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Paycheck Protection Program (PPP) – Guide for Small-Business Owners


Additional Resources

NOTE: The Biden Administration has announced some important changes to the Paycheck Protection Program that may affect freelancers and micro-business owners. Refer to the Small Business Administration’s PPP loan program guidance for up-to-date information. 

The most widely publicized feature of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a massive stimulus bill passed amid the worsening economic fallout of the COVID-19 pandemic, was a provision for one-time stimulus payments ranging up to $1,200 per head to most American adults.

Coupled with expanded unemployment insurance, one-time payments of $500 per dependent child to eligible parents and guardians, and other types of small-business assistance loans (such as Economic Injury Disaster Loan disbursements), it undoubtedly helped Americans facing pandemic-induced financial insecurity.

But a lower-profile feature of the CARES Act has arguably proved even more consequential for millions of Americans who remained employed, not to mention the entrepreneurs supervising their work: the Paycheck Protection Program (PPP).

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What Is the Paycheck Protection Program?

Through the PPP, the CARES Act authorizes the SBAmall Business Administration (SBA) to disburse up to $659 billion in low-interest loans to small businesses, self-employed individuals and solopreneurs, and qualifying nonprofit organizations.

Each PPP loan covers up to $10 million in business payroll costs during the eight weeks following its origination. Any proceeds put toward payroll and certain other qualifying expenses are forgivable at the borrower’s request.

That means loans used entirely for qualifying expenses don’t need to be repaid at all — assuming the borrower’s loan forgiveness application is granted and the borrower lives up to the program’s terms.

PPP first opened for small-business applications on April 3, 2020. Self-employed individuals and nonprofits were permitted to apply beginning on April 10, 2020. After closing on Aug. 8, 2020, the program was reauthorized by Congress in December 2020 and reopened for first- and second-time applicants in January 2021. It will remain open until at least May 31, 2021, with some important changes implemented by the Biden administration, including the potential for higher loan amounts for sole proprietors.

If you’ve already applied for a PPP loan, review the program’s procedures for repayment and applying for forgiveness. Otherwise, bookmark this article and check back regularly for updates on the program’s status.

Eligibility & Application Requirements

Millions of small-business owners, self-employed individuals and solopreneurs, and nonprofit organizations are eligible to apply for PPP loans. And the PPP application process itself is more straightforward and less bureaucratic than a typical SBA loan application, which is good news for cash-strapped borrowers hoping to expedite their applications.

Who’s Eligible for a PPP Loan?

Any qualifying entity with fewer than 500 employees is eligible to apply for a PPP loan. That includes:

  • Formally incorporated for-profit businesses
  • Nonprofit organizations
  • Tribal businesses
  • Self-employed individuals, including those working as independent contractors and freelancers

The PPP waives the employee limit for certain types of businesses. The SBA Contracting Guide has more information about business size calculations and relevant exceptions.

The PPP waives ordinary restrictions on SBA loan applications, making it much easier for businesses and self-employed individuals to apply. Most important, the program waives the credit elsewhere requirement, which compels SBA loan applicants to look for other sources of credit before applying for SBA funding. Essentially, any eligible business can use the PPP as a first resort to help cover payroll.

Getting a PPP Loan

Sole proprietorships and small businesses, including nonprofits, were cleared to apply for the first round of PPP loans beginning on April 3, 2020. Self-employed individuals and independent contractors were cleared to apply beginning on April 10, 2020. Eligible individuals and entities must have been in business on Feb. 15, 2020.

For both groups, the application period was initially set to last until June 30, 2020. On June 30, with about $130 billion in unspent funds still on the program’s books, Congress extended the application period until Aug. 8, 2020.

Following the program’s reauthorization, eligible businesses that have not already received first-draw PPP loans were cleared to apply beginning on Jan. 11, 2021. Second-round applicants (for second-draw PPP loans) were cleared to apply beginning on Jan. 19, 2021.

Eligibility criteria for second-round applicants are different from (and stricter than) those for first-round applicants, per the SBA:

  • The applicant already received a first-draw loan and has used (or will use) the full amount for authorized uses only.
  • The applicant has no more than 300 employees.
  • The applicant can prove a 25% reduction or more in gross receipts between comparable business quarters in 2019 and 2020.

Businesses eligible for Economic Injury Disaster Loans (EIDL) can also apply for PPP loans if eligible. However, businesses that receive EIDL loans may have their PPP loan amounts reduced by the amount of the EIDL disbursement. See the SBA’s FAQs on EIDL and PPP issues.

How to Apply

To apply for a PPP loan, complete and submit a completed PPP loan application with all required supporting documentation to an approved lender. Use the SBA’s zip code search feature to find a list of approved lenders near you or visit to start your application.

On the loan application form itself, you must support your funding request with valid payroll documentation — most likely a report from your payroll provider showing a detailed breakdown of your payroll expenses, including payroll taxes.

You must also provide your tax identification number (your employer identification number or Social Security number), which your lender may use to verify the payroll information submitted with your application is identical to the payroll tax information you submitted to the IRS.

You must also certify in good faith that your business meets several conditions of the PPP:

  • The economic uncertainty around COVID-19 impacts your business.
  • You’ll use the proceeds for approved purposes.
  • You have not and will not receive another PPP loan.
  • You’ll provide all documentation required by the lender before the loan is disbursed.

Calculating Your Funding Request (PPP Loan Amount)

You can apply for 100% of your expected monthly payroll costs (or gross income for sole proprietors) for the eight weeks following your loan’s funding plus an additional 25% of that amount to cover other expenses. This calculation depends on your business’s age and seasonality:

  • If your business has been open since the start of 2019 or before, use your average monthly payroll expenses for 2019 to estimate your payroll obligations for the eight weeks covered by the PPP loan.
  • If your business is seasonal, use your average monthly payroll expense during the second quarter of 2019.
  • If your business opened after Jan. 1, 2019, use your average monthly payroll expense during the first two months of 2020 (from Jan. 1 to Feb. 29).

In all cases, multiply your average monthly payroll expense by 2.5 to calculate the maximum funding amount.

Beginning in the first week of March 2021, applicants without employees (sole proprietors) can use gross revenue as the basis for their funding request, rather than net income (income after business expenses), as had previously been the case. This change is part of a package of Biden administration updates aimed at ensuring the Paycheck Protection Program helps the most vulnerable small businesses and solopreneurs.

Key PPP Loan Features

PPP loans have very low interest rates and short repayment terms. However, for many borrowers who devote the entirety of their loans’ proceeds to payroll costs, these features won’t ever come into play thanks to the program’s generous criteria for loan forgiveness. As long as you use it as indicated, getting a PPP loan forgiven is even easier than getting one in the first place.

PPP loan terms are identical for all program borrowers, regardless of loan size, employee count, entity type, or any other factor.

What You Can Use Your Funds For

You can use PPP loans to cover four types of expenses:

  • Payroll
  • Mortgage interest
  • Rent
  • Utilities

You can use loan proceeds to cover expenses other than payroll (nonpayroll costs) only if you incurred those expenses under contracts (such as commercial leases or real estate purchase agreements) in force before Feb. 15, 2020.

The SBA defines payroll expenses to include:

  • Compensation (employee salaries, wages, tips, and commissions) up to $100,000 per employee on an annualized basis
  • Employee benefits, including paid leave and vacation time, group health insurance payments, severance pay, and retirement benefits
  • State and local taxes on compensation
  • Income from self-employment or independent contracting, if applicable, up to $100,000 annualized per employee

Interest & Collateral

The interest rate on all PPP loans is a flat 1.0%. All loans are unsecured, meaning borrowers aren’t required to put up collateral as a condition of funding. Nor is a personal guarantee required from business owners or organization heads.

However, the SBA advises that using loan proceeds for any fraudulent purpose — basically, affirming that you’ll use the funds for payroll or other qualifying business expenses and then failing to do so — is a violation of federal law that exposes the borrower to criminal prosecution.

Expenses Eligible for Forgiveness

All four types of eligible expenses — payroll, mortgage interest, rent, and utilities — are eligible for forgiveness.

However, because the primary purpose of the PPP is to subsidize employers’ payroll costs, it is unlikely loans will be fully forgiven when the borrower uses more than 40% of the proceeds to cover other expenses.

For example, an employer using 50% of a hypothetical PPP loan’s proceeds for rent and utilities and 50% for payroll would most likely be obligated to repay 10% of the loan’s principal. The entire amount used for payroll would be forgiven, but only 80% of the amount used for rent and utilities would be.

These forgiveness requirements come with an important carve-out for self-employed individuals with no employees. Because the SBA treats all income from self-employment as a payroll expense, self-employed PPP loan recipients can apply for (and likely receive) a maximum loan forgiveness amount of up to $20,833 in loan proceeds — 2.5 times the monthly cap on payroll expense forgiveness using the $100,000 cutoff.

Forgiveness Requirements

You must meet specific additional requirements to maintain eligibility for full forgiveness. Your forgivable amount is likely to be reduced if you do either of the following:

  • Decrease your full-time equivalent employee headcount before applying for forgiveness, unless you’re unable to rehire laid-off employees or hire similarly qualified employees or your business is unable to return to pre-pandemic activity
  • Decrease compensation (salaries and wages) by more than 25% for any employee earning less than $100,000 annualized in 2019

PPP Loan Repayment Schedule

All PPP loan balances not eligible for forgiveness are due in full two years after origination.

All borrowers can elect to defer payments entirely until the SBA pays the full amount to be forgiven to the lender, provided the borrower applies for forgiveness within 10 months of the conclusion of the forgiveness period. During this deferral period, interest continues to accrue.

Deferring payments does not affect the repayment term — you must repay all unforgiven balances within two years if your loan originated before June 5, 2020, or within five years if your loan originated on or after June 5, 2020.

However, borrowers can prepay — make loan payments ahead of the official repayment schedule — and can pay off loans in full without penalty at any time during the applicable repayment window.

How to Get Your PPP Loan Forgiven

You can request PPP loan forgiveness at any time during the loan term, though for practical purposes, it makes more sense to do so before repayments begin. You must include documentation supporting your claim to use the funds for approved purposes, including:

  • Documentation verifying full-time status and compensation rates for each full-time employee on your payroll
  • Mortgage documents
  • Lease agreements with evidence of rent paid
  • Any applicable utility bills

Under normal circumstances, you’ll receive an up-or-down decision on forgiveness within 60 days of submitting your loan forgiveness application to the SBA. Forgiveness amounts generally are not subject to income or business tax, but you should check with your tax advisor for guidance on whether to report these amounts on your tax return.

Final Word

The Paycheck Protection Program was a short-term fix for the sharp, sudden economic contraction caused by the COVID-19 pandemic. Demand for the first and second tranches of PPP funds was enormous, and the third round is likely to be no different.

If you do get the opportunity to apply for a Paycheck Protection Program loan, think of it this way. If your borrower application proves successful, the hour you spend gathering the necessary documentation, completing your application form, and submitting it to the lender of your choice could be the most profitable hour you spend at work this entire year.


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Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.