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An Independent Contractor’s Guide to PPP 2nd Draw Loan Forgiveness Documentation

You might have found that getting the PPP second draw loan was easier than you thought.

The government wanted to get stimulus money to as many people as possible. They simplified the process, and then some FinTech companies like Womply and Blue Acorn made it even easier.

But now it's time to apply for PPP loan forgiveness on that second draw loan. And they want documentation!

As an independent contractor, especially someone working in the gig economy, this whole thing looks pretty intimidating.

Is it really that complicated? How do you find the information that banks and the Small Business Administration are looking for?

Hundreds of documents piled up on one another, an image that comes to mind for many when we think of PPP loan forgiveness documentation.
This is what we often think of when we hear the word “documentation.”

If you want to get your second draw loan forgiven, you may have to do a little more book keeping work than you thought. However, it's not that difficult. We'll walk through all that. In the article below we'll look at:

  • Why the SBA is looking for reduction of revenue documentation
  • The three types of documentation the SBA will accept
  • When you can use just your tax records as documentation
  • How to use financial statements as documentation
  • How to use bank records as documentation
  • What happens when you've provided your documents?

But first, a disclaimer:

The information in this article is based on my research. This is for informational purposes only and is NOT financial or tax advice. For one's individual personal situation, small business owners should seek out advice from a CPA or financial adviser who is deeply familiar with how the Paycheck Protection Program works with your particular business type.

This article is geared towards self employed individuals.

I thought that it was important to point this out before you got any further.

This particular website is geared towards independent contractors in the gig economy. It's especially meant to help those who deliver for companies like Grubhub, Doordash, Uber Eats, Instacart and a number of smaller delivery outfits. Much of this also applies to rideshare drivers such as with Uber and Lyft.

Ultimately, this article is for the person who works as a sole proprietor. It's for someone who is in business for themselves who files their business taxes as part of their individual tax return.

If you run a corporation, or your business provides employee compensation for others than yourself, documentation requirements are much more complex than this article will cover. Your maximum loan amount is likely much higher, you have other business expenses that may qualify, and the reporting and payment receipts requirements may be very different for you.

For most self employed individuals and gig workers, the PPP loan amount AND the loan forgiveness amount are both based on what they call owner compensation replacement. The CARES Act originally set that at 2.5 times your net profit, and the Biden administration later amended it to be 2.5 times gross receipts.

For most sole proprietors, PPP funds are considered owner compensation replacement, which is considered a payroll cost. That means that payroll expenses and other eligible expenses aren't a factor as much as they are for a business with payroll.

This information relates to SECOND draw PPP loans.

You don't typically need as much documentation for your forgiveness application on first draw PPP loans. The first set of loans didn't have the reduction of revenue requirement. Typically your IRS form Schedule C for 2019 and 2020 are sufficient.

For first and second draw loans, most self employed individuals will use the same form 3508S to apply for forgiveness. It's a fairly straight forward form.

All of this to say, getting full loan forgiveness is a simpler process for the first PPP loan you received. This article is to help people know what they need to prove their reduction of income for the second loan.

Why do you need reduction of income documentation to get your second draw PPP loan forgiven?

Reduction of revenue for a business or self employed person illustrated by a bar graph on a green chalkboard.

You may not have even heard of the reduction of income requirement. Some Fintech companies and lenders were trying to get so many applications pushed through that they quit mentioning that requirement.

The government allowed people to take a second PPP loan as part of the December 2020 Stimulus package. However, there was an additional requirement.

To qualify for a second loan, you had to show that you had at least a 25% reduction of income for any quarter of 2020 when compared to 2019.

In other words, if your earnings for a given quarter in 2020 were more than 25 percent lower than earnings for the same quarter of 2019, you qualify.

In order to have the second draw loan forgiven, you have to be able to show that at least one quarter had that much reduction. The SBA wants proof. Tax documents don't provide that proof since those just give annual numbers and the PPP qualification is based on quarter by quarter numbers.

The SBA chose to wait until you apply for forgiveness to ask for that proof. And now that it's time to apply for full forgiveness, the time has come to provide that proof.

Calculating the reduction of revenue

The reason that reduction of revenue is important is this: The government wanted the second draw of the PPP to go to businesses whose earnings were impacted by the pandemic. The way they chose to measure it was by what they called a reduction of revenue

If you started your business on or before the first half of 2019, you will compare how much you made in a given quarter (January through March, April through June, July through September, or October through December) to the same quarter of the year before.

You can read more here about the 25% reduction of revenue requirement for second draw PPP loans and use our PPP Second Draw Reduction of Income qualification tool here to see if you qualify. If you started your business later than the first half of 2019, there are some different rules as to how you compare quarters, and those rules are discussed in the article and the qualification tool linked above.

Obviously if you earned more during a given quarter in 2020 than you did the same quarter in 2019, you didn't have a reduction of income. But if there's one quarter where you did earn less in 2020, you might qualify.

