This article was updated June 17, 2020 with information from the new PPP Forgiveness Application 3608EZ and the 19th Interim Final Rule. 

If you’re self-employed and qualified for a Paycheck Protection Program (PPP) loan, then no doubt you are hoping you can get as much of it forgiven as possible. We’ll walk through that process in this article. 

This article discusses forgiveness only for those who are: 

• Self-employed 
• Have no (zero) W-2 employees and 
• Filed (or will file) Schedule C with their Form 1040 to report their business income to the IRS. 

Please note, the material contained in this article is for informational purposes only, is general in nature, and should not be relied upon or construed as a legal opinion or legal advice. Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. We encourage you to consult with your lawyers, CPAs and Financial Advisors.

PPP Flexibility Act

On June 5, 2020 the President signed the PPP Flexibility Act, which changed some of the rules regarding forgiveness for PPP loans. Then on June 17, 2020, Treasury and SBA released a new simpler forgiveness application, the PPP Loan Forgiveness Application Form 3508EZ. This article includes this new updated forgiveness application and instructions.

If you are self-employed with no employees, the forgiveness application is not as complicated as it first seems. We’ll do our best to make filling it out as simple as possible. 

Calculate Your Forgiveness Amount

You can use Nav’s Free Self Employed PPP Forgiveness Calculator to estimate how much you may be eligible for in forgiveness: 

Try Nav’s Self-Employed PPP Loan Forgiveness Calculator HERE

However, you’ll still need to fill out the application with your lender. Keep in mind that ultimately your lender will process your forgiveness application so you will need to follow their instructions.

All borrowers using this form must submit the following to their lender:

• The PPP Loan Forgiveness Application Form 3508EZ 
• Representations and Certification
• Documentation

The PPP Borrower Demographic Information is optional and does not affect forgiveness. 

As you follow along here, note that we have copied actual fields and their instructions from the SBA application. Tips in italics below those fields are our comments, based on our understanding of the current guidance. 

PPP Loan Forgiveness Calculation Form

Let’s go through the application step by step. Your lender may use an electronic version but it doesn’t hurt to keep a written copy. 

First you’ll fill out some basic loan information about your business: 

This information should be straightforward, and you will generally use the information you used to apply unless it has changed from the time you applied.  

SBA PPP Loan Number: ________________________ 

This is the number assigned by the SBA to your loan. Request it from your lender if you don’t have it. 

Lender PPP Loan Number: __________________________ 

Enter the loan number assigned to the PPP loan by the lender. Again, request it from your lender if necessary. 

PPP Loan Amount: _____________________________ 

This is the amount you received from the lender. 

PPP Loan Disbursement Date: _______________________

Enter the date PPP loan funds were deposited in your bank account. If you received more than one disbursement, use the date of the first one. 

Employees at Time of Loan Application: ___________ 

Enter the total number of employees at the time of the Borrower’s PPP Loan Application.

The application is not clear whether an applicant filing as self-employed with no employees should enter 0 or 1 here. Ask your lender. (It should not affect forgiveness.)

Employees at Time of Forgiveness Application: ___________

Enter the total number of employees at the time the Borrower is applying for loan forgiveness.

Same as the question above. 

EIDL Advance Amount: ______________________

If you have received an Economic Injury Disaster Loan grant (advance), enter it here. This amount does not have to be repaid. (Note that the direct deposit notation from the SBA should include EIDG for the grant.) 

EIDL Application Number: __________________________

If you applied for an EIDL, enter your application number. (If you don’t have this number or can’t find it, try contacting the SBA Office of Disaster Assistance.) 

Payroll Schedule: The frequency with which payroll is paid to employees is: ☐ Weekly ☐ Biweekly (every other week) ☐ Twice a month ☐ Monthly ☐ Other _____________

Note: Self employed individuals don’t often pay themselves on a regular schedule. If that’s the case you can check “other” and enter a description such as varies. It should not affect forgiveness in this case.

