PPP Forgiveness for the Self-Employed (Independent Contractors and Sole Props)

By Owen Yin on June 4, 2020

Editor’s note: On May 18, the SBA released the PPP Forgiveness Application Form, which is what you’ll need to fill out to get your loan forgiven. If you’re self-employed, here’s how to fill out your forgiveness form correctly. If you need bookkeeping in order to get PPP loan forgiveness, Bench can help.


The Paycheck Protection Program loan can be completely forgiven if you spend it on the right things, and if you prove those expenses.

However, PPP forgiveness works differently for sole proprietors and independent contractors, the biggest difference being the concept of “owner compensation replacement” which greatly simplifies the loan forgiveness process. Here’s everything you need to know.

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.

Now, how do you get that amount forgiven, since you don’t have payroll to spend it on?

Owner compensation replacement

Instead of spending your funds on payroll, you can automatically get eight week’s worth of net profit forgiven, without having to spend it on anything. This is called “owner compensation replacement”—it makes things nice and simple. 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).

A simple example

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.

Frequently asked questions

What’s the biggest loan I can get?

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 $15,385 automatically eligible for forgiveness as owner compensation replacement. The remaining $5,448 can be forgiven if spent on the approved expenses over the 24 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 have a 2019 Schedule C, but I want to use my 2020 financials. Can I do that?

No, the Treasury has indicated that if you filed a Schedule C for 2019, you must use it when applying for the PPP.

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 5 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, home office expenses can be forgiven.

Learn more: Home Office Deductions and the PPP


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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