Finances and Taxes

Self-Employed Folks, Here’s Your Complete Guide to the Paycheck Protection Program

DeVan Curry CEO, ANCUR, Inc. 
Guide to PPP Loans for Self-Employed and Contractors - Gusto

Updated as of December 29, 2020: On December 27, 2020, President Trump signed a new bill into law called the Consolidated Appropriations Act, 2021. Within this bill there is new PPP legislation. Stay up-to-date and learn everything you need to know about PPP Round 2 here.

You’ve probably heard of the Paycheck Protection Program (PPP). The $660 billion forgivable loan program was created to help small businesses impacted by COVID-19 keep their lights on and their teams paid. But what if you don’t have employees?

This piece will break down how the PPP loan application and forgiveness processes differ for self-employed folks, sole proprietors, and independent contractors.

How the PPP is different for self-employed individuals

While many small businesses were able to start applying for PPP loans on April 3, applications from the self-employed weren’t accepted until April 10.

Who exactly does this apply to?

The separate guidance mainly applies to unincorporated businesses, aka sole proprietorships and Limited Liability Companies (LLCs), and 1099 contractors. 

Why are things different for this group?

The short answer is that PPP loan amounts are typically calculated based on businesses’ average payroll expenses. For businesses without employees or payroll, the loan amounts then have to be calculated based on profit. 

For a little extra context, sole props and LLCs don’t have a separate tax liability like corporations do. Their business concerns are taxed on a personal basis, and this would preclude them from paying wages and taxes as an employer would to an employee.

Self-employed: Applying for PPP loans

Corporations use their W-2 employee payroll costs to calculate their PPP loan amounts.

When self-employed individuals apply for PPP loans, their “average monthly payroll cost” figures are substituted by owner compensation. This is calculated by averaging their monthly owner draws.

Here’s how you’d do that: Aggregate your 2019 monthly draws in a simple spreadsheet, divide the sum by 12, and you’ll get your monthly average net profit. (If you were only in business for part of 2019, divide by the total number of months you were operating.) Multiply the result by 2.5, and you get your PPP loan amount.

(Total 2019 monthly draws / 12) x 2.5 = PPP loan amount

As these aren’t technically payroll costs, they don’t include payroll taxes; so unlike corporations, you’ll leave those costs out. Note that your “payroll cost” amount must exceed $2,400 in order for you to apply.

To substantiate the application amount, sole props should provide the following tax documentation:

  • 1040 with a Schedule C and/or
  • 1099 statements

Self-employed: Applying for PPP loan forgiveness

PPP loan forgiveness is pretty easy for self-employed borrowers with no employees.

Owner compensation replacement

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.”

Your owner compensation replacement value is two and a half months of your net income as reported on your 2019 Schedule C, with an annualized cap of $100,000. That means the maximum possible loan amount is $20,833, with $15,385 automatically eligible for forgiveness as owner compensation replacement. The remaining $5,448 can be forgiven if spent on approved expenses (more on those below) over the 24-week covered period.

What else can you spend the loan on?

Generally, PPP funds must be used during the allotted 24-week period for payroll. For self-employed folks without employees, all the payroll funds can only be used to pay the owners.

What else can self-employed folks use the funds for and still qualify for forgiveness? There are very narrow categories, and all must have been in place prior to February 15, 2020:

  • Rent, including business housing and equipment like computer software or hardware
  • Business utilities, including gas, water, transportation, cable, and software
  • Mortgage interest for pre-existing business property mortgages
  • Required business services that support the production of the businesses product or services

Pro tip: COVID-19 supplies are considered business-related expenses—or better yet, migration of your website, or software acquisition to help you transition to remote work.

Many of you may be wondering if you can use the remaining funds to pay contract workers. Unfortunately, PPP funds can only be used to pay W-2 employees as contractors themselves are self-employed and are therefore considered separate tax entities by the IRS.

My suggestion to sole props in this situation is to follow the rules—but note that the rules don’t dictate how you “distribute” your personal funds, including using them to pay contract workers.

Here are a couple tips to improve your likelihood of qualifying for full forgiveness:

  • Make regular and even payments (e.g. bi-weekly).
  • Track all withdrawals, including dates and amounts, throughout the 24-week forgiveness period.
  • Keep records in Excel or your favorite accounting software.

Form 3508EZ

Earlier this week, a new EZ application for PPP loan forgiveness (Form 3508EZ) was introduced. It’s only one page and much simpler than the previous application. You can apply for forgiveness with the EZ application if:

  • You are a self-employed individual, independent contractor, or sole proprietor;
  • If you had no employees at the time of the PPP loan application; and
  • If you did not include any employee payroll expense in the “average monthly payroll cost” calculation on your loan application. 

When you’re ready, you can apply for PPP loan forgiveness here.

Updated: January 6, 2021

DeVan Curry
DeVan Curry DeVan Curry is the founder and current CEO of ANCUR, Inc. Through ANCUR INC, DeVan gained nearly six figures in Paycheck Protection Program loans for his clients from the SBA, with a 100% approval rate, during the COVID-19 crisis. He has helped over 200 small businesses and startups throughout the Southeast become successful and profitable and achieve their vision.


  • Irma

    Hi, If I have a $5,000 loan and would like to use 40% for utilities and 60% (3,000) for owner compensation replacement, Could I take the $3,000 payment in one lump sum or do I need to distribute it in 6 weekly payments (500 each) since I have not started drawing money and have only 6 weeks before Dec. 31st? I was planning to use the loan after Dec 31, 2020 when my pandemic unemployment ended but just learned about the December 31, 2020 deadline. Thank you!!

    • Gusto Editors

      Hi Irma — the forgiveness application requires borrowers to report their owner compensation replacement over the entire covered period. There aren’t specific requirements regarding when to claim your owner compensation replacement, but be sure to keep the December 31, 2020 cutoff for eligible expenses in mind.

  • Xavier

    Hi, I am self-employed and have received a PPP loan to supplement my income as it is steadily declining due to Covid. I was wondering how to compensate myself. Does it matter how much I make month to month? If at the end of the year I make more than last year because of the loan, is that Ok? as long as it doesn’t pass $100,00 limit? I doubt I will make more, but if I did, would that be ethical? Also am I reporting this as income at end of the year and do I pay estimated taxes on it?

    • Gusto Editors

      Hi Xavier, we recommend you consult a CPA or tax advisor for specific guidance on your situation.

      PPP loans for sole proprietors are determined by the borrower’s owner compensation replacement based on 2019 net profit with an annualized cap of $100,000. That means that the maximum possible loan amount is $20,833, and this entire amount can be used as personal income replacement.

      The CARES Act generally provides that the forgiven loan amount will not be included in federal taxable income. The IRS clarified that a borrower cannot deduct otherwise deductible expenses that they paid for using funds from a forgiven PPP loan. Although a forgiven loan amount may be exempt from federal taxes, the amounts for replacement income that are distributed to business owners or employees are still taxable for those individuals.

  • Nicole

    Hi I am a 1099 contractor through a company that finds and manages clients for my Virtual Assistant business. They also pay me bi-weekly through Gusto! I was approved and received my PPP loan a few days ago. I will definitely be using the funds for owner compensation and a small amount for utilities and computer,software expenses since I have a home office I use 90% of the time. Believe me the loan was not a large amount. I had the funds deposited into my personal savings account as I do not make enough to warrant separate business banking accounts. Is it best to “pay” myself from the savings account into my checking account on bi-weekly basis? Should I divide the 60% allowable for payroll comp by 12 (weeks) to get the correct amount to pay myself over the 24 week period? Would this be an acceptable way of tracking for loan forgiveness?

  • Warren jep

    As a sole prop isn’t 100% of the loan forgivable using the 24 week period? Since the calculation for forgiveness is line 31 schedule c divided by 12 x 2.5 is the same as the calculation used to apply for the loan , owner compensation replacement should completely satisfy the requirement of 100% forgiveness without spending anything or using funds for utilities, rent etc? This question along with when can the sole prop file for forgiveness is the other question .

    • Gusto Editors

      Correct! Forgiveness for Schedule C filers is determined by the borrower’s owner compensation replacement based on 2019 net profit. If a sole proprietor utilizes the 24-week period, 2.5 months of 2019 net profit can be claimed for forgiveness up to the maximum amount of $20,833 for a self-employed person with no employees.

      According to SBA guidance, borrowers can file for forgiveness immediately after they have spent all of their loan proceeds. A borrower has 10 months from the end of the covered period or until December 31, 2020, whichever occurs first, to submit an application for loan forgiveness. Keep in contact with your lender to make sure you have the most up-to-date information on when they will be accepting forgiveness applications.

  • Michael

    Going through the instructions for 3508EZ line 8 states enter the smallest of lines 5, 6 and 7. Since line 7 is 60% of total payroll costs it appears that only 60% of payroll costs can be forgiven even if 100% of the loan funds were used for payroll. So I must be missing something. Everything I have read states that 100% of the PPP loan principle can be forgiven if used for payroll. What is the story with this?

    • Gusto Editors

      You are correct — in order for 100% of a PPP loan to be eligible for forgiveness, 60% of the loan proceeds must be spent on eligible payroll costs.

      Line 7 adjusts the forgiveness amount to ensure that at least 60% of the PPP loan was used for payroll costs. For example, if the total payroll costs in Line 1 are $40,000, the potential forgiveness amount in Line 7 is $66,666.67 ($40,000 / 0.60).


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