The Paycheck Protection Program (Forgivable SBA Loan)

The Paycheck Protection Program is a new SBA loan that includes forgiveness if the proceeds are used for payroll, rent, and other qualified expenses. This program is available to small businesses, freelancers, independent contractors and gig workers.

Any amounts forgiven are not included in taxable income. Grants are normally considered taxable income, so this is essentially a tax-free grant. (!!!)

How Do I Qualify?

Assuming you are self-employed or own a business that has less than 500 employees, the requirement for this loan is that you need to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19. This is a very vague way of saying:

You don’t need to currently show a specific drop in revenue in order to be eligible. You just need to anticipate a drop – and most of us are.

Instead of the loan being given based on repayment ability (creditworthiness), the loans will be granted based on whether a business was operational on February 15, 2020 and had employees on payroll or a paid independent contractor.

Do not read that as, “I am a freelancer, I don’t have anyone on payroll, I don’t qualify.” – the net income you are generating is considered payroll under this loan.

If you don’t have any employees, whenever you see the word payroll, just think “my income” and/or payments that you pay to contractors that work for you.

Let’s define what they mean by “payroll” below:

WTH is Payroll?

Payroll costs include:

  • Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee)
  • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee*
  • Employee benefits including costs for vacation, parental, family, medical, or sick leave
  • Allowance for separation or dismissal
  • Payments required for the provisions of group health care benefits including insurance premiums
  • Payment of any retirement benefit
  • State and local taxes assessed on compensation

*So if you do not have employees and are self-employed, you will use your net earnings over the period they need to verify. If you do not have your bookkeeping in order – get it in order as you’ll need it.

How Much Can I Get?

The maximum amount of the loan is 250% of your average payroll costs over the last 12 months. Again, independent contractors typically don’t have payroll costs in the traditional sense, so we are still waiting on additional information to be released on the loan max calculation for these individuals. It’s likely that the average self-employment income over the last 12 months will be used for this calculation.

When & Where Do I Apply?

Starting April 3, 2020, small businesses and sole proprietorships can apply and on April 10, 2020, independent contractors and self-employed individuals can apply.

The loan application process will be handled through banks, unlike the disaster SBA loans that are handled on SBA’s website. The bank where you do your business banking would be a good place to start.


I don’t think it’s overkill to send out as many inquiries for assistance as possible; you don’t know where the help will come from. However keep in mind you can’t apply to more than one bank.

How Do I Apply?

The Department of Treasury has a fact page here that includes this application. The application can’t actually be submitted on the website, but having it filled out ahead of time is not a bad idea.

I suggest compiling the following list of documents:

  • Payroll and Benefits Info
    • Payroll Tax Returns from 2019 (940, 941, 944)
    • Payroll reports from 2019 and 2020 year-to-date showing gross wages and paid time off broken down by employee (your payroll software likely already has a custom report created specifically for the PPP).
    • Documentation showing the total of all health insurance premiums paid by the company under a group health plan in 2019 and 2020. (Personal health insurance paid by the company doesn’t seem like it will count, but I would compile it now just to be safe.)
    • Documentation showing the sum of all retirement plan funding that was paid by the company in 2019 and 2020 (do not include the amounts withheld from payroll)
  • 1099 Info
    • 1099s for independent contractors that would otherwise be an employee of your business from 2019 – do not include 1099s for outside services such as attorneys, rent, etc.
  • Taxes
    • 2019 taxes (suggest pulling business and personal if you are an S-Corp just to be safe) – if you don’t have these filed yet, make sure you have a Profit and Loss and Balance Sheet
    • 2018 taxes (suggest pulling business and personal returns if you are an S-Corp just to be safe)
  • Other Assistance Received
    • Pull documents showing any funds you’ve already received in 2020

How Does the Forgiveness Work?

Any amount of the loan spent on qualified expenses (payroll costs, interest payments, mortgage, rent, or utilities) during an 8-week period after the loan’s origination date, will be forgiven assuming you do not make any changes to your payroll numbers/staff.

Please note the following:

  • For payroll costs: if the wages are above $100,000, the compensation above $100,000 will not be forgiven. Payroll costs include salaries, wages, vacation pay, retirement benefits, and state/local taxes assessed on compensation), health insurance premiums, and employee commissions/tips.
  • For all other qualified expenses: the item must’ve been in place prior to February 15, 2020. For example, if you move into a new office space on March 1, 2020, the rent for that office will not be forgiven because you did not have it in place prior to February 15, 2020.
  • The forgiveness amount is tied to you not laying off staff so your payroll numbers during the 8-week period will be compared to payroll numbers for the prior year. If you’ve already laid-off staff, you can hire them back use the PPP funds to pay them.

You might be thinking, “Well, shit, I can definitely use all of it for payroll and rent. It will all be forgiven!” Not so fast!

Let’s run through some quick numbers.

The max amount of the loan is 250% of the average payroll over the last 12 months – the equivalent of 2.5 months. 2.5 months can be translated to 10.83 weeks (yeah I just did some algebra there). As we know, the amount forgiven will be based on what’s spent over the span of 8 weeks. So there’s an additional 2.83 weeks of payroll funds you’ll be receiving that would not be forgiven unless they’re spent on another qualified expense.

If your annual payroll cost is $50,000, you’d receive $10,417 as a loan (50k / 12 months * 2.5 months). Of this $10,417, $7,692 would go towards payroll costs (50k / 52 weeks * 8 weeks). That leaves $2,725 that you would need to spend in qualified expenses over 8 weeks in order to have it forgiven. That might not be so difficult.

If all that makes your head spin, just use this calculator below to figure out your total loan amount, what would be forgiven and what would be unforgiven. The unforgiven amount will need to be repaid over 2 years at 0.5% interest. No payments are due for 6 months, but interest will accrue over this time.


Misc. Info

If you receive a $10,000 grant from the EIDL loans (more information on that below) the grant will be subtracted from the amount that’s forgiven under PPP. So let’s say you get the $10,000 grant from EIDL, then a $25,000 loan under PPP of which 100% of it is used for qualified expenses and should be forgiven. Only $15,000 of that $25,000 would actually be forgiven.


Please reach out, we’d love to help! 

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Countless assumes no liability for actions taken in reliance upon the information contained herein.

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