self-employed retirement contributions

When the Paycheck Protection Program was initially announced, many self-employed individuals were relieved to learn that they were eligible for the forgivable loan. If you’re self-employed and received PPP funds, there’s a frequently overlooked rule related to loan forgiveness that may apply to you: your solo 401(k) contributions, as well as contributions to other retirement accounts, will not count toward loan forgiveness.

According to the Payroll Protection Program Flexibility Act, which was passed in June, small businesses that received a PPP loan must spend at least 60% of the loan on payroll costs in order to be eligible for forgiveness, with the remaining 40% spent on expenses that can be categorized as utilities, rent, and/or mortgage interest. For small businesses with employees, payroll costs can include benefits—including healthcare and retirement contributions. But for independent contractors and sole proprietors, that’s not the case.

As a self-employed individual, you qualify for a Solo 401k plan, and you’re able to make contributions as both an employer and an employee. Your PPP funds, however, are not considered eligible for contribution to your Solo 401(k). According to the SBA, payroll costs for an independent contractor or sole proprietor only include wages, commissions, income, and/or net earnings. Solo 401(k) contributions are made out of your net compensation, which is the amount you used to determine your PPP loan. While that net compensation is forgivable, an additional retirement contribution on top of your net compensation would be considered double-dipping.

If you’re self-employed, received PPP funds, and made a contribution to your Solo 401(k) expecting that contribution to count toward your forgivable total, you have a couple of options. You can leave the money in your retirement account and consider it as a regular contribution (assuming you haven’t gone over your contribution limit for the year). You will need to repay it to the SBA when your PPP loan goes into repayment—it won’t count toward forgiveness. If you need to take the money back out in order to repay the loan, contact your plan administrator as soon as possible. Typically, you would be able to withdraw the excess contribution without penalty if you notify your plan administrator by March 1 of the following year. You’ll receive your contribution back, as well as any earnings it amassed while it was in the account. Note that you must report these earnings as part of your taxable income.

We recommend submitting your application for PPP forgiveness when you can. If you’re concerned that you may not receive full forgiveness of your PPP loan or you’re unsure what funds can be put toward your 401k plan, we welcome you to schedule a consultation with our team.