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How PPP loans work if you’re self-employed

The application and forgiveness process are a little different for these borrowers.

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PPP applications close August 8, 2020 — but may reopen

The PPP is set to stop closing applications on August 8. But that might not be the last of the program. A new stimulus bill could extend the PPP loan program — and even expand forgiveness or offer second loans to small businesses. Stay tuned for updates.

You can qualify for a Paycheck Protection Program (PPP) loan if you're self-employed. But this coronavirus loan program works differently if you work for yourself. Applications opened later, and the requirements are slightly different. And you won't be able to use the same formulas as other businesses to calculate your loan amount or forgiveness.

These rules are subject to change — the SBA has already made several modifications to this program. If the government passes a new stimulus bill, there may be more changes to how PPP loans work for self-employed borrowers.

Do I count as a self-employed individual?

For the purposes of the PPP, self-employed people include sole proprietorships, independent contractors and anyone else who pays self-employment taxes in addition to income tax. This means you file Schedule C or F, Schedule SE and self-employment tax forms along with your income taxes every year.

You also must be eligible for a cornaivurs sick leave tax credit through the Families First Act — the first coronavirus bill Congress passed — to qualify for a PPP loan. In most cases, if you file self-employment taxes, you would qualify for coronavirus sick leave tax credit.

If you're not sure you count as self-employed, consult a tax professional.

You don't count as self-employed if you're in a partnership

The one exception to the self-employed rule is partnerships. Even if you file taxes as a self-employed individual, partners are required to apply for a PPP loan as a regular small business.

But as a partnership, the way you calculate your loan amount is slightly different from the formulas small businesses and self-employed borrowers use. This is mainly because you file different tax documents than other types of business owners.

Am I eligible for a PPP loan?

The PPP comes with a few additional requirements for self-employed borrowers. On top of the general PPP loan requirements, you must also meet the following criteria:

  • Operating before February 15, 2020
  • Report self-employment income on your taxes
  • Filed or will file Form 1040 Schedule C or F for 2019
  • Principal place of residence is in the US
  • Had a net profit above $0 in 2019, if business was established that year

How do I calculate my PPP loan amount?

The formula you use to calculate your loan amount depends on what type of business you have and how you pay your taxes. Generally, you need to complete your 2019 taxes before you can calculate your loan amount.

Independent contractors or self-employed individuals with no employees

Follow these steps to calculate the maximum amount you're eligible to borrow through the PPP if you don't have any employees.

  1. Get a copy of your 2019 IRS form 1040 Schedule C.
  2. Find your net profit from 2019 on line 31 and write it down. If it's over $100,000, write down $100,000.
  3. Divide the number from from step 2 by 12 to calculate your average monthly net profit for 2019.
  4. Multiply your average monthly net profit from 2019 by 2.5. This is the maximum you can borrow through the PPP.

Independent contractors or self-employed individuals with employees

If you have employees, follow these steps to calculate your maximum PPP loan amount.

  1. Get a copy of your 2019 IRS form 1040 Schedule C, form 941 from each quarter of 2019 and all state and local quarterly tax forms.
  2. Write down your net profit from 2019, in line 31. If it's over $100,000, write down $100,000. Label the number step 2.
  3. Add up the gross wages and tips you paid employees in 2019. You can find this in line 5c, column 1 on your 941 form for each quarter. Write it down and label it step 3.
  4. Add up all employer contributions for employee health insurance. You can find this on Schedule C, line 14. Write it down and label it step 4.
  5. Add up all employer contributions to retirement plans. You can find this on Schedule C, line 19. Write it down and label it step 5.
  6. Add up all 2019 state and local taxes based on compensations. You can find this on your quarterly state and local government wage reporting forms. Write it down and label it step 6.
  7. Add up all answers from step 2 to step 6.
  8. Divide your answer from step 7 by 12 to get your average monthly payroll cost.
  9. Multiply your monthly payroll cost by 2.5. This is the most you can borrow through the PPP.

