Breakdown of Options Available to Self-Employed during COVID-19
Updated: Apr 22, 2020
As a small business owner and bookkeeper for several consultants that have been affected by the current pandemic, I've been watching legislation coming out of DC in response to COVID-19 closely to see what options are available. In these unprecedented times, we still don't know fully how things will be interpreted because the bills are being further defined everyday and it is anticipated that there will be more relief/stimulus to come. Of course, it is our hope that you haven't had a negative impact from COVID-19 but given the nature of the consulting, speaking, conference industry that is likely not to be the case for many. Below is meant to bring attention to and provide a quick synopsis of financial options available to consultants as they navigate uncharted waters.
The CARES (Coronavirus Aid, Relief, and Economic Security) Act, which was enacted Friday, March 27th, 2020, is of most interest to small businesses, sole proprietors, self-employed, and independent contractors. Note: As long as new information is available, we will do our best to continue to update this post.
Paycheck Protection Program - SBA 7(a) Loans
Who can apply? - Small businesses, nonprofits, sole proprietor, and independent contractor, self-employed. Note: If you are a partner in a partnership, you must file together.
When can I apply? - The application process is open to all small businesses (including nonprofits), sole proprietors, independent contractors and self-employed individuals. Click here to learn more and download the application on the U.S. Treasury. Note: Even though the first opening day for applications was April 3rd, some banks are still be scrambling to pull together their processes. Keep an eye on your bank for directions.
Amount - Loans can be for up to two months of your average monthly payroll costs for the 12 months prior to applying for the loan plus an additional 25% of that amount (Example: $10,000 avg. monthly payroll costs x 2.5 = $25,000 Loan amount request)
Calculating payroll costs for sole proprietors, self-employed and independent contractors - Calculating payroll costs depends on if you have employees. Without employees: Step 1: Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value). If this amount is over $100K, reduce it to $100K. If this amount is zero or less, you are not eligible for PPP. Step 2: Calculate the average monthly net profit amount (divide the amount from Step 1 by 12). Step 3: Multiply the average monthly net profit amount (step 2) by 2.5. Step 4: Add any EIDL made between 1/31 - 4/3 that you seek to refinance, minus any advance under the EIDL COVID-19 (because it does not have to be repaid). With employees: Step 1: Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value). If this amount is over $100K, reduce it to $100K. If this amount is zero or less, you are not eligible for PPP. Step 2: 2019 gross wages and tips paid to employees (whose principal place of residents is the US) computed using 2019 IRS Form 941 wages and tips (line 5c-column 1) from each quarter plus any pre-tax employee contributions for health insurance or other benefits not included in line 5c-column 1; subtract any amounts paid to any individual employee in excess of $100K and any amounts paid to employees outside of the US.Despite conflicting information, the US Treasury said on Thursday, April 2nd that independent contractor costs are not to be included because they can apply for a PPP loan on their own. Step 3: Add 2019 employer health insurance contributions (health insurance component of Form 1040 Schedule C line 14), retirement contributions (Form 1040 Schedule C line 19), and state and local taxes assessed on employee compensation). Step 4: Add Steps 1 - 3 together. Step 5: Calculate the avg. monthly amount by dividing Step 4 by 12. Step 6: Multiply the average monthly amount from Step 5 by 2.5. Step 7: Add any EIDL made between 1/31 - 4/3 that you seek to refinance, minus any advance under the EIDL COVID-19 (because it does not have to be repaid).
What documentation will be