The PPP loan is particularly attractive to independent contractors and sole proprietors due to the “owner compensation share” or “owner compensation replacement” concept, which can fully forgive the debt and allow the borrower to use the money anyway they please. Heres how forgiveness works for self-employed individuals. Whats Bench?Online bookkeeping and tax filing powered by real humans.
President Biden announced on February 22 modifications to the Paycheck Protection Program that will impact self-employed people who apply for a PPP loan after March 3, 2021. This article breaks down the forgiveness process for loan applications made before and after March 3, 2021. Watch the video below for an overview of the changes.
The Paycheck Protection Program (PPP) was a lifeline for millions of small businesses during the COVID-19 pandemic, providing much-needed financial assistance to keep their doors open and employees on the payroll. But what happens when it comes time to repay the loan? For self-employed individuals, the answer is a bit more nuanced.
The Good News: Forgiveness is Possible
The good news for self-employed individuals is that PPP loans can be forgiven, meaning you won’t have to repay the loan amount However, there are specific criteria that must be met to qualify for forgiveness
The Criteria for Forgiveness
To qualify for PPP loan forgiveness self-employed individuals must meet the following criteria:
- Use the loan funds for eligible expenses: This includes payroll costs, rent, utilities, mortgage interest, and other business-related expenses.
- Maintain employee headcount and salary levels: You must maintain the same number of employees and pay them at least 75% of their pre-pandemic salaries.
- Spend the funds within the covered period: The covered period is the timeframe during which you can use the PPP loan funds. It can be either 8 or 24 weeks, depending on your loan agreement.
- Submit a forgiveness application: You must submit a forgiveness application to your lender within 10 months of the end of your covered period.
The Forgiveness Process
The forgiveness process is relatively straightforward. You will need to gather documentation to support your claim, such as payroll records bank statements, and tax forms. Your lender will then review your application and make a decision on whether to forgive the loan.
What Happens if You Don’t Qualify for Forgiveness?
Should you not satisfy the requirements for absolution, you will be accountable for paying back the PPP loan. The loan terms are generally favorable, consisting of a one percent interest rate and a five-year repayment period. It’s crucial to remember that even if you are not eligible for loan forgiveness, you will still be required to pay interest on the total amount of the loan.
Key Takeaways for Self-Employed Individuals
- PPP loans can be forgiven for self-employed individuals who meet the eligibility criteria.
- The forgiveness process is relatively straightforward, but it’s important to gather the necessary documentation.
- If you don’t qualify for forgiveness, you will be responsible for repaying the loan with a 1% interest rate and a 5-year repayment period.
Additional Resources for Self-Employed Individuals
- SBA PPP Loan Forgiveness for Self-Employed Individuals: https://www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program/ppp-loan-forgiveness-self-employed-individuals
- Bench Guide to PPP Loan Forgiveness for the Self-Employed: https://www.bench.co/blog/operations/ppp-forgiveness-contractors-sole-props
Remember, if you are a self-employed individual who received a PPP loan, it’s important to understand the forgiveness process and your repayment obligations. By carefully reviewing the criteria and gathering the necessary documentation, you can increase your chances of having your loan forgiven and avoid any repayment surprises.
How sole proprietor PPP loans are calculated
Before, sole owners could use their 2019 or 2020 net income, as shown on a Schedule C, to apply for a PPP loan. But changes were made on March 3, 2021 that affected the PPP loan calculation process. There are now two calculations depending on if you have payroll.
Further reading: How to Calculate Gross Income for the PPP
Whatâs the biggest loan I can get?
The PPP limits compensation to an annualized salary of $100,000. The maximum PPP loan for independent contractors or sole proprietors without employees is $20,833, and the full amount is automatically forgiven as owner compensation share.
Do PPP loans have to be paid back?
FAQ
Who is not eligible for a PPP loan self-employed?
Are businesses required to pay back PPP loans?
Are 1099 employees eligible for PPP forgiveness?
What are the repayment rules for PPP?
How much can a self-employed borrowers get a PPP loan?
This amount cannot exceed $20,833. This is the amount most self employed borrowers with no employees will use to qualify for a first-time PPP loan. You must provide the 2019 or 2020 (whichever you used to calculate loan amount) Form 1040 Schedule C with your PPP loan application to substantiate the amount for which you applied.
Can I get a PPP loan if I have no employees?
If you are self-employed and have no employees, the SBA provides the following instructions in the March 3, 2021 for new PPP loan borrowers: If you have no employees, use the following methodology to calculate your maximum loan amount:
Can self-employed borrowers get PPP loan forgiveness?
PPP loan forgiveness is pretty easy for self-employed borrowers with no employees. Rather than spending on payroll, self-employed individuals get their compensation reimbursed and forgiven without having to spend it on anything. This is called “owner compensation replacement.”
Can self-employed calculate PPP loans based on net profit or gross income?
In March 2021, the SBA released new guidance allowing the self-employed to choose whether they want to calculate their PPP loans based on net profit or gross income. Previously, calculations were limited to net profit, which limited the funds you could access if you’re in the habit of maximizing tax deductions.