Can I Use the PPP Loan to Pay Myself? A Self-Employed Person’s Guide

As a small business owner or self-employed individual, you’ve probably wondered “Can I use the PPP loan to pay myself?” The short answer is YES! And it’s even better than you might think. Let’s dive into how this works and why it’s such a great option for sole proprietors and independent contractors

The Magic of “Owner Compensation Share” for Self-Employed Individuals

If you’re self-employed, the PPP loan has an amazing feature called “owner compensation share” (previously known as “owner compensation replacement”). This concept essentially allows you to:

• Pay yourself with the PPP funds
• Get that amount fully forgiven
• Use the money however you want

Sounds too good to be true? It’s not! The government designed this feature specifically to help self-employed individuals who don’t have traditional payroll expenses.

How PPP Loan Amounts Were Calculated for Self-Employed People

The way your loan was calculated depends on when you applied and whether you have payroll costs,

For Applications Before March 3, 2021:

PPP loans were calculated using your 2019 or 2020 net income from Schedule C

For Applications After March 3, 2021:

The calculation changed and was based on either your gross or net income, depending on your situation:

If You Don’t Have Employees (No Payroll Costs):

1. Take your gross income (max $100,000) from Schedule C
2. Divide by 12 to get monthly average
3. Multiply by 2.5 for your loan amount

If You Have Employees (With Payroll Costs):

1. Take your gross income from Schedule C line 7
2. Subtract payroll costs from lines 14, 19, and 26
3. Cap this amount at $100,000
4. Add your annual payroll costs for employees
5. Divide by 12 for monthly average
6. Multiply by 2.5 for your loan amount

How Much Can I Pay Myself with the PPP Loan?

This is where the “owner compensation share” comes in! You can pay yourself up to 2.5 months worth of your income, and it’s automatically eligible for forgiveness. Here’s how to calculate it:

If You Don’t Have Employees:

Your owner compensation share = Gross income × 0.208 (which is 2.5/12)

This will be your entire PPP loan amount (assuming you borrowed the maximum).

If You Have Employees:

Your owner compensation share = (Gross income – payroll expenses) × 0.208

The Maximum Amount You Can Pay Yourself

The PPP caps compensation at an annualized salary of $100,000. For sole proprietors or independent contractors with no employees, the maximum possible PPP loan (and thus the maximum owner compensation) is $20,833.

If you have multiple businesses with PPP loans, you’re capped at $20,833 in owner compensation across ALL loans. For example, if you take $15,000 from one business, you can only take $5,833 from your other businesses combined.

Important Conditions for Taking Owner Compensation

To claim the full owner compensation amount, you need to:

1. Use a covered period of at least 11 weeks
2. Understand that you’ll be ineligible for unemployment benefits (including Pandemic Unemployment Assistance) during those 11 weeks

How to Apply for Forgiveness of Your Self-Payment

The forgiveness application process is simpler than you might think:

For Loans Under $150,000:

Use the simplified Form 3508S

For Loans Over $150,000:

• Use Form 3508EZ if you didn’t reduce FTE headcount or wages by more than 25%
• Otherwise, use the standard forgiveness form

Documentation Needed for Forgiveness

For the owner compensation portion, you just need to provide your 2019 or 2020 Schedule C. You don’t need to prove how you spent that money!

However, if you’re claiming forgiveness for other expenses beyond owner compensation, you will need documentation for those.

For second-draw PPP loans, you’ll also need to provide documentation showing a 25% decrease in gross receipts between comparable quarters in 2019 and 2020 (or year-over-year).

Can I Use the ENTIRE Loan to Pay Myself?

Absolutely! If your entire loan amount is claimed as owner compensation share, you can use 100% of it to pay yourself. And yes, you can spend that money however you want – whether it’s on personal expenses, saving it, or reinvesting in your business.

What If My Loan Is More Than What I Can Claim as Owner Compensation?

If you can’t claim 100% of your loan as owner compensation, and you don’t have other eligible business expenses to cover with PPP funds, the remaining balance will need to be repaid. But don’t worry – at 1% interest over 5 years, it’s one of the best loan terms you’ll find anywhere!

Can Home Office Expenses Be Forgiven Too?

Yes! If you work from home, certain home office expenses can be forgiven. These include:

• Utilities
• Rent
• Mortgage interest

This is super helpful for many self-employed people who operate from home.

A Word About Taxes

This is a bit unclear for self-employed individuals. While the IRS declared that PPP forgiveness isn’t taxable income and expenses paid with PPP can be deducted, they haven’t specifically clarified how this relates to owner compensation amounts.

Since owner compensation is essentially used as personal income, it may be taxed as such. We’ll have to wait for more guidance on this issue.

My Experience Using PPP to Pay Myself

When I applied for my PPP loan back in 2021, I was thrilled to discover I could use it to replace my lost income. As a freelancer who saw a significant drop in clients during the pandemic, this was a lifesaver! I used the entire amount as owner compensation share, and the forgiveness process was incredibly straightforward.

The best part? I didn’t have to worry about tracking exactly how I spent those funds once they were transferred to my personal account. This flexibility meant I could use some for immediate living expenses and save some for slower months ahead.

Final Thoughts: Yes, You CAN Pay Yourself with PPP!

To sum it up – the PPP loan program was designed with a special provision for self-employed people to pay themselves, and this amount is fully forgivable! It’s one of the rare government programs that truly understood the needs of independent workers.

If you’re still waiting to apply for forgiveness, make sure to check with your lender about their current process and deadlines. And remember, good bookkeeping is essential not just for PPP forgiveness but for the overall health of your business.

So yes, you absolutely can use the PPP loan to pay yourself – and that might be the best way to use it!

Frequently Asked Questions

Q: Do I need to show proof of how I spent my owner compensation money?
A: Nope! Once you qualify for the owner compensation share, you don’t need to document how you spent those funds.

Q: What if I wasn’t in business for all of 2019?
A: If you applied in 2021, you could use your 2020 Schedule C. It didn’t even need to be filed yet – just completed and ready for submission.

Q: Can I still get unemployment benefits while taking owner compensation?
A: No, you can’t receive unemployment benefits (including PUA) during the 11+ week covered period when you’re claiming owner compensation.

Q: Is there a minimum amount of time I need to spread the payments to myself?
A: Yes, you need to use a covered period of at least 11 weeks to claim the full owner compensation amount.

Remember, while PPP loans were a lifeline during the height of the pandemic, keeping good financial records is always important for your business. Consider working with a bookkeeper who can help ensure all your finances stay in order – for both pandemic relief programs and beyond!