Money milestones: How to get PPP funds when you’re self employed

Brian Acton


Brian Acton

Brian Acton

Contributing Writer

Brian Acton is a contributing writer at Policygenius who covers personal finance, insurance, and other topics.

Published January 21, 2021|7 min read

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When it comes to financial assistance during the pandemic, self-employed individuals haven’t been left behind. Freelancers can potentially qualify for thousands of dollars for payroll costs, rent and utilities.

The latest COVID-19 relief bill was signed into law in December, providing an additional $284 billion for the Paycheck Protection Program. The program allows eligible businesses to apply for low-interest private loans to help them stay afloat and maintain payroll during the pandemic. Loan interest rates are capped at 1% and loans are forgivable if used for qualifying expenses.

You don’t have to have staff on the payroll to qualify. Freelancers, independent contractors and sole proprietors with no employees are eligible to apply. Both first-time applicants and second-timers can qualify. Here’s how to get PPP funds when you’re self employed.

1. Understand the basics

Know your eligibility

Whether this is your first or second PPP loan, you should verify your eligibility to receive funds. You must have been in business as of Feb. 15, 2020 and your primary residence should be in the United States. Sole proprietors, independent contractors and self-employed persons are eligible to apply, and must have filed a Form 1040 Schedule C for 2019 or 2020.

If this is your second PPP loan, you need to have experienced a 25% reduction of income in 2020 when compared to 2019 (more on how to verify this later). You also must have already used the full amount of your first PPP loan by the date in which your second loan is expected to disburse (under SBA guidelines funds must be disbursed within 10 calendar days of loan approval).

For more information on eligibility, consult the Small Business Administration website.

Know how much you can get

You can receive up to 2.5 times your average monthly profit in PPP loans. For example, if you make an average $1,000 per month, you’re eligible for $2,500. To calculate this, you will need the latest Form 1040 Schedule C you filed with your 2019 or 2020 tax returns. Then look at line 31 net profit.

Line item 31 is your net profit amount, which in the case of truly self-employed individuals without any employees, “is synonymous with your income,” said Jim Pendergast, senior vice president of altLINE Sobanco, a division of The Southern Bank Company.

Independent contractors and freelancers can claim up to $100,000 net profit for a PPP loan. Here’s how to calculate the maximum amount you can borrow: If you made anything between $0 and $100,000, use the exact amount in line 31 to calculate your loan amount. If you made over $100,000, use $100,000 for your calculation — you cannot claim any income above that amount on your loan application. Next, divide the net profit amount by 12, then multiply the result by 2.5. That’s the maximum amount you are eligible for. If you claimed zero dollars on line 31, you are ineligible to apply.

2. Find a lender

PPP reopened for applications on Jan. 11, but the availability will be staggered to allow community financial institutions the first crack at submitting loan applications. All participating lenders will be allowed to join soon after.

Thousands of financial institutions participate in the PPP, but not all of them do. Here is a full list of all lenders participating in the program as of June 25, 2020.

Finding the right lender may take time. Some lenders might only be working with existing customers, while others will be closed to applications until they receive further guidance from the SBA. Some lenders may shut down applications if they become overloaded with requests, then open them back up later.

You can start with a financial institution you already trust and do business with. Inquire about its PPP participation and application process, then expand your search from there. It could be helpful to keep a working list of lenders you’ve researched, along with a link to PPP information on their website and a description of their current status.

There are likely some scammers out there offering to help borrowers secure funds or fill out their applications. Only work directly with participating lenders through official channels.

3. Submit your application

Once you’ve found a lender, it’s time to submit your application. The process will differ between lenders — some larger financial institutions may have high-tech, self service portals while others may have a more manual process.

You will be required to submit documentation to verify your income, business status and other eligibility requirements. Here is some of the information you will need to provide (the lender may require additional documentation):

  • Your application form which includes your name, address, business name, business size, business tax ID number or Social Security number, contact information and more.

  • Your 2019 and/or 2020 Form 1040 Schedule C to substantiate the PPP loan amount requested.

  • Some lenders may require 1099-MISC forms that verify your income.

  • Invoices, bank statements, receipts and other records that establish the validity of your business and income.

  • If this is your second PPP loan, you will need to demonstrate that you experienced a 25% reduction of income in any quarter in 2020 when compared to certain quarterly results in 2019. Make sure you can produce gross receipts to verify this loss.

The most important documents you'll need for your application will pertain to 2019 Form 1040 Schedule C filings, said Pendergast. This will include your annual tax returns alongside things like 2019 IRS Form 1099-MISC filings. “It's also helpful to include monthly bank statements and even payment invoices to substantiate the numbers submitted,” he said.

Borrowers will need to select the covered period, or the time frame they have to spend their PPP funds on eligible expenses to qualify for forgiveness. Borrowers can indicate covered periods as short as eight weeks and as long as 24 weeks, and the covered period begins when the borrower receives funds.

When the lender has your full application and you have provided all the supporting documents, they will process the application and submit it to the SBA. At this point you will wait to see if your loan application has been approved or rejected.

If your application is rejected you should double check it for errors and ask the lender why it was denied. If you are unable to move forward, you may want to look at other assistance and relief you may qualify for. check out Intuit’s list of self employed relief programs.

4. Receive your loan

Once your loan is approved you will receive the funds in a single payment. Use your business bank account to deposit your PPP funds (if you don’t already have one, think about opening one). This will make it easier to demonstrate how you used the funds without commingling the loan with your personal finances.

You can use the funds to replace lost income or help with business expenses. If you don’t use the funds for eligible expenses, you will have to pay them back at a 1% interest rate. If you use the funds for eligible expenses, they are 100% forgivable.

To receive forgiveness, you need to use at least 60% of the funds for payroll — since you are self employed, all payroll replacement goes directly to you. You can still get forgiveness if you use up to 40% of the funds for eligible expenses including:

  • Rent, mortgage, interest and utility costs.

  • Covered operations expenditures including software, cloud computing and accounting costs.

  • Covered supplier costs, which are payments made to suppliers for expenses essential to business operations, made prior to taking out the loan.

  • Covered worker protection expenditures, which are expenses to keeping your business in compliance with federal, state and local COVID-19 regulations.

As a self-employed person, you may technically not have any payroll expenses because you don’t have any employees. You can qualify for loan forgiveness under the “owner compensation” rule, which allows you to be forgiven for up to eight weeks of 2019 net profit (8/52 of your 2019 net profit).

You must use the funds for the eight- to 24-week covered period.

5. Apply for forgiveness

The first round of PPP was confusing and many business owners expressed frustration with the application process. In response, the latest round of PPP now contains a streamlined, one-page only application. “This new version is available for download on the SBA's site as the ‘PPP EZ Loan Forgiveness Application Form’ and is available for any borrower, including self-employed individuals, who took out less than $150,000,” said Pendergast.

Many lenders aren’t processing forgiveness applications yet as they wait for further clarifications from the SBA. For more details about what you need to do, you should contact your lender directly. Luckily, you have 10 months after the covered period expires to submit your forgiveness application, so there’s some time.

Recommended reading

Here are six documents every freelancer needs to do their taxes.

For the detailed ins and outs of the PPP for all borrowers, start with the SBA website.

Here are financial tips for freelancers.

Image: GettyImages / 10'000 Hours