Self-employed farmers

If you're a farmer and don't have employees, follow these steps to calculate your maximum PPP loan.

  1. Get a copy of your 2019 IRS form 1040 Schedule F.
  2. Find your net farm profit from 2019 on line 34 and write it down. If your net farm profit was over $100,000, write down $100,000.
  3. Divide the number you wrote down for step 2 by 12. This gives your average monthly net farm profit for 2019.
  4. Multiply your average monthly net farm profit from 2019 by 2.5. That's your maximum PPP loan amount.

If you have employees, follow the steps for independent contractors or self-employed individuals with employees. But use line 34 of Schedule F instead of line 31 of Schedule C.

Partnerships

While you can't apply as a self-employed individual, the PPP has specific rules for how partnerships can calculate their maximum loan amount.

  1. Get copies of your 2019 IRS Form 165 — including Schedule K-1, forms 941 for each 2019 quarter and any quarterly state and local wage reporting forms from that year.
  2. On Schedule K-1, find line 14a — your self-employment net earnings — and subtract any expenses, unreimbursed partnership expenses, depletion and oil and gas properties listed in section 179.
  3. Multiply the result from step 2 by 0.9235 and write down the result per partner. If the result is over $100,000 per partner, write down $100,000 per partner. Label the result step 3.
  4. Find the gross wages and tips you paid employees in 2019 in line 5c, column 1 of form 941 for each quarter of 2019. Also add any pretax contributions to health insurance and other benefits that aren't taxable. Subtract any wages you paid to employees who reside outside of the US and any wages or tips that you paid employees over $100,000. Write down the result and label it step 4.
  5. Find any annual contributions your partnership made to employee health insurance on line 19 of form 1065. Write it down and label it step 5.
  6. Find any contributions your partnership made to employee retirement plans in 2019. You can find this number on line 18 of form 1065. Write it down and label it step 6.
  7. Add up any state and local taxes based on employee compensation that your partnership paid in 2019. Write it down and label it step 7.
  8. Add up your answers from step 3 to step 7 and write it down. This is your annual payroll cost from 2019.
  9. Calculate your average monthly payroll cost by dividing your annual payroll cost by 12.
  10. Multiply your monthly average payroll cost by 2.5. This is the most you can borrow through the PPP.

S corporations and C corporations

S and C corporations should follow these steps to calculate the maximum PPP loan amount.

  1. Gather the following documents: IRS form 1120, 1120-S and forms 941 for each quarter of 2019 and all state and local quarterly tax forms.
  2. Find all wages and tips paid to employees, as reported on line 5c, column 1 on form 941 from each quarter. Write that number down.
  3. Subtract any wages or tips that you paid employees residing outside the US. Also subtract any employee wages and tips over $100,000. Write down the result and label it step 3.
  4. Find the amount you paid toward health insurance for your employees, if any, on line 24 of IRS form 1120. Alternately, you can find this amount on IRS form 1120-S line 18. Write it down and label it step 4.
  5. Find the amount you paid in employer retirement contributions. You can find this on line 23 of IRS form 1120 or line 17 of form 1120-S. Write it down and label it step 5.
  6. Add up any state and local taxes based on employee compensation from your 2019 quarterly tax forms. This will primarily be state unemployment insurance tax. Write down the result and label it step 7.
  7. Calculate your annual payroll cost for 2019 by adding up your answers to step 3 through step 6.
  8. Calculate your average monthly payroll cost by dividing the annual payroll cost by 12.
  9. Multiply your average monthly payroll cost by 2.5. This is your maximum PPP loan amount.

