Helpful PPP Loan Guidance for 1099 Employees

Helpful PPP Loan Guidance for 1099 Employees

Reading Time: 6 minutes(Last Updated On: August 18, 2021)

Running a business solo is a tough gig, particularly during a global pandemic.

In fact, there are more than 44 million self-employed individuals in the U.S., accounting for roughly 30% of the entire American workforce. And with the economy taking such a hard hit because of the coronavirus outbreak, it’s clear that these 1099 employees need help just like any other business owner.

Financial relief for self-employed Americans is here in the form of the Paycheck Protection Program! Find everything you need to know and how to apply for a PPP loan as a self-employed worker, below.

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Self-employed workers and the Paycheck Protection Program

The Paycheck Protection Program is unique in many respects, one of them being that funding through the PPP is being offered to virtually all small business types including sole proprietors, self-employed individuals, and independent contractors. To be clear, the PPP is not unique in that regard; the Economic Injury Disaster Loan (EIDL) program also provides funding to those business types.

Top tip: Learn how the PPP and EIDL program compare & contrast before you apply with our  breakdown of PPP vs EIDL.

Looking back, it’s evident that the rules, instructions, and details surrounding the Paycheck Protection Program could have been communicated more clearly to small businesses and lenders. There were, and still are, complaints coming from small business owners all across the country that the application process is complicated and puzzling.

Chief among the criticisms of the Paycheck Protection Program is how confusing the PPP loan application process is for businesses that have 1099 employees, as well as the PPP loan application for 1099 employees themselves.

To be clear, we don’t mean businesses that have one-thousand-and-ninety-nine employees. We’re referring to independent contractors who are not included as permanent employees in a business’s normal payroll expenses.


What is a 1099 employee?

A 1099 employee is often referred to as a contractor, freelancer, or self-employed individual. According to the IRS, “an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.”

1099 employees can be plumbers, electricians, carpenters, painters, and even attorneys, accountants, and freelance writers – among many other professions.

There are more than 44 million self-employed individuals in the U.S., accounting for roughly 30% of the entire American workforce. Click To Tweet

So, who isn’t a 1099 employee? As the IRS defines it, “You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done).”

That’s pretty cut-and-dry stuff. But when it comes to PPP loans and 1099 employees though, things can start to get a little tricky. If you have questions about how 1099 employees can or should apply for PPP loans, scroll down for the answers!


Paycheck Protection Program (PPP) loan guidance for the self-employed

If you’re thinking about applying for PPP loans as a self-employed individual, there are plenty of questions to be asked. We’ve heard business owners and 1099 employees asking for help and so we’ve answered the call for more info, right here.

Note: Do you have questions about the Paycheck Protection Program more generally? Have a look over our PPP FAQs page:


Are 1099 employees eligible for the Paycheck Protection Program?

Yes, 1099 employees are eligible for the Paycheck Protection Program. In fact, according to PPP rules, businesses are supposed to leave 1099 employees out of their payroll expenses entirely.

What does that mean? Essentially, 1099 employees are supposed to apply for PPP loans on their own.

If your business meets the following criteria, you’re eligible for a self-employed PPP loan:

  • Must have been operating prior to February 15, 2020
  • Must be living and working in the United States
  • Must have a net profit for the year of 2019
  • Must be generating income as a sole proprietor, independent contractor, or self-employed individual
  • Must file a Form 1040, Schedule C for the year of 2019

Note: If you’re concerned about the Paycheck Protection Program running out of funds before you can apply, don’t worry. As of June 2, 2020, there remains more than $140 billion in the second round of PPP funds.


How to apply for PPP loan if you are self-employed

To apply for a PPP loan as an independent contractor or self-employed individual, you’ll be required to fill the same PPP loan application through a bank or alternative lender just like any other business type.

Applying for a PPP loan as a self-employed individual is almost the exact same process as it is for other business types, though there are different documents that you’ll be required to provide.


