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How to apply for a PPP loan when self-employed
Business Capital

How to apply for a PPP loan when self-employed

15 min read


The deadline for PPP application submissions has been extended to May 31, 2021. We encourage all those interested in receiving PPP funding to apply as funds are still available for distribution.

Apply for your PPP loan now.

The Paycheck Protection Program created by the CARES Act has proven to be incredibly popular for small businesses affected by COVID-19. 

In fact, the first round of SBA PPP funding through the SBA was exhausted by April 15th, 2020; however, Congress sent another $310 billion toward the PPP program in late April and President Trump signed an additional Coronavirus Relief Bill on December 27th, 2020 that provides an additional $284 billion for the Paycheck Protection Program. 

We’re here to break down the PPP loan process for self-employed individuals and make it easier for you to get funding.

SBA clarifications for self-employed PPP applicants

There has been some confusion about the application process for SBA loans for self-employed individuals, freelancers, and 1099 contractors. For self-employed small business owners, there is an added layer of calculation for payroll and which businesses can qualify. 

In an effort to clarify the SBA loan application process for small business owners who are self-employed, (filing a Form 1040 Schedule C), the SBA published an update to the Interim Final Rule.

In an effort to target small businesses and those most in need of economic stimulus, the Biden administration adjusted the formula for calculating eligible funding for sole proprietorships and very small businesses. 

Starting the last week of March 2021, businesses of 20 employees or fewer will be able to use gross income instead of net profit to apply for PPP funding—meaning they’ll be eligible for much more per loan. 

We are breaking down the most important requirements and information below, but every situation is unique. We encourage you to read the Treasury Department’s full interim final rule explanation with your financial and legal teams to determine what it means specifically for your business before you apply.

Who is eligible to apply for a self-employed PPP loan?

In order to apply for a PPP loan as a self-employed individual or independent contractor, you have to meet the following criteria: 

  • Must be in operation before February 15, 2020
  • Must have income from self-employment, sole proprietorship, or as an independent contractor
  • Must live in the United States
  • Must file a Form 1040, Schedule C for 2019
  • Must have net profit for 2019

A note on partnerships

Partnerships are eligible for PPP loans, however there must only be one PPP loan application per partnership. Partners may not submit separate applications as self-employed individuals.

According to the Interim Final Rule “partnerships are eligible for PPP loans under the [CARES] Act, and the Administrator has determined… that limiting a partnership and its partners (and an LLC filing taxes as a partnership) to one PPP loan is necessary to help ensure that as many eligible borrowers as possible obtain PPP loans before the statutory deadline of June 30, 2020.”

*Note: Timeframes for the application process have yet to be finalized for the January 2021 funding.

How much money can you get?

First time borrowers may get 2.5x monthly payroll up to $10 million, while second-time applicants will top out at $2 million.

A priority period from February 24-March 9 has been created to give special preference to businesses with fewer than 20 employees.

Starting at the end of March 2021 a new formula will allow sole proprietorships and small businesses to calculate their maximum PPP funding based on gross profits instead of net, increasing their allowable borrowing max.

How to calculate your payroll costs

The most common question surrounding self-employed PPP applications is how to calculate payroll. Many self-employed individuals, sole proprietorships, and independent contractors report varying profits each month or seasonal fluctuations in business, making it difficult to determine a set monthly payroll. 

The Payroll Protection Program is designed to cover 2.5 months of payroll costs for small businesses to keep them afloat and prevent layoffs or business closures during the COVID-19 economic crisis. 

Here’s how to calculate your costs, step by step:

For self-employed individuals without employees

  1. Find or complete your Form 1040, Schedule C. 
  2. Locate your net profit on line 31. The max for PPP loans is $100,000 annualized income, so cap any net profit over $100,000 for the following steps. 
  3. Divide this total by 12 to find your average monthly net profit. 
  4. Multiply by 2.5 to determine the PPP loan amount to request to cover 2.5 months of average profits (“payroll”) for a self-employed business.
  5. Gather documentation to substantiate this income – 2019 IRS Form 1099-MISC detailing non-employee compensation received (box 7), invoice,  or bank statement showing self-employment, and a 2020 invoice or bank statement covering February 15, 2020 at the latest.

For self-employed individuals with employees

  1. Find or complete your Form 1040, Schedule C. 
  2. Locate your net profit on line 31. The max for PPP loans is $100,000 annualized income, so cap any net profit over $100,000 for the following steps. If less than zero, set to zero. 
  3. Add gross wages & tips for employees residing in the US using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c- column 1).
  4. Add pre-tax benefits to employees, such as health insurance. 
  5. Cap all individual employee’s wages, tips, and benefits at $100,000.
  6. Add employer health insurance and retirement contributions (found on Form 1040 Schedule C line 14 and 19, respectively), and any state and local taxes on employee compensation that apply to your business. 
  7. Divide this total by 12 to find your average monthly net profit. 
  8. Multiply by 2.5 to determine the PPP loan amount to request.
  9. Gather documentation to substantiate this income – 2019 Form 1040 Schedule C, Form 941 and state wage unemployment insurance tax forms from each quarter in 2019 (or tax forms/payroll processor records containing similar information), evidence of any retirement and health insurance contributions, and an invoice or bank statement demonstrating business in operation before February 15th, 2020.

