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PPP Loans: What Is Owner Compensation Replacement & How Does It Work?

    Chris Motola
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Chris Motola

Chris Motola

Expert Analyst & Reviewer at Merchant Maverick
An expert in personal and business loans and financial health, Chris Motola has been writing about small business finance and payments for over 5 years. He has been cited in various industry publications, including Forbes Advisor, GoBankingRates, and Medium. Chris is a graduate of the University of Central Florida.
Chris Motola
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    Chet Lustgarten

    Thanks for your extremely helpful article. You refer to SBA Form 3508EZ but that form appears to apply to PPP loans of more than $150,000. Moreover, that form caps the forgivable amount at 60% of the amount entered on line 1 of the form. (SBA Form 3508S does not mention such a cap.) That would mean that a sole proprietor with a loan of less than $20,833 with no payroll expense cannot claim 100% of the loan to the extent it does not exceed net (or gross?) income divided by 12 and multiplied by 2.5. So I assume that what you are saying is that the 60% cap does not apply to a sole proprietor with no employees who is claiming loan forgiveness for owner compensation replacement.

      Jessica Dinsmore

      Hi Chet,

      Thank you for posting! Form 3508ez instructs borrowers to divide line 1 by 0.60, not multiply it by 0.60. So it’s not 60% of line 1. For example, if you claim the maximum $20,833 owner compensation, your maximum forgiveness amount is $34,721, not $12,499 (assuming you claim no other expenses). So no special exemption is needed for ownership compensation on Form 3508ez. I hope that helps!


        i have a question. I am on unemployment compensation while i got approved for PPP loan. can i only apply my expenses for forgiveness since i am on unemployment.
        or I have to return all the money.

          Erica Seppala

          Hi Mirna!

          If you have received PPP funds, this will need to be reported as income to your state unemployment office. Doing so may make you ineligible to receive benefits through your PPP covered period. However, you may be eligible to apply and receive benefits again once your PPP loan funds have been exhausted. I would encourage you to reach out to your state unemployment office to learn more. Good luck!


            Regarding the 20,833 limit, does that apply to each draw or both draws combined? I just received my second draw today, I’m an independent contractor and used 100% of the first draw for owner compensation (which was less than 20k), but if I do the same with the second draw that would exceed 20,833, but not sure if that rule applies to each draw separately or both combined? Thanks

              Erica Seppala

              Hi Mandy!

              That amount applies to each draw. Since your second draw will cover a time period that is different than your first draw, you will be able to pay yourself owner’s compensation up to the maximum amount with your new PPP loan.


                I had 1099 NEc for 100K for 2020 and I received $20800 PPP 1 Loan in April 2021. I did not file my tax return for year 2020 yet as I have extension.
                Do I have to show profit of minimum of $20800 on line 31 of Schedule C of tax year 2020.

                  Jessica Dinsmore

                  Hi Chris,
                  Thanks for posting here! Our understanding is that if the loan is forgiven you don’t have to report it as income–I hope that answers your question!


                    I’m self employed with no employees. in your response to Sheree, you stated that the Owner Compensation Replacement rule allows you to allocate 2.5 months’ worth of net profit (using 2019 net profit for calculation) to personal compensation and that this amount is considered forgivable. My 2nd draw PPP loan was approved using 2020 gross income. How does Owner Compensation Replacement work with that?

                      Erica Seppala

                      Hi Sheri!

                      If gross income was used to calculate your PPP loan, you will also use gross income to calculate Owner Compensation Replacement. As someone that is self-employed with no employees, you can simply calculate 2.5 months’ worth of your 2020 gross income that was reported on line 7 of your Schedule C. The maximum amount of $20,833 still applies when you calculate your OCR this way. Good luck!


                        I used my 2020 Schedule C to determine my PPE amount as a self-employed contractor. As I understand it, 11 weeks after my loan process, I can apply for forgiveness using the entire amount (less than $10k) as compensation. Do I just put this on the Payroll line of the EZ form?

                        Also, are any travel expenses a qualified expense trying to get Covid reduced business back?

                          Erica Seppala

                          Hi PLM!

                          Yes, if you used your PPP loan for Owner Compensation Replacement, this will be forgiven. This amount will be written on the “Payroll Costs” line of Form 3508EZ.

                          Unfortunately, travel expenses are not forgivable under the rules of the PPP. Good luck!

                            Sheree Saleem

                            If I am self employed with no employees do I pay myself or not

                              Jessica Dinsmore

                              Hi Sheree,

                              Yep! The short answer is:

                              “…your 2019 net profit is used to determine your monthly average net profit. The Owner Compensation Replacement rule allows you to allocate 2.5 months’ worth of net profit to personal compensation.

                              This amount is considered forgivable, meaning you won’t be expected to pay it back. Better yet, there are no restrictions on how you can spend that portion of your funds.”

                              But please refer back to the article for more specifics and calculations.


                                Do I have to pay income tax on the Owner compensation Replacement?

                                  Erica Seppala

                                  Hi Christine!

                                  PPP loans that are used for eligible purposes and are forgiven are not taxable. This includes Owner Compensation Replacement.


                                    So, if you are the owner and you have employees that work for you and they get W2s, that means you are not a sole propieter. So, therefore, you cant use ppp loan to compensate. CORRECT????

                                      Jessica Dinsmore

                                      Hi Diana,

                                      The term sole proprietor really just refers to the business structure, meaning that there is one sole owner who is the responsible party. A sole proprietorship can have employees, and the owner can receive compensation as well. We breakdown the payroll calculation in this post on PPP Loans For Sole Proprietors. Does that help? I hope so!

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