New self-employed enterprises

Companies that weren't around in 2019 but were established before February 15, 2020 should follow these steps to calculate the maximum PPP loan amount:

  1. Fill out IRS form 1040 Schedule C — or Schedule F if you're a farmer — with information for January and February 2020.
  2. Fill it out as you would based all income from and expenses those two months to complete the form with one exception. On line 13 of Schedule C or line 14 of Schedule F, only include one-sixth of the amount of annual depreciation and the expenses deductions you include in section 179. And only include one-sixth of the amount of the 2020 depreciation deduction on investments you made before 2020.
  3. Find the net profit amount for January and February 2020 on line 31 of Schedule C and line 34 of Schedule F and write it down. If it's more than $16,667, write down $16,667 instead. Label your answer step 3.
  4. Add up employee payroll costs for January and February 2020. Subtract any payroll costs for employees who live outside of the US and tips or wages over $16,667 per employee. Write it down and label it step 4.
  5. Add your answers from step 3 and step 4 and write down the answer and label it step 5.
  6. Divide the answer from step 5 by 2. Write the result down and label it step 6.
  7. Multiply your answer from step 6 by 2.5. That's your maximum loan amount.

Can I refinance an EIDL with a PPP?

In some cases, yes. You can refinance an Economic Injury Disaster Loan (EIDL) that you received between January 31, 2020 and April 3, 2020 — in other words, before PPP applications were available. If you have an eligible EIDL that you'd like to refinance, you can add the loan balance to your loan amount.

What about the grant?

The SBA has given conflicting instructions on when to subtract an EIDL grant from your PPP loan. Its instructions for calculating your loan amount say to subtract the grant from your EIDL balance before adding it to your PPP loan. But several other SBA rulings instruct borrowers to subtract the EIDL grant from the PPP loan forgiveness amount.

Before you apply, ask your lender when it prefers you subtract the EIDL grant. And remember — you can't refinance an EIDL that you received after April 3, 2020.

How do I apply for a PPP loan as a self-employed borrower?

You can apply by filling out a PPP loan application through a lender that offers funding through this government program. The application is relatively short — the hardest part is calculating your maximum loan amount. You can read about what to expect with our guide to the PPP loan application.

What documents do I need to submit?

Document requirements vary depending on the type of business you have. But generally, you'll need to provide all or some of the following paperwork.

  • Payroll tax filings, such as W-2, W-3s and payroll processing reports
  • Forms 1099-MISC
  • 2019 1040 Schedule C or F
  • 2019 invoices, bank statements or books of records showing that you were self-employed that year
  • 2020 invoices, bank statements or books of records showing that you were operating on February 15, 2020
  • 2019 1040 Schedule 1 for self-employed farmers
  • Forms 941 or 944 for each 2019 quarter if you have any employees
  • State and local tax forms
  • Proof of retirement contributions
  • Proof of health insurance contributions

Partners should submit 2019 IRS Form 1065, including section K1, instead of a 1040.

How does forgiveness work for a self-employed borrower?

Fill out the forgiveness form, the EZ form or the equivalent from your lender. There are limits to how much you can count toward your eligible payroll expenses. How much you can qualify for depends on the length of the period covered by forgiveness — called a covered period.

  • The eight-week covered period. The maximum amount of forgiveness that you can qualify for is 15.35% your 2019 net profit, up to $15,385.
  • The 24-week covered period. The maximum amount of forgiveness you can qualify for is either 20.83% of your 2019 net profit, up to $20,833.

If you have employees on payroll, your loan is capped at either eight or 24 weeks worth of 2019 employee compensation. The $15,385 and $20,833 caps still apply — but they're per employee.

Other than this, the application process for forgiveness is the same as it is for all borrowers. You can read about it with our guide to PPP loan forgiveness.

Bottom line

The PPP can be a great resource for all types of businesses struggling with the coronavirus outbreak — including self-employed individuals. But loan amounts forgiveness and requirements work a little differently for borrowers who work for themselves. Since SBA guidance isn't clear, don't hesitate to ask your lender any questions.

Read our small business guide to financing during COVID-19 to find out about more of your options.

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