Do PPP Loans Have to Be Paid Back for the Self-Employed?

The Paycheck Protection Program (PPP) provided a lifeline for many self-employed individuals and small business owners during the COVID-19 pandemic. These forgivable loans helped cover payroll, rent, utilities and other business expenses when revenues dropped dramatically. However, one common question that arose was – do PPP loans have to be paid back for the self-employed?

The short answer is yes, PPP loans do legally have to be paid back. However, the great news is that PPP loans are eligible for full forgiveness if the funds are used appropriately on eligible expenses. Self-employed individuals can qualify for forgiveness just like any other PPP borrower.

Here is an overview of how PPP loan forgiveness works for the self-employed:

PPP Loan Calculations for the Self-Employed

For self-employed borrowers without employees, the PPP loan amount is calculated by taking their net profit amount from their Schedule C tax form and dividing by 12 to find the monthly payroll amount This monthly amount is then multiplied by 25 to arrive at the PPP loan amount they can qualify for.

For example

• Net profit on Schedule C: $100,000
• $100,000 / 12 = $8,333 average monthly payroll
• $8,333 x 2.5 = $20,832 PPP loan amount

Self-employed individuals with payroll costs go through a few extra calculation steps. The process involves taking the gross income from a Schedule C, subtracting payroll costs, then adding back in the annual payroll costs from IRS forms to find the total PPP loan eligibility.

PPP Loan Forgiveness for the Self-Employed

To receive full PPP loan forgiveness, at least 60% of the loan proceeds must be spent on payroll costs. For the self-employed with no employees, owner compensation replacement counts as their payroll costs.

This owner compensation replacement amount is calculated as 2.5 months of their 2019 or 2020 net profit, essentially allowing them to use those funds as income replacement.

Self-employed borrowers can also spend up to 40% of the PPP loan on other eligible business expenses like rent, mortgage interest, utilities, operations expenditures, property damage costs, supplier costs, and worker protection expenditures.

To apply for forgiveness, self-employed borrowers can use the simplified Form 3508S forgiveness application if their loan amount is $150,000 or less. For loans over $150,000, Form 3508EZ can be used in most cases. Documentation of expenses will need to be provided during the application process.

What Happens If the PPP Loan Isn’t Fully Forgiven?

If the full PPP loan amount is not forgiven because funds were not spent on eligible expenses, the remaining loan balance will have to be repaid.

The good news is that PPP loans have an extremely low interest rate of only 1% fixed over a 5 year term. There are no prepayment penalties, so borrowers can pay back the loan early with no extra fees.

While PPP loans do technically need to be repaid if not forgiven, these loans provided self-employed individuals and small business owners with an incredible opportunity to cover expenses and keep their operations running when revenues dropped.

With proper documentation and spending on eligible expenses, self-employed PPP borrowers have an excellent chance at qualifying for full forgiveness. This allowed many to weather the pandemic storm and come out ready to grow their business again.

Steps for Self-Employed Individuals Seeking PPP Loan Forgiveness

Here is a summary of key steps self-employed borrowers should take regarding their PPP loan:

• Track owner compensation replacement and eligible business expenses during the covered period
• Assemble documentation of expenses
• Apply for forgiveness through their lender once their covered period ends
• If not fully forgiven, repay any remaining loan balance based on the loan terms
• Consult a financial professional for guidance if needed

The PPP provided a vital lifeline for self-employed individuals across the country. While these loans do technically need to be repaid if forgiveness criteria is not met, this program offered borrowers an opportunity to keep their business afloat during very challenging times. With proper documentation and eligible spending, the self-employed have an excellent chance at full forgiveness.