How PPP Forgiveness Works for the Self-Employed

By Owen Yin on August 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.


Sole proprietors and independent contractors are finding the PPP loan especially appealing because of the “owner compensation replacement” concept that can grant them full forgiveness, letting them use the funds however they want. Here’s how forgiveness works for self-employed individuals.

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 2.5 month’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 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 2.5/12 (or 0.208). This is essentially your entire PPP loan, assuming your loan amount did not factor in additional payroll expenses.

If you are using an 8-week forgiveness period, you can claim 8 weeks’ worth of owner compensation replacement. The remaining PPP funds will need to be spent on utilities, rent, and mortgage interest expenses in order to be forgiven.

For self-emplyoed individuals that have multiple businesses with PPP loans, you are capped at $20,833 in owner compensation replacement across all loans obtained by all businesses. For example, if you receive $15,000 in owner compensation from one business, you will only be able to receive $5,833 compensation from all other businesses you have an ownership stake in.

Our article about the Owner Compensation Replacement breaks down some common questions about using it, including if it’s compatible with PUA (spoiler alert—it’s not).

Applying for forgiveness

Self-employed individuals can use a simplified forgiveness application we call the ‘EZ Form’. This form applies to you as long as you don’t have employees on payroll. If you do have payroll expenses, then you can use the standard forgiveness application.

We expect the big lenders will set up their own online application process, so you may not need to fill out the SBA’s version of the form. Forgiveness applications are not being accepted or processed just yet.

Frequently asked questions

What’s the biggest loan I can get?

The PPP limits compensation to an annualized salary of $100,000. For sole proprietors or independent contractors with no employees, the maximum possible PPP loan is therefore $20,833, and the entire amount is automatically eligible for forgiveness as owner compensation replacement.

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 amount for forgiveness.

Keep in mind that your lender and the SBA have the right to request and audit your business’s financial documents and records, as outlined in your loan agreement. Continue with your ongoing bookkeeping and recordkeeping habits.

Can I get PPP expenses forgiven and deduct them from my taxes?

No. Generally, eligible expenses your business pays can be claimed as tax deductions. However, any expenses that you claim for forgiveness under the PPP will not be allowed to be claimed for a deduction. 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?

Yes, it’s possible that your entire PPP loan can be claimed as personal income replacement! This applies to PPP loans using a 24-week covered period.

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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