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PPP Loan Forgiveness for Freelancers and Other Self-Employed Workers

May 19, 2021
(updated: Nov 30, 2022)
Max 5 min read

On May 4, 2021, the general funds for Paycheck Protection (PPP) loans ran out. Although pending applications and applications from Community Financial institutions will still be processed by the Small Business Administration, new ones will not. The PPP loan program is set to officially expire on May 31, 2021. 

If you, like hundreds of thousands of other small business owners across the country, have applied for and received PPP loan funding, you’re probably wondering how and when to apply for forgiveness. 

For freelancers and other self-employed workers, the terms regarding loan eligibility and forgiveness haven’t always been clear. Furthermore, it wasn’t clear if self-employed workers would even qualify for full forgiveness of their loans. 

The SBA has released more information to clarify these points of concern. Self-employed people can request full forgiveness for their loans. However, there are a few requirements you should be aware of before submit your loan forgiveness application. 

Self-employed people can request full forgiveness for their loans.

Self-employed workers CAN use the whole PPP loan as compensation replacement

For small business owners with employees, 100% of the PPP loan amount could be used on payroll costs and other eligible expenses and qualify for full forgiveness. For this group of people, forgiveness qualification is a pretty straightforward process. 

However, the rules weren’t quite so clear for freelancers, sole-proprietors, and self-employed folks — many of whom don’t have employees on the payroll and don’t qualify for other eligible expenses, such as utilities, rent, supplier costs, or personal protection equipment. 

Could you use the full amount of the PPP loan for owner compensation replacement and still have it forgiven? 

Fortunately, we now have that answer thanks to guidance from the updated PPP Flexibility Act and the SBA: Yes, PPP loan recipients can use 2.5 months’ worth of net profit from 2019 or 2020 as owner compensation replacement and qualify for full forgiveness assuming a covered period of 24 weeks. 

The ability to qualify for forgiveness for 2.5 months worth of net profit likely comes as a huge relief to self-employed people, many of whom were deeply affected by the impact of the COVID-19 pandemic

PPP loan forgiveness terms

However, whether you qualify for partial or full forgiveness, there are still general terms to be aware of, especially since these terms have received several updates via the PPP Flexibility Act. 

PPP loan

To qualify for full forgiveness of the PPP loan, self-employed folks will need to:

  • Use at least 60% of the loan to cover payroll costs, which, for self-employed workers, is essentially their salaries 
  • Use up to 40% of the loan on eligible expenses such as utilities, rent, and mortgage interest
  • Use the loan within 24 weeks of receipt of the funds in your bank account (this is referred to as the “covered period” for loan recipients.) 

Those who do not have any employees on their payroll don’t have to worry about headcount, maintaining compensation levels, rehiring grace periods, etc. 

How to apply for PPP loan forgiveness as a freelancer

When it’s time to apply for PPP forgiveness, you’ll turn to your original lender who issued your loan (not the SBA.) Your lending institution will review your application and documentation and make an assessment for forgiveness within 60 days of your application submission. 

Independent contractors, freelancers, sole proprietors, and other self-employed workers can have 8 weeks of loan proceeds forgiven automatically as part of the compensation replacement. This amounts to 75% of your PPP loan amount (assuming you applied for and received the maximum loan amount available.) 

If you don’t have other qualifying expenses to offset the remaining 25% of your loan amount, you can use 2.5 months’ worth of net profit as owner compensation replacement assuming you used a covered period of 24 weeks. 

Once your lender approves your application, the SBA can refund the lender with the balance of the forgiven loan amount. 

Required documentation for PPP forgiveness applications

When it comes time to apply for forgiveness, you will need to resubmit your the same Schedule C you used to initially apply for the loan. So, if you used your 2019 Schedule C, you’ll submit that. 

If you’re applying for forgiveness of eligible expenses besides payroll, you must have claimed those expenses as deductions on your Form 1040 Schedule C. You’ll also need to show proof that you paid those expenses during your covered period. These could be rent or mortgage interest payments, for example. 

Luckily, the SBA has drastically simplified the official PPP Loan Forgiveness application. If you are a self-employed worker that does not have employees on a payroll, you can fill out SBA Form 3508EZ. You can check with your lender to see if they have a digital version of this form. 

If you are self-employed and have a PPP loan less than $150,000, you can use SBA Form 3508S, which is even more simplified than Form 3508EZ. 

When filling out Form 3508S, you’ll need to include the following:

  • Your contact information 
  • Whether you’re applying for your First Draw or Second Draw Loan 
  • SBA PPP loan number
  • Lender PPP loan number 
  • Employees at time of loan application, if applicable
  • Employees at time of forgiveness application, if applicable 
  • Dates of the covered period
  • Amount spent on payroll costs
  • Requested loan forgiveness amount 

What’s nice about Form 3508S is that you do not need to provide any calculations or documentation. However, be aware that the SBA can request documentation at any point. If it’s discovered that you lied on your PPP loan forgiveness application, you could face up to 30 years in prison and/or up to a $1 million fine. Remember, honesty is always the best policy! 

PPP loan forgiveness

When should you apply for forgiveness?

Technically, there is no hard deadline by which you must submit your PPP loan application. As a borrower, you can apply for forgiveness once the total loan amount has been used. Keep in mind that if you used all of your loan for owner compensation replacement and are seeking full forgiveness, you will need to have used this over a 24-week covered period, which starts with the date your loan was disbursed to you. 

Although it’s not required, some lenders recommend waiting until the end of your covered period to begin the forgiveness process. 

Despite the lack of initial clarity, the Paycheck Protection Program has had the potential to provide much-needed aid to small business owners across the country. Make sure you’re applying for the maximum amount of forgiveness that you qualify for! Contact your lending institution if you have any questions. 

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