Here's how you calculate the reduction:

  1. Add up all of your business earnings for each quarter of 2019 and 2020.
  2. Compare each quarter of 2020 to the same quarter in 2019.
  3. If you earned less in 2020 for any quarter in 2020 than the same quarter in 2019, move on to step 4. If you didn't, you don't qualify for forgiveness.
  4. For each quarter where you earned less, do the following:
    1. Subtract your earnings for the quarter in 2020 from earnings for the same quarter in 2019
    2. Divide the difference by how much you earned for that quarter in 2019. That number will be your revenue reduction percentage.
    3. If your revenue reduction for any quarter was more than 0.25 (25%) you qualify. If none are greater, you don't qualify.

Here's an example:

  • In the 2nd quarter of 2019 your business earned $16,000.
  • For the same quarter in 2020, you earned $13,000
  • Subtract $13,000 from $16,000, and the difference is $3,000
  • Divide $3,000 by $16,000 and you get .1875 (or 18.75%). 18.75% is less than 25%, so that quarter doesn't qualify.
  • If the 2020 earnings had been $11,000 instead of $13,000, the difference of $5,000 is .3125 (31.25%) of the 2019 earnings, which does qualify.

Only one quarter has to have a reduction of revenue of more than 25% to qualify.

Are there times when you don't need documentation?

Some business owners won't need to prove a reduction of revenue. It depends a lot on what type of business you're in.

The SBA launched a Direct Forgiveness Portal. A lot of smaller lenders will have you use their direct portal.

As part of that portal, the SBA introduced a COVID Revenue Reduction Score. Businesses with loans less than $150,000 can use their score instead of documenting their own qualification.

How the score works is that they look at the type of business you have. Some business types were hit harder by the pandemic than others. Rideshare and many travel related businesses are an example.

The SBA creates a score based on the type of business you operate. If your business type has a score that meets a certain level, you may be able to bypass the documentation process.

This website focuses a lot on the Gig economy. While there are a lot of similarities between rideshare and delivery, this is one where the two may be on opposite ends of the COVID Revenue Reduction Score.

There was a dramatic drop in rideshare business when the pandemic hit. Uber and Lyft drivers are more likely to have a score that allows them to bypass the whole documentation process.

At the same time, delivery business took off like gangbusters. Doordash, Uber Eats, Instacart, Grubhub and others had their business explode. As a result, delivery contractors may not meet that COVID Revenue Reduction Score.

Whether you can use that score depends on where you have to file for forgiveness. If your financial institution handles its own forgiveness applications, you will likely have to provide the documentation no matter what. If your lender uses the SBA portal, the score will determine whether you need to provide documentation.

Three types of documentation that the SBA will accept

You say you earned less in 2020. The SBA wants you to prove it. You can do that one of three ways.

  • Tax returns will work in some situations
  • Financial statements showing quarterly earnings and expenses
  • Bank records

We'll walk through each document type.

Initially you'll submit one. You may be asked later to submit more information, so be prepared.

What they don't ask for

One thing you'll notice: The SBA isn't asking for records of your payments to yourself. They are not asking for you to prove that you paid yourself a paycheck from one bank account to another or anything like that.

They don't ask for independent contractor spending or cancelled checks in the time period from the beginning to the end of the covered period, because that was never a requirement for loan forgiveness in the first place.

I have heard of smaller financial institutions asking sole proprietors for information like that.

My theory is that these are people who tend to work with traditional small businesses. They are used to working with companies with payroll and may not understand how it's different for a sole proprietorship.

I have to wonder if situations like this are part of why the SBA created their forgiveness portal in the first place, to make sure people didn't get bogged down with requests for information that was never required in the first place.

When will tax records be enough to document your reduction of income?

A pen and calculator on top of a stack of tax documents

When you applied for your Paycheck Protection Program loan, you likely had to upload some tax information. As a self employed person or sole proprietor, you would have provided your Schedule C that showed your earnings and expenses for your business.

In most situations, your Schedule C will not be enough. That is because the requirement is based on quarterly earnings, and your Schedule C only reports numbers for the entire year.

However, the SBA did make an exception.

If your total business earnings for the entire year in 2020 were at least 25% less than your 2019 business revenue, you can simply submit your Schedule C's for both years.

It makes sense when you think about it. If you made 75% or less for the entire year in 2020 than in 2019, then at least one quarter of the year had to be a 25% revenue loss or greater.

How to use financial statements as documentation of a 25% revenue reduction.

If you've been keeping good records, providing a copy of those records is a good way to go.

If you haven't been keeping good records, now is as good a time as any to start.

You can provide a profit and loss statement to show your quarterly earnings for each year to document your quarterly totals.

A profit and loss statement is a standard report provided by most bookkeeping programs. Programs such as Hurdlr, Quickbooks or Quickbooks Self Employed will let you choose the dates and create a P & L (Profit and Loss) report.

A Profit and Loss statement lists several lines of numbers. It will show your income (with some programs letting you show income from several sources). Then it provides total amounts spent for each of several expense categories.

Take a look at your Schedule C from your taxes. It's entitled “Profit and Loss from Business.” It is very similar to what you would see on a P&L form from your bookkeeping software.

Example of a Profit and Loss statement for first quarter of 2020 (January, Feburary, and March) showing total earnings, total expenses by category, and total net income.
A sample Profit and Loss statement for first quarter 2020 as generated by Hurdlr.

The example above shows a profit and loss for the first quarter of 2020, with income and expense totals for January through the end of March.

What the SBA is looking for in your financial statements.

Here's what the Treasury department says:

If the financial statements are not audited, the Applicant must sign and date the first page of the financial statement and initial all other pages, attesting to their accuracy. If the financial statements do not specifically identify the line item(s) that constitute gross receipts, the Applicant must annotate which line item(s) constitute gross receipts.

Treasury Department answer to “What documentation do I need to provide to corroborate that my entity sustained at least a 25 percent reduction in gross income?”

The SBA prefers audited financials. That means you've had a CPA or auditing company look through your book keeping and compared it to other things, and it's made sure everything lines up.

Audits are expensive. Few of us independent contractors will have that done.

However, you can submit signed copies of your Profit and Loss. When you sign the copy, you're making a statement that these numbers are accurate.

In other words, don't make up numbers.

Sign and date the first page. If your P&L is like the example above, it will be one page for 2019, and one page for the same quarter in 2020. Initial the second and following pages, then scan the signed forms and submit.

How to use Bank Statements to Document your Reduction of Revenue

If you didn't use a book keeping program that lets you create a profit and loss report, you have two options:

  1. Get a program like Hurdlr or Quickbooks Self Employed and enter your information.
  2. Get a copy of your bank records and add it all up.

If you choose to use bank records for your documentation here's what you will have to do:

  • Download or print out your bank records for every month of 2019 and 2020. Do this for EVERY bank or debit card that you have had earnings deposited in.
  • Underline or highlight every deposit that was a payment for your business. Do not leave anything out. Skipping over payments can get you in trouble.
  • Add up all of those payments for every month.
  • Add those totals up for every quarter.
A sample of a bank statement showing deposits from gig economy companies like Grubhub, Uber, and Doordash, with the totals highlighted.
Sample of a bank statement with deposits higlighted

Gather together every bank statement for every bank for every month in the quarter that you're claiming a reduction of revenue for. Highlight or underline every deposit. Then scan those into one document that you can upload.

Some thoughts about using bank statements.

I said this earlier, but it's worth repeating:

Make sure you've recorded every payment you ever received.

In the gig economy it's easy to have payments sent to more than one place. You might get payments deposited to your bank account, but then use Doordash's debit card for instant pay. Or maybe you changed banks. Don't leave anything out.

It's hard to do if you changed banks. With a lot of banks, you can't log in to get your bank statements once you've closed the account. If that happens you'll need to contact your bank.

Don't be tempted to leave out any statements because they don't have deposits on them. You want to be thorough. Even if you have several pages of bank records that have nothing underlined, include them.

In the example above, I blurred out some transactions. Don't do that on your bank records that you turn in. Don't block anything out.

The important thing is, you don't want to give them any reason to think you're leaving anything out or trying to hide anything. If anything looks shady or seems to be missing, they can come back asking for more information.

You have to be accurate with all this. Here's the thing: They already have your tax records. They can easily require you to provide all your records for the whole year, and if your tax records don't line up with the numbers you're providing, that can create problems.

What happens once you've provided your documents?

Three individuals sitting in a waiting room checking their watches as they wait for their PPP loan forgiveness application to be approved.

At this point it depends on where you apply for forgiveness.

If your bank does their own processing, they will review your ppp loan forgiveness application and documentation. If they feel there's something not quite right, they may ask for further documentation.

For example, if your Profit and Loss seems off, they may ask for financials for the full year. Or they may request bank account statements to support your information. Tax records, full year financials and even 1099's may be requested. If your financials, bank statements and tax records are not lining up, that could lead to further scrutiny or having your application for forgiveness denied.

This is why it's important that you don't make stuff up. Absolutely do not create documentation. That's bank fraud, and you don't want to get caught up in the repercussions of that.

Once your loan servicer has reviewed everything they'll submit your application to the SBA for final approval. They may also ask for additional information.

If your application was through the SBA portal, the review of application and approval are all handled by the SBA. As mentioned earlier, they may not require documentation at all depending on your industry.

Ultimately, the bank or processor has 60 days to make a decision on whether to forward your application to the SBA, and the SBA has 90 days to approve it from that point. Additional time may be required if the SBA decides further review is needed.

In most cases it won't take that long.

To give you an idea on what to expect, my first draw forgiveness application took 33 days from submission to SBA decision. Keep in mind that the additional documentation requirements can slow things down a lot for second draw PPP loan forgiveness applications.

If you have good records and it's well organized, that will help tremendously. It may be worth taking the time to double check all of your information and make sure it lines up. If you haven't kept records, it might be wise to organize everything now and put it into a good bookkeeping format.

I know, it's kind of like doing taxes all over again. But remember that you applied for a business loan through the United States Government. Your best way of making sure it comes off without a hitch is to make sure you have all your ducks in a row as a business should.

It could be the difference between having your loan forgiven or paying back thousands of dollars.

Could this help someone else? Please share it.