Here’s how to pay your PPP loan money, if you’re self employed. The goal is to create crystal clear documentation showing how you used these forgivable funds.
What’s a PPP Loan?
Simply put, there’s a loan program offered because of the Cares Act called the PPP. When these funds are used properly, these loans are completely forgiven. This means you get to keep the money and don’t have to pay back any of it.
My initial post about the PPP covers the basics and many of the changes along with way. It’s detailed and helpful, so check that out here. There were also recent updates about Round 2 of PPP, so be sure to read that too.
Can I Really Pay Myself 100% of PPP Loan Money?
If you’re self-employed, an independent contractor, sole proprietor, or gig worker, then I have good news for you. Schedule C workers with no employees can use 100% of their PPP loans as owner’s compensation when choosing the 24-week covered period for forgiveness.
You’re not alone in wondering how to pay yourself and what documentation is going to be necessary to get forgiveness. I’m going to tell you how to pay yourself PPP loan money as owner’s compensation in four separate ways:
- Straightforward Answer—Do nothing and wait.
- Good Answer—Continue to do what you normally do.
- Better Answer—Open a separate, new PPP account to create clean documentation.
- Best Answer—Open a separate, new PPP account and make ten equal transfers over ten weeks.
Why Would I Do Nothing and Wait?
Let’s start with the straightforward answer—do nothing and wait. People are not going to like to hear this, but the SBA has failed to give proper guidance about how to pay yourself if you’re self employed.
Lenders are confused and don’t provide answers. The guidance online isn’t clear, and all the countless rule changes have left us with more questions than answers.
I don’t like this straightforward answer at all because the SBA has given you these funds to use for your business. Therefore, as soon as they’re deposited in your account, you have the right to use them. Let’s move on to the next answer.
Pay Yourself As You Normally Would
A good answer to our question is to simply pay yourself as you normally would. However, this leaves a huge gray area. For example, if someone is paying themselves weekly or biweekly or they do some sort of owner’s draw monthly or quarterly, then what does it mean to continue to do as you normally would?
When it comes time to request forgiveness is simply providing bank statements or payroll documents going to be enough to show how you paid yourself? Let’s talk about a better answer to this question.
Create Crystal Clear Documentation
A better answer for how you can pay yourself PPP funds is to open a separate, new bank account.
I use CIT Bank for my real estate because it’s a high interest savings builder account. I make monthly deposits when rent checks arrive to keep that side of my business separate.
SoFi money is another great option for a new, separate PPP account. Right now, you get $50 when you open a SoFi Free Money Bank Account and deposit $500.
The smart reason to open a new account for your PPP funds is that if any part of your PPP loan is not forgiven it’s going to turn into a 1% loan. Therefore, depositing the full amount into a bank like CIT or SoFi is going to create crystal clear documentation.
Remember, by doing this your bank statements are going show you receiving the PPP funds into your preexisting business or personal account. Then, it will show you transferred all of the money into a separate, new PPP account.
Now, you’re going to need to provide both statements as documentation—one showing the funds deposited and withdrawn, and the other showing that you have received the funds in your separate, new PPP account.
Listen very carefully to this next part. Because the amount of money you were supposed to receive for your PPP loan was your Schedule C Line 31 divided by 12 times 2.5—essentially, 10 weeks of payroll—some people may have been given too much money.
You need to check your PPP loan amount to make sure you know the amount that will be forgiven. I created a PPP Loan Calculator spreadsheet that you can access for free to check your numbers.
Request access here and make a copy for yourself.
There were also major updates made early 2021 to the PPP loan amount available to sole proprietorships. It is possible now to apply using your Schedule C Line 7, which is gross income. The calculation is going to be the same as above, except now you’re allowed to use Line 7.
It’s unclear at this time if increases can be requested for those of you who’ve already got money using Line 31.
I’m Confused. Why Do I Get 10 Weeks of Payroll If My Covered Period is 24 Weeks?
Some people are going to get confused because they’re only entitled to 10 weeks of payroll. However, they have 24 weeks to use the funds. To help clear up the confusion, let me give you the best answer for how to pay yourself PPP funds.
If you’re self-employed, first open a new bank account. Then, I want you to download my calculator to check your Schedule C numbers.
Next, take that correct PPP loan forgiveness amount and divide it by ten.
See, even though you have 24 weeks to use the funds, the correct amount of your PPP loan was only supposed to cover ten weeks or 2.5 months.
Therefore, once the funds are deposited in that new high interest savings account, you need to establish a bank to bank external transfer for 10 weeks. Over the course of those ten weeks, 10% of your PPP loan is going to transfer right back into your personal account.
This way you can use the funds and show you’ve paid yourself over ten weeks or 2.5 months.
Let me give you an example. Someone who received a $10,000 PPP loan would pay themselves $1,000 a week for ten weeks.
The best way to show documentation that they paid themselves is to transfer the money out of the account where the funds were initially deposited into a separate, new account.
Those funds are then transferred evenly over ten weeks. After that time, the balance in that separate, new account will get down to zero. At that time, you have used all of the PPP funds as owner’s compensation. Congrats!
How Do I Apply for PPP Forgiveness?
When your lenders are ready, they will accept your PPP loan forgiveness application—you can use the EZ form or the S form. Some lenders are creating a portal that auto-fills your information, so be on the lookout for that.
Many lenders appear to be going about loan forgiveness differently right now. Some are waiting on the SBA for more information, while others are encouraging borrowers to apply.
Either way, you should gather your statements from the dates when the funds were deposited in that initial account and the statements of you using those funds over the ten weeks. Your lender may ask for these bank statements, so I suggest being prepared with all documentation.
Also, remember that this money is not viewed as taxable income. It is not something that is going to be reported on your taxes as income.
Talks of a second round of PPP funding for small businesses are true too!
Okay, Let’s Recap
Many people are looking for answers on how to pay themselves PPP money.
A straightforward answer is to simply sit back and wait for the SBA to provide more guidance. However, that doesn’t allow you to use the funds in a way where you feel confident they’re going to be forgiven.
A good idea is to pay yourself as you normally would, whether that’s weekly, biweekly, monthly, or quarterly. Simply continue to pay yourself in your own routine manner.
A better idea is to open up a separate, new bank account solely for the purpose of depositing the entire PPP loan amount. To be clear, this is not a necessity. However, it is going to create a secondary form of documentation to show that you received and paid yourself those PPP funds.
The best idea is to open up a new bank account, check your Line 31 OR Line 7 calculation (depending), transfer the entire amount into that separate, new PPP account, and then make ten weekly transfers back to yourself. This shows that you paid yourself over the course of ten weeks or 2.5 months.
This way when you go to apply for forgiveness you will show that you have exhausted the funds in the correct amount. Then, you will you get 100% loan forgiveness.
Please let me know down in the comments if that’s something you would appreciate me posting about in the future.
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As always, I’m Rich and until next time.
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