Which documents do 1099 employees need for a PPP loan application

The documents required for 1099 employees to apply for a PPP loan are:

  • PPP Loan Application
  • ID: driver’s license or another form of government identification
  • Statement of Good Will: a signed statement certifying that you’ll only use the funds to pay for costs approved by the program
  • Net Profits: Completed Form 1040, Schedule C
  • Payroll Costs: Tax Forms 940 and/or 941 between January 1, 2019 and the time of application
  • Expenses: a record of all business costs including invoices, bills, statements, and other costs like utilities, rent, and so on
  • Waiver from your existing lender(s): if you have any outstanding balances on business loans, you’ll need confirmation from those lenders – in the form of a waiver – that you can afford to take on more unsecured debt

Non-payment of Invoice


Are PPP loans for a 1099 employee forgivable?

Yes, 1099 employees and self-employed individuals are eligible to apply for PPP loan forgiveness. But self-employed individuals will calculate the amount of the PPP loan, and the amount of forgiveness, differently from other business types.

Another important note is that the amount of “payroll costs” for a 1099 employee will be automatically forgiven (**see ‘Step d’ below). It’s the remaining amount of the loan that isn’t automatically forgiven which you’ll need to be careful about if you want to avoid paying it back later on down the line.


How to calculate your PPP loan forgiveness as a self-employed individual without employees

First, calculate your PPP loan amount:

a. Define your net income as listed on your Form 1040, Schedule C (if it’s more than $100,000 then you must reduce it to $100,000)

b. Divide net income by 12 to get “payroll costs”, even if you don’t have a payroll

c. Multiply your monthly payroll costs by 2.5 to define your PPP loan amount

Second, calculate your owner compensation replacement:

d. Multiply your net income by 8/52 (**this amount is automatically forgiven)

Third, subtract your owner compensation replacement amount from your PPP loan amount. The remainder must be used on other expenses eligible under PPP guidelines (utilities, rent, mortgage interest) in order to qualify for forgiveness.

Let’s use a quick example to explain:

  1. You earned a net income of $30,000 in 2019
  2. Your monthly payroll costs were $2,500 ($30,000/12)
  3. Your PPP loan amount was $6,250 ($2,500 x 2.5)
  4. Your owner compensation replacement amount is $4,615.38 ($30,000 x [8/52])
  5. $6,250 (PPP loan amount) – $4,615.38 (owner compensation replacement amount) = $1,634.62
  6. You must use the remaining $1,634.62 on utilities, rent, mortgage interest in order to qualify for forgiveness for that amount.


Do you need to file your 2019 business tax return before applying for a PPP loan?

No, you don’t need to file your 2019 business tax return before applying for a PPP loan. But you do need to have it filled accurately and completely since that information is important when applying for a PPP loan.


Are self-employed partnerships eligible for PPP loans?

Partnerships are eligible to receive PPP loans, but must only submit one PPP loan application for the partnership. If you’re in a partnership, you may not submit a separate PPP loan application as a self-employed individual.


Where self-employed individuals and 1099 employees can apply for a PPP loan

If you’re an independent contractor looking to apply for a PPP loan, look no further.

Apply for a PPP loan through Become and get matched with the funding provider that best fits your business’s financial needs. There’s no cost to apply, it’s fast, and it’s easy. Plus, Become is here to answer any questions throughout the application process. You won’t be left high and dry!


What if your net income is negative?

If you filled your net income on your Form 1040, Schedule C as a negative amount (a net loss), your business will not be eligible for a PPP loan.


What if your self-employed PPP loan application is rejected?

Not every business owner will have their PPP loan application approved. Some individuals will inevitably be rejected for one reason or another.

If you’ve applied for a PPP loan and were rejected, there are PPP alternatives that you can use to meet your financial needs – even as a 1099 employee or self-employed individual. Those include the EIDL program, SBA Bridge Loans, as well as smaller state or city-run programs and even privately run initiatives.


Give and get support

The Paycheck Protection Program is by no means the only resource that 1099 employees have to fight back the financial effects of COVID-19. They have each other! During these trying times, there is real strength in numbers. Business owners, whether self-employed or otherwise, are joining forces to support one another throughout this crisis.

Whether it’s asking & answering questions, sharing useful information, providing tools, tips, or resources – there are plenty of ways that businesses can help one another survive. Wondering where you can do all of that

Become a member of the Business Owner Community today and Become United.

Disclaimer: The information contained in this article is provided for informational purposes only, should not be construed as legal advice on any subject matter and should not be relied upon as such. The author accepts no responsibility for any consequences whatsoever arising from the use of such information.