Covered Period: _________ to __________

The PPP Flexibility Act changed the Covered Period for purposes of the calculations in the worksheet. (Note there is more than one “Covered Period” in the CARES Act. Here we are talking about the one that refers to when you spend the funds to qualify for forgiveness.) Here’s how it is described in the application instructions: 

“The Covered Period is either: 

(1) the 24-week (168-day) period beginning on the PPP Loan Disbursement Date, or 

(2) If the Borrower received its PPP loan before June 5, 2020, the Borrower may elect to use an eight-week (56-day) Covered Period. 

For example, if the Borrower is using a 24-week Covered Period and received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, October 4. In no event may the Covered Period extend beyond December 31, 2020.”

Alternative Payroll Covered Period, if applicable: _________ to __________

This calculation provides some flexibility in case the employer pay period doesn’t match up well with the covered period. It won’t apply to most self-employed individuals who simply pay themselves on a more informal basis from business revenues. However, if you normally pay yourself on a set schedule, you can review the definition of the Alternative Payroll Covered Period on page 2 of the application instructions to see if you want to use the alternative covered period. 

If Borrower (together with affiliates, if applicable) received PPP loans in excess of $2 million, check here: ☐

This should not apply to a self-employed individual with no employees, as their maximum loan amount is $20,833. If you received more than $2 million in PPP funds this article does not apply to you. 

Forgiveness Amount Calculation

Payroll and Nonpayroll Costs 

Line 1: Payroll Costs _____

Here you enter your payroll costs. As someone who is self-employed with no employees, that’s the money you pay yourself for working in your business—owner’s compensation—also referred to as owner’s compensation replacement.

Owner Compensation: Enter any amounts paid to owners (owner-employees, a self-employed individual, or general partners). For a 24-week Covered Period, this amount is capped at $20,833 (the 2.5-month equivalent of $100,000 per year) for each individual or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower. For an 8- week Covered Period, this amount is capped at 8/52 of 2019 compensation (up to $15,385). 

Make sure you understand this as owner’s compensation replacement is the main expense you will use to qualify for forgiveness as a self-employed individual with no employees. Based on the Interim Final Rule (Certain Pledges of Loans) and the subsequent Interim Final Rule (Revisions to Third and Sixth Interim Final Rules), a self employed individual with no employees can apply for forgiveness for owner’s compensation paid during the covered period using one of the two following formulas: 

If your PPP loan was made before June 5, 2020 you may choose to use 8 weeks of net profit from line 31 of the 2019 Schedule C, minus any FFCRA credit for the covered period. The basic calculation is this: 

2019 Schedule C Line 31 net profit divided by 52 then multiplied by 8

However, the maximum compensation for forgiveness purposes is up to $100,000 of annualized pay for an employee or owner so that means for one owner-employee or partner, the most you can enter here is $15,385 using this formula. 

The other option is to calculate owner’s compensation replacement as 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period. That calculation is:

2019 Schedule C Line 31 net profit divided by 12 then multiplied by 2.5

Since self employed individuals apply for PPP based on 2.5 times their 2019 net profit as listed on line 31 of their 2019 Schedule C, this second calculation likely matches the amount received and will likely result in full forgiveness based solely on payroll. 

In both cases, if you claim, or will claim, a credit for sick or family leave under the Family’s First Coronavirus Response Act you must subtract that amount from owner’s compensation for forgiveness purposes. 

Note that employers with employees may include other costs in Payroll costs, including health insurance and retirement plan contributions. But the application instructions state: 

Do not add employer health insurance contributions (or) employer retirement contributions made on behalf of a self-employed individual or general partners, because such payments are already included in their compensation, and contributions on behalf of owner employees are capped at 2.5 months’ worth of the 2019 contribution amount.

Read the full instructions for more details. 

Nonpayroll Costs: Most self-employed individuals will likely be able to qualify for full forgiveness based on the new guidelines and the 24-week Covered Period. So you may not need or want to apply for forgiveness based on nonpayroll costs. But if you do, here is more information about those costs. 

Note that a previous the Interim Final Rule states: 

You must have claimed or be entitled to claim a deduction for such expenses on your 2019 Form 1040 Schedule C for them to be a permissible use during the eight-week period following the first disbursement of the loan (the ‘‘covered period’’). For example, if you did not claim or are not entitled to claim utilities expenses on your 2019 Form 1040 Schedule C, you cannot use the proceeds for utilities during the covered period.

