Self-Employment, 1099s, and the Paycheck Protection Program

Editor’s note: On Tuesday, May 4th the PPP ran out of general funds and the SBA stopped accepting new PPP loan applications. A reserve of funds is still available for community financial institutions that lend to businesses run by women, minorities, and underserved communities. Additionally, a reserve of funds remains for applications previously submitted but not yet reviewed by the SBA. If you have already submitted your loan application, however, this does not guarantee you funding.



The Paycheck Protection Program (PPP) is designed to support American small businesses with immediate cash support during the COVID-19 pandemic. If you are a sole proprietor, an independent contractor, or a gig worker, here’s what you need to know, and what you’ll need to apply. This guide has been updated to reflect the new First Draw and Second Draw loan distinctions.

All small businesses qualify for the Payment Protection Program.

This includes:

Sole proprietors who report income and pay taxes on a Schedule C in your personal tax return. Whether you’re a fitness instructor, tutor, freelancer, or side hustler, if you’ve got a Schedule C, you can qualify.

Independent contractors who collect 1099-MISC forms (but for the PPP, you’ll need to submit a Schedule C, not your 1099s).

Gig economy workers who take on-call jobs provided by companies such as Uber, DoorDash, Lyft, TaskRabbit, and Instacart.

The only stipulation is that your business was operational as of February 15, 2020. If you started your business after that date, you will not be eligible for this program.

Further reading: The Paycheck Protection Program (A Simple Guide)

What is the benefit of the Paycheck Protection Program?

This program is designed to help Americans stay employed and retain their salaries. As the name implies, this is a payroll-focused program. The payout you receive will be based on your average monthly payroll expense multiplied by 2.5. Under the PPP, your payroll expense can include your salary expenses and health insurance premiums.

The biggest perk of this program is that it can be almost entirely forgiven. If you keep your payroll expenses consistent to what they were before the COVID-19 pandemic, including the salary paid and the number of employees paid, you could be eligible to have those expenses forgiven from your loan amount, as well as certain other expenses such as rent and utilities.

The good news is that if you are self-employed (and you are your only employee), this should be easy to achieve!

However, it is important to note that you cannot receive both Unemployment Benefits and a PPP loan at the same time. You can use the PPP funds to pay yourself through what’s called owner compensation share or proprietor costs. This is to compensate you for a loss of business income. To take the full amount of owner compensation share, you will have to use a covered period of at least 11 weeks weeks. By doing so, you are making yourself ineligible for unemployment benefits (under Pandemic Unemployment Assistance) for the full 11 weeks.

You should consider the payout of each program to determine which is the best fit for you.

Further reading: PPP Loans vs. Unemployment Benefits (How to Choose)

What if I don’t use a payroll service?

If you own a business and do not give yourself a salary through a payroll service, you are likely still eligible for the Paycheck Protection Program—with one exception. Businesses that are structured as C corporations or S corporations must be using payroll to pay their owners, because the corporation is taxed separately from the individual. If you own a corporation and have not been paying yourself a salary through payroll, you will not have a salary covered through the PPP. This is because distributions or dividends from a corporation are not considered to be a salary or self-employment income.

Further reading: Do Owner Draws Count as Salary for the Paycheck Protection Program?

Sole proprietors and the PPP

If you run a business on your own, your business is a sole proprietorship— even if you haven’t formally let the IRS know.

Since you don’t have employees, you won’t be reporting your payroll costs for the PPP loan. Instead, you’ll be reporting your gross business income, which will be reported on line 7 of a Schedule C (for loans prior to March 3, 2021, this was net income). As long as your business was operational prior to February 15, 2020, you can apply to the Paycheck Protection Program.

You will need to provide a Form 1040 Schedule C for either 2019 or 2020, depending on which year you used to calculate your loan amount.

If you’ve already filed your taxes, this should be easy: just submit a copy of your filled-out Schedule C to your lender. If you haven’t filed your taxes yet, you will need to get retroactive bookkeeping done so you can calculate your gross income and fill out your Schedule C properly.

If you don’t have bookkeeping or a tax return, we strongly recommend that you get caught up with your bookkeeping. Without a payroll service, bookkeeping is the best way to determine your net profit as a sole proprietor (which is what the PPP will ask for).

Your monthly average payroll expense will be your annual gross profit divided by 12. If your annual gross profit is over $100,000, you may only claim up to $100,000 divided by 12.

Further reading: Gross Profit vs. Net Profit: Understanding Profitability

**Sole proprietors with payroll expenses

If you are including salaries and wages paid to employees (or yourself) in your PPP loan amount calculation, you cannot use your gross income as reported on line 7 of a 2019 or 2020 Schedule C.

Instead, take the value from line 7 and subtract lines 14, 19, and 26. The maximum of this value is $100,000. By subtracting those lines, you are removing any payroll costs from your gross income so you aren’t double dipping.

