06 Apr CARES Act Benefits Freelancers and Small Businesses
NOTE: Legislation passed and signed into law on April 24 replenished funding for the PPP and EIDL programs. Applications which have been pending are being processed. We expect the new funding will be depleted quickly, and are encouraging graphic artists to submit their applications as soon as possible. The Guild is advocating on behalf of graphic artists for stimulus funds earmarked for micro-businesses, sole proprietorships, and freelancers.
The CARES Act, passed on March 27, 2020 to address the financial duress caused by the COVID-19 crisis, included a suite of programs designed to assist small and large businesses, as well as freelancers. Those include stimulus payments for individuals, an extension of unemployment benefits to freelancers, payroll protection loans, an expansion of the SBA’s Economic Injury Disaster Loan program, self employment tax credit, and employee retention tax credit. Freelancers and independent contractors will be surprised to learn that many of these programs will benefit them as well as small businesses.
Stimulus payments are cheques that the government is issuing directly to tax payers. You don’t need to do anything. The stimulus cheque amounts will be deposited directly into your bank accounts on file with the IRS.
- Stimulus payments apply to taxpayers, including those who receive social security, retirement and disability checks, unemployed people and veterans. Individuals will receive up to $1,200 per person, or $2,400 for a couple filing jointly, as well as $500 per child under 17. Eligibility is based on your 2019 or (if you haven’t filed for 2019), 2018 tax filing. The stimulus check amounts will be deposited directly into your accounts on file with the IRS.
- The full stimulus payment amount is limited to individuals who earn $75,000 or under, or $150,000 or under for a couple filing jointly. Individuals earning $75,000-$99,000 or couples earning $150,000-$198,000 will receive a partial payment. (Your payment is reduced by $5 for every $100 your income exceeds the $75,000 limit.)
- For a head of household, the stimulus payment is limited to individuals who earn under $112,500 for the full payment, or up to $136,000 for the partial payment.
- The income threshold the check amount is based on refers to your “adjusted gross income” or AGI, as reported on your income tax form.
- Those who do not qualify for a stimulus payment because their 2018 or 2019 income threshold was too high may be eligible to receive a credit on their 2020 tax return if their 2020 income drops below the qualifying threshold.
- Those Not Eligible
- Children 17 and over, and college students claimed as dependents (note that these children are also too old to qualify their parents for the $500/child payment)
- Disabled people who are claimed as dependents
- Seniors who are claimed as dependents
- Immigrants without social security numbers, such as non-resident aliens, temporary workers, and illegal immigrants
- Children born in 2020, including in the early part of the year (although you’ll probably get a credit on your 2020 taxes)
- People who owe back child support
- Parents with split custody: the stimulus check for the children will only appear in the account of the parent who claimed the children on whichever tax form is used to calculate the check amount (2018 or 2019)
For more information, check the IRS’ FAQs page.
Enhancement of Unemployment Benefits
The CARES Act expands the unemployment insurance currently provided by states by providing an additional $600/week for up to four weeks, by including independent contractors and freelancers, and by restarting benefits that have lapsed. The enhanced unemployment benefits will be administered by each individual state. You can pull up your state’s unemployment offices by visiting CareerOneStop’s Unemployment Benefits Finder and selecting your state from their drop-down.
- The Federal Pandemic Unemployment Compensation provision provides an extra $600/week on top of your state unemployment benefits, until July 31 (four months from the time of enactment).
- Unemployment benefits are extended an additional 13 weeks after the state unemployment benefits run out, expiring on December 31, 2020. In states where the first week of unemployment is not covered, benefits are provided for that week.
- Under the Pandemic Unemployment Assistance provision, independent contractors, freelancers, gig economy workers (those working on a 1099 basis), and those with limited employment history are eligible.
- Workers who otherwise are able to work*, but are prevented from doing so for COVID-19-related reasons, may be eligible for unemployment benefits. Those reasons include diagnosis or symptoms of COVID-19, caring for a family or household member with COVID-19, unable to work because of an imposed quarantine; caring for a child whose school has closed because of a COVID-19-related public health emergency; or place of employment has closed because of COVID-19-related public health emergency.
- The provision allows states to pay pro-rated unemployment benefits to employers who reduce hours.
- Those not eligible: Workers receiving paid sick leave or family leave, or those who can work from home are not eligible for unemployment benefits.