Also note that for nonpayroll costs, an eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period. Eligible nonpayroll costs cannot exceed 40% of the total forgiveness amount. Count nonpayroll costs that were both paid and incurred only once.

Line 2. Business Mortgage Interest Payments:_______

Enter the amount of business mortgage interest payments (not including any prepayment or payment of principal) paid or incurred during the Covered Period for any business mortgage obligation on real or personal property incurred before February 15, 2020. Do not include prepayments.

Line 3. Business Rent or Lease Payments: ______

Enter the amount of business rent or lease payments paid or incurred for real or personal property during the Covered Period, pursuant to lease agreements in force before February 15, 2020. 

Line 4. Business Utility Payments:______

Enter the amount of business utility payments (business payments for a service for the distribution of electricity, gas, water, telephone, transportation, or internet access) paid or incurred during the Covered Period, for business utilities for which service began before February 15, 2020. 

Potential Forgiveness Amounts

Here is where you calculate your potential amount of forgiveness.

Line 5. Add the amounts on lines 1, 2, 3, and 4: ________

Line 6. PPP Loan Amount: _______

Line 7. Payroll Cost 60% Requirement (divide Line 1 by 0.60): _____

Divide the amount on line 1 by 0.60, and enter the amount. This determines whether at least 60% of the potential forgiveness amount was used for payroll costs. 

Forgiveness Amount 

Line 8. Forgiveness Amount (enter the smallest of Lines 5, 6, and 7): _______

That’s it. Hopefully you’ve discovered you potentially qualify for full forgiveness.

However, there’s a caveat to the forgiveness amount on Line 8. The application does not require you to subtract the amount of an EIDL grant you received here, though previous guidance indicates the grant should be subtracted from the PPP for forgiveness purposes. In fact, the instructions for the application note that “If applicable, SBA will deduct EIDL Advance Amounts from the forgiveness amount remitted to the Lender.” If you received an EIDL grant, don’t be surprised if the amount of forgiveness is reduced by that amount. 

Documenting Forgiveness For Self-Employed

The new application instructions application includes details on how to instructions for documenting payroll expenses for employees. But it doesn’t describe how to document owner’s compensation for the self employed. So instead we’ll return to the Interim Final Rule that describes the PPP for the self-employed. There it states: 

“The 2019 Form 1040 Schedule C that was provided at the time of the PPP loan application must be used to determine the amount of net profit allocated to the owner for the eight-week covered period.” (Note that the eight-week period was extended to twenty-four weeks under the PPP Flexibility Act.) 

This seems to imply that no further documentation beyond the 2019 Schedule C will be required to document the owner’s compensation portion of forgiveness. However, it’s probably a good idea to pay yourself the amount of owner’s compensation from your business bank account (if you have one) during the covered period and keep a record of that payment (or payments). 

Nonpayroll Expenses 

If you apply for forgiveness for nonpayroll expenses you’ll need to be able to document those expenses. According to the application, you will need: 

Documentation verifying existence of the obligations/services prior to February 15, 2020 and eligible payments from the covered period. 

a. Business mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the covered period; or lender account statements from February 2020 and the months of the covered period through one month after the end of the covered period verifying interest amounts and eligible payments.

b. Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the covered period; or lessor account statements from February 2020 and from the covered period through one month after the end of the covered period verifying eligible payments. 

c. Business utility payments: Copy of invoices from February 2020 and those paid during the covered period and receipts, cancelled checks, or account statements verifying those eligible payments.

Finally, note the instructions state you must retain PPP documentation for six years after the date the loan is forgiven or repaid in full. In addition, you permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.

What Happens if The Entire Loan Isn’t Forgiven? 

The PPP Flexibility Act increases the likelihood that self-employed individuals will qualify for full forgiveness based on owner’s compensation replacement. But if not, any remaining balance will become a loan at 1% interest for two years. (Under the PPP Flexibility Act the loan repayment period is 5 years for loans made on or after June 5, 2020). There is no prepayment penalty if you want to pay that back right away. A small amount of interest may have accrued in the meantime and you’ll need to also pay that. If you keep the loan, the guidance seems to suggest you should still spend those funds for authorized purposes, namely the payroll and nonpayroll expenses described here.