2020 Annotated Schedule C

Take this value, add in your 2019 or 2020 payroll costs, then divide by 12 for your average monthly payroll expenses. Multiplying this by 2.5 will give you your PPP loan amount.

Sole proprietors who are married

If you run a sole proprietorship informally with a spouse, you will only apply to the PPP once, and your spouse would not be considered to have a salary through the business unless they were paid as a contractor prior to February 15, 2020.

Sole proprietors with more than one business

If you own more than one sole proprietorship, you may apply separately for each - but only if these sole proprietorships have separate EINs. The general rule of thumb is that you can apply separately for as many businesses you own that have separate identification numbers, or separate tax reportings. You may apply for the PPP once with your SSN as a sole proprietor, and then separately for any other businesses you own using their EINs. If this situation applies to you, the SBA has ruled that your owner compensation is capped at $20,833 across all businesses. For example, if you received $10,000 in compensation from one business, you would be able to report a maximum compensation of $10,833 from all other businesses.

Independent contractors and the PPP

If you work as a 1099 independent contractor, you are by default considered to be a sole proprietor in the eyes of the IRS. This means your freelance income gets reported annually on a Schedule C within your personal tax return. You will have a Schedule C even if you pick up odd jobs or do freelance work, and this Schedule is based on the 1099-MISC forms you collect from the companies or individuals who have hired you as a contractor.

Your salary is most easily determined by looking at the gross profit listed on your Schedule C. If you have already filed your 2019 or 2020 taxes, or prepared a 2019 or 2020 return, this will be reported on line 7 of the Schedule C. If you have not filed your taxes, you will still need to fill out a Schedule C in order to qualify for the PPP.

Rent, mortgage, and utilities expense

The Paycheck Protection Program funding can cover your office lease, rent, or mortgage interest, provided that you had it before February 15 2020. If you have a home office, you can claim a portion of the expenses (the percentage of your home that’s used as a home office).

Again, collect any paid invoices, statements, lease agreements, or cancelled checks that will help prove you had these expenses.

However, if you want to have your loan forgiven, you must spend 60% of the loan funds on payroll costs (and the remaining 40% on rent, mortgage interest, and utilities).

New eligible expenses

All PPP loans can be used on the following approved expenses:

  • Operations expenses such as invoicing and accounting software (an online bookkeeping service like Bench counts)

  • Property damage costs due to public disturbances not covered by insurance

  • Supplier costs such as work materials

  • Protective equipment to be COVID-compliant

Further reading: How to Spend Your PPP Funds (Updated for 2021)

When does the application open?

As of January 2021, the PPP is fully in operation. The SBA is accepting applications for both First Draw loans for any eligible business that has not yet received a PPP loan and Second Draw loans for any eligible business that has spent their first loan.

How do I apply?

You can apply for the Paycheck Protection Program through an SBA-backed lender. We recommend applying through your own financial institution to start—a lender you already have an existing banking relationship with. That will be the fastest way to get approved.

Next, we recommend applying for PPP through a community bank. They have less demand and will likely be able to process you faster.

If you’re applying for the PPP for the first time, refer to our guide for First Draw loans.

Second Draw loans have some additional requirements. We’ve put together a separate Second Draw application guide here.

Financial records you’ll need

You’ll need to provide payroll/bookkeeping records to prove your payroll expenses.

That could include:

  • Payroll processor records

  • Payroll tax filings

  • Schedule C for a sole proprietorship (mandatory for self-employed folks)

If you don’t have access to those kinds of documents, you can also provide bank records.

Proof of income

The lender will want to see all documents related to any wage, commission, income, or net earnings from self-employment that you have received. This means that you’ll need to collect any earnings reports, pay stubs, or invoices you have.

Sole proprietorship and independent contractors will need to submit a 2019 or 2020 Schedule C showing income and expenses from the sole proprietorship.

All self-employed individuals with payroll expenses (because they have employees) will need to submit 2019 or 2020 payroll tax filings such as quarterly Form 941s and state wage unemployment insurance forms reported to the Internal Revenue Service.

Proof of operation

All self-employed individuals will need to provide evidence that their business was operating on or around February 15, 2020. An invoice, bank statement, bookkeeping record, or payment record can be used.

If you own more than one business

We are also hearing reports that entrepreneurs who own more than one business are having difficulty getting relief funding when their businesses don’t have cleanly separated finances. If you own more than one business, it’s important to get separate bookkeeping done for each business. This will become doubly important when it comes time to prove your expenses for loan forgiveness.

Can I apply to the PPP through more than one lender?

Yes! There is no harm in applying through more than one lender. In fact, lenders are encouraging businesses to apply through multiple lenders, to increase their chances of getting processed in time.

If you’re applying for a Second Draw PPP loan, we recommend applying through your first lender, as your information can be carried over. Many fintech lenders like BlueVine will still accept new Second Draw applications though—just make sure you know your original SBA PPP loan number.

More COVID relief resources

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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