkeeping and financial statements for the months that you were in operation.

Can I use the entire PPP loan to cover my payroll?

No. The updated guidance prevents self-employed individuals from claiming the entire amount as income replacement.

I don’t have any other business expenses I can claim for forgiveness.

If you don’t have any eligible business expenses you can use the PPP funds for, the remaining balance of the loan will need to be repaid according to the PPP loan terms. At 1% interest for 2 years, it’s one of the best loan terms you can find, but there is no prepayment penalty if you wish to pay it all off early.

Can I get home office expenses forgiven?

Yes. As long as they fit within the categories of utilities, rent, and mortgage interest and you claimed or were entitled to claim a deduction for those expenses on your 2019 Form 1040 Schedule C,  home office expenses can be forgiven.

We Are Here to Help

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