How you can use your PPP loan

The PPP loan has specific guidelines for use than other SBA loans, especially if you are looking for 100% loan forgiveness. However, the requirements have been relaxed for small businesses during the COVID-19 crisis to maximize the impact of relief funds. 

Here’s how you can and can’t use your PPP loan:

What can you use your PPP funds for?

What you can use your PPP funds for What you can not use your PPP funds for
Employee payroll or replacing owner compensation Buying new equipment or property
Mortgage interest Mortgage payments (principal)
Rent Any expenses (rent, utilities, etc) that you can’t claim on your Form 1040 Schedule C
Utilities Purchasing inventory
Debt interest Other debt payments
Upgrades to your business, including protection measures like plastic sneeze guards, drive through windows, repairs after public disturbances, etc. Using more than 25% of your PPP on non-payroll costs

Where to apply for PPP

You can apply for a PPP loan as a self-employed individual once applications open for the 1,800 qualified SBA lenders. Keep an eye out on Divvy’s PPP loan hub for a link to the application once it becomes available.

You should be prepared with the necessary documents:

  • Net Profits: Form 1040 Schedule C, completed
  • Payroll: Tax Forms 940 and/or 941 from January 1, 2019 to the most current filing. *Note that a bank statement will not suffice for proof of payroll & operations
  • Expenses: statements, invoices, or bills for mortgage insurance, rent, utilities, etc
  • Existing lender waiver: A waiver or email from your existing lender(s) confirming that you can take on additional, unsecured financing.

When to apply for PPP

We recommend waiting until the last week in March 2021 to apply for PPP loans in order to take advantage of the more favorable funding formula for small businesses. 

PPP loan forgiveness for self-employed individuals

One of the most appealing features of the PPP loan is the generous loan forgiveness. However, the updated rules for the self-employed may limit the amount forgiven. The reason for the limitation is that most independent contractors, self-employed individuals, and sole proprietors have far less overhead and could use all of the loan for compensation, causing an unintended windfall.

“Congress determined that the maximum loan amount is based on 2.5 months of the borrower’s payroll during the one-year period preceding the loan. Congress also determined that the maximum amount of loan forgiveness is based on the borrower’s eligible payments—i.e., the sum of payroll costs and certain overhead expenses— over the eight-week period following the date of loan disbursement.”

Essentially, you get 2.5 months of payroll and it can be forgiven if you use the funds appropriately and with careful documentation within the 8 weeks following disbursement. Divvy’s expense tracking and budgets are the smartest way to meticulously (but easily) keep records of all expenditures of your business, especially when you need to justify the way you are using SBA funds. 

Forgiveness is contingent upon proof of acceptable funds use, such as paid invoices, payroll processing records, bills, etc.

PPP loan terms

Paycheck Protection Program second round loan terms
Eligible businesses Individuals filing a Form 1040 Schedule, including:

  • Sole proprietors
  • Independent contractors
  • Self-employed individuals
Max borrowing amount

First time applicants may borrow the lesser of:

  • $10 million OR
  • 2.5x average monthly payroll costs

Second time applicants may borrow the lesser of:

  • $2 million OR
  • 2.5x average monthly payroll costs
Term lengths 2 years
Interest rates 1%
Forgiveness Up to 100%*
Deferred payments 6 months (though interest still accrues)
  • Payroll and compensation
  • Insurance premiums and healthcare benefits
  • Mortgage interest costs
  • Rent and utilities
  • Interest on other debt obligations

*Forgiveness may be reduced dependent on reduction of number of employees or reduction in salaries.

Alternative lending sources

Small businesses and self-employed individuals may be feeling stressed without this PPP loan option available. Emergency funding could be vital for your business to survive this crisis. 

While the CARES Act provided for a variety of funding options for small businesses, unfortunately, Economic Injury Disaster Loans and EIDL Grants are also closed for the present time. 

While we wait for SBA funds to be reopened, your small business may consider a more traditional bank loan from a private financial institution. Many banks are currently offering quick approvals and low interest rates to businesses affected by COVID-19. 

US Bank and Washington Federal are also offering some of the most compelling lifelines right now. Though you should also consider digital lenders like Lendio, Kapitus, or Kabbage as they tend to have faster applications and funding times. 

Note: We have partnered with some lenders, which may provide us compensation.

Unemployment Assistance for Self-Employed Individuals

In addition to PPP funds, the Coronavirus Relief Bill provides extended and expanded unemployment benefits to self-employed individuals. This includes an additional $300 per week until March 21st, 2021 for those receiving unemployment and allows for federal assistance once individuals have exhausted state funds.

An influx of capital can change the game for a self-employed individual or independent contractor. With Divvy, you can get a flexible credit line with enforceable budgets—for free. Apply now.

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