How to Spend Your PPP Funds (Updated for 2021)


Owen Yin


Reviewed by


January 20, 2021

This article is Tax Professional approved


If you want to get your PPP loan forgiven, you’ll need to spend your funds in very specific ways. Here are some common questions we get asked on what a Paycheck Protection Program loan can be used for. These guidelines apply to both First Draw and Second Draw PPP loans.

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What can I spend my PPP funds on?

Generally, PPP funds can be used for four purposes: payroll, mortgage interest, rent/lease, and utilities. Payroll should be the major use of the loan. The second stimulus bill also introduced four new categories of expenses that are allowed. We’ll go through all of the categories below.

What exactly is included in “payroll expenses”?

Payroll expenses include the following:

  • Gross salary or wage
  • Tips
  • Gross commissions
  • Paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act)
  • Allowances for dismissal or separation paid
  • Employee benefits costs (including retirement contributions)

Can I use the PPP to pay contractors?

Unfortunately, no. Payments to anyone who is not on employee payroll, whether they’re called independent contractors, subcontractors, or 1099 contractors, are all ineligible payroll expenses.

Can I use the PPP on back pay?

Yes, back pay fits within the definition of payroll that is incurred and paid within the 24-week forgiveness period.

However, if your employee was taking advantage of unemployment benefits during that time, back pay may complicate matters.

Can I use the PPP on new employees?

Yes, payroll costs of newly hired employees are eligible expenses.

Note that if you’re having a hard time getting your former employees back to work, you’re not required to bring on new employees just to meet your headcount numbers—the SBA has provided some leniency in that case.

Further reading: PPP Rules on Rehiring Employees

Can I use the PPP on bonuses?

Yes! The SBA has finally clarified that bonuses paid to employees, including hazard pay and commissions, are eligible for forgiveness.

However, bonus pay is considered one part of total compensation, which cannot exceed an annualized rate of $100,000 (or $15,385 for an 8-week period, $46,154 for a 24-week period). In other words, if you were already paying your employee $100,000 per year, you can’t add a bonus on top of that and get it forgiven.

Can I use all the PPP funds to pay myself?

No, and this applies to all small businesses.

Keeping your employees laid off and increasing your own pay goes against the purpose of the program. Your forgivable amount would be reduced because your headcount was lower than before.

Taking out funds as owners draws are not eligible PPP expenses at all, and would also not qualify for forgiveness.

Self-employed individuals can pay themselves with PPP funds, by claiming their owner compensation replacement. Their entire PPP loan is potentially forgivable.

Finally, compensation in general is limited to an annualized rate of $100,000, or $46,154 for the 24-week period. If you’re using an 8-week covered period, the cap is $15,385.

Can I use the PPP on taxes?

No, the PPP cannot be used to pay outstanding business, corporate, or property taxes. However, PPP funds can be used to cover state and local payroll taxes that you (the employer) have to pay over the loan period. Federal employment taxes are not a forgivable expense.

Can I use the PPP on retirement plans?

Yes, the employer’s contributions to employee retirement plans are allowed.

Contributions to a personal IRA or other retirement account would be considered to be a use of your personal owner compensation. The guidelines related to owner compensation apply as normal.

Can I use the PPP on utilities?

Yes, the SBA has defined utilities as “business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access.”

These utilities must have been in service before February 15, 2020.

For self-employed individuals who wish to claim a portion of their home utility expenses as part of their home office deduction, you must have claimed (or were eligible to claim) these deductions on your 2019 Schedule C. Put another way, if in 2019 you worked in an office space and did not have a home office, you could not have claimed a deduction on your home electricity bill. Even if you are currently working at home now, you are not eligible to claim home electrical utility expenses for forgiveness.

Further reading:

What are the new categories of expenses I can use the PPP loan for?

The second stimulus bill expands the categories of approved expenses to give businesses more flexibility when using their PPP loan.

  • Operations expenses: software subscriptions or services used in your business operations, such as payroll, sales, billing, and bookkeeping (like Bench)
  • Property damage repairs: costs due to public disturbances in 2020 that insurance did not cover
  • Supplier costs: essential purchases for your business that you obtained according to a contract, order, or purchase order that was in effect before you received the loan
  • Worker protection expenses: costs for protective equipment or property improvements made to comply with local or state health guidelines

Can I use the PPP on debt?

No, payments on credit card balances, merchant loans, or other forms of debt are not allowed PPP expenses.

The interest on business mortgage payments is allowed. Acceptable examples of a business mortgage include:

  • Mortgage interest on a warehouse you own to store business equipment
  • Auto loan interest on a car you own to make business deliveries

Can I pay off my EIDL loan with the PPP?

You can use PPP funds to refinance any EIDL loan your business received between January 31 and April 3, 2020.

I can’t find enough things to spend the PPP on. Can I just use it as a low-interest loan?

Unfortunately, no. You need to spend the PPP on the approved categories. If you stray outside the intended guidelines, you could be subject to scrutiny (and in severe cases, charged with fraud).

When you receive the PPP loan, you agree to only spend the funds on certain things. In order to receive the PPP loan you need to make following certification:

The funds will be used to retain workers and maintain payroll; or make payments for mortgage interest, rent, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures as specified under the Paycheck Protection Program Rules; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.

If you have excess funds, or believe you received more funds than you were qualified for, it is best to avoid spending it. Then you can speak to your lender about returning the excess funds.

More PPP resources

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
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