* Note that 1099 workers may not be able to qualify for unemployment benefits for COVID-19- related reasons. The CARES Act creates two categories for workers eligible for Pandemic Unemployment Assistance: 1099 workers, and those experiencing work stoppage for COVID-19-related reasons. States have broad authority to interpret the provisions of the bill. See the Authors Guild’s excellent analysis of the bill for more information.
Payroll Protection Program
On April 15, the SBA announced that the PPP program is closed due to a lapse in funds. New applications are not being accepted. We are hearing that banks are processing PPP loans in anticipation of additional funding. We expect that the program will be refunded.
Small businesses, sole proprietorships, and independent contractors can apply for loans of approximately 2.5x the average monthly payroll through the Small Business Payment Protection Program. The purpose of the loan is to prevent employees from being laid off by subsidizing eight weeks of payroll. The loans must be applied to payroll, rent, and utilities. If applied appropriately, the entire amount of the load may be forgiven.
- Apply early: The loan program will be capped. Small businesses (under 500 employees) and sole proprietorships (such as design and illustration studios) can apply starting April 3rd. Independent contractors and self employed (such as individual designers and illustrators earning 1099 income) can apply starting April 10.
- The loan maximum amount will be 2.5x average monthly payroll costs.
- For the self-employed, the loan amount is determined by the wage, commissions, income, or net earnings from self-employment for the year prior to the loan (not more than $100,000 in a single year).
- The interest rate on the loan will not exceed 4%.
- Apply early: The loan program will be capped. Small businesses (under 500 employees) and sole proprietorships (such as design and illustration studios) can apply starting April 3rd. Independent contractors and self employed (such as individual designers and illustrators) can apply starting April 10.
- The loan maximum amount will be 2.5x average monthly payroll costs.
- For the self-employed, the loan amount is determined by the wage, commissions, income, or net earnings from self-employment for the year prior to the loan (not more than $100,000 in a single year)
- The interest rate on the loan will not exceed 4%.
- The loan amount must be used for:
- Payroll costs (at least 75% on payroll)
- Rent or interest on mortgage
- Debt obligations on loans which precede the PPP loan
- Employee healthcare costs
- Payments on the loan are deferred for six months (interest will accrue), and the loan is due in two years.
- If the workforce is maintained, and the money used as outlined above, you can apply for loan forgiveness.
To apply for the PPP loan, you’ll need to find a lender active through the SBA’s 7a lender program. If your own small business bank is part of this program, work through them. You’ll also need to fill out the lender’s PPP loan application. Many banks will require you to have some sort of relationship with them – for example, a business account or credit card – or will want assurance that you don’t have a business borrowing or credit relationship with another bank. The lender will require documentation showing that the loan is required to weather economic uncertainty and maintain payroll, including tax documents, mortgage payments, etc. In order to apply for debt forgiveness, you’ll also need to prove that you used the funds as required, so accurate record-keeping is a must.
If you’re an independent contractor, you’ll need to include your 1099-MISC forms. If you’re a sole proprietor, you’ll need to submit the appropriate schedules from your tax filing.
There is some confusion as to when sole proprietors and independent contractors should apply. Small businesses and sole proprietorships can apply starting April 3, and independent contractors and gig workers on April 10. However, there isn’t clear guidance on who is considered a sole proprietor versus an independent contractor. According to The Balance SMB, the distinction is made in how you are considered for tax purposes. A “sole proprietor” is a one-person business who is not registered with their state as a business entity, such as an LLC, corporation, or partnership. Sole proprietors file Schedule C forms with their personal taxes. Independent contractors work for someone else and receive a 1099-MISC to show their earnings. The difficulty, as any freelancer knows, is that you can be both a sole proprietor and an independent contractor. Many freelancers receive both 1099 income as a contracted worker, as well as income from services they provide to clients. Both the 1099 income and the other income streams are reported on their Schedule C.
So how to choose when to apply for the PPP?
Because there are serious concerns that the PPP loan program is underfunded, it’s crucial that individuals apply early, before the funding runs out. The opening date for applying as a sole proprietor is April 3, one week earlier than the opening date for applying as an independent contractor. A good rule of thumb to follow will be to look at your Schedule C. If you’ve only reported revenue streams from 1099 forms, you should apply as an independent contractor. But if you’ve reported multiple income streams (which may include 1099 income), you should be able to apply as a sole proprietor. Regardless of which route you’re going, search for a lender, and apply as soon as you can.
Forbes has a comprehensive article, How To Calculate Payroll Costs For Your Paycheck Protection Program Loan.
- Add together your payroll costs for the past 12 months (employees must be US residents). If you’re a sole proprietorship or independent contractor, total up all your wages, commissions, income, and/or net earnings for the past year.
- Subtract from the result calculated in step 1 any compensation in excess of $100,000/employee or contractor or sole proprietor. (For example, if you as a sole proprietor earned $130,000 last year, you’ll subtract $30,000 – the amount over $100,000 – in step 2. If you didn’t earn over $100,000 total, you’ll subtract 0 from your aggregated payroll costs.)
- Divide the result in step 2 by 12 to get your average monthly payroll costs. (Note: if you’re a new business, you can use your Q1 payroll costs to calculate this instead.)
- Multiply the result of step 3 – your average monthly payroll costs – by 2.5 to get your loan amount.
- If you received an EIDL (Economic Injury Disaster Loan) from the SBA between January 1, 2020 and April 3, 2020, add that to your loan amount. Be sure to subtract any advance you received from your EIDL COVID loan, since the advance doesn’t have to be repaid.
The US Chambers of Congress has an excellent recap of the PPP. The Small Business Administration also has information on their website. PPA has also posted a video of how to apply for the Paycheck Protection Program; register with PPA to view the webinar.
Economic Injury Disaster Loan Program
On April 15, the SBA announced that the EIDL program is closed due to a lapse in funds. New applications are not being accepted. We expect that the program will be refunded.
The EIDL program predates the COVID-19 crisis, but the CARES Act relaxed requirements for the program and increased its funding. It also expanded the program to cover sole proprietorships and independent contractors. The program extends loans to these and other small businesses which experience temporary losses incurred from COVID-19-related public emergencies. Any business under 500 employees (including sole proprietorships and independent contractors) in existence before January 31, 2020, is eligible.
- The loan can be applied towards working capital, necessary expenditures, paid sick leave for employees unable to work from COVID-19, increased costs from supply chain issues, maintaining payroll, rent or mortgage, and certain repayments
- The interest rate is 3.75%.
- The loan may not be forgiven.
- If you’ve received an EIDL loan related to COVID-19 losses, you may not apply for a PPP loan. However, you may be able to refinance an existing EIDL loan with a PPP loan if you meet eligibility requirements.
- While your application for an EIDL loan is pending, you may apply for an EIDL grant, which, if approved, will be paid within three days of application. The EIDL grant need not be repaid, even if the EIDL loan is denied.
PPA has an excellent guide on how to apply for an EIDL loan for download. You can apply for an EIDL loan directly on the SBA website.
Self Employment Tax Credit
If the COVID-19 emergency means that you are unable to get to your job, you may be able to receive a credit on your income taxes, to be claimed on your income tax return and reduce your estimated tax payments. The COVID-19-related causes include:
- You’re subject to a federal, state, or local quarantine order
- You’ve been advised to self-quarantine by a health official, or you have COVID-19 symptoms and are seeking a diagnosis
- You’re caring for someone under quarantine, or self-quarantine
- You’re caring for a child whose school or daycare is closed because of a COVID-19-related public order
- You’re experiencing a substantially similar condition specified by Health and Human Services. (This provision exists to cover illness arising from any mutation of the COVID-19 originating virus.)
If you’ve been subjected to a quarantine or self-quarantine, the credit equals 100% of your sick leave equivalent amount. The sick leave equivalent amount is the lesser of either your average daily self employment income, or $511/day for up to 10 days ($5,110 total).
If you’re caring for someone under quarantine or self-quarantine, or for a child whose school or daycare has closed, the credit equals 67% of your sick leave equivalent amount. The sick leave equivalent amount then is $200/day for up to 10 days ($2,000).
You can also claim a coronavirus emergency family leave credit for up to 50 days. In this instance, the credit amount would equal the number of qualified family leave days multiplied by the lesser of either $200, or your average daily self employed income. The maximum total family leave credit would be $10,000.
Employee Retention Tax Credit
Employers whose operations were fully or partially suspended due to COVID-19-related public emergency orders, or who experience a loss of over 50% in gross receipts as compared to the same quarter in 2019 are eligible to apply for the employee retention tax credit. The credit would be for 50% refundable payroll tax of up to $10,000 for each eligible employee.
- Credit applies to wages paid after March 12, 2020, and before January 1, 2021.
- Businesses which have received PPP loans would not be eligible to apply.
- If the Eligible Employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee.
For more information, visit the IRS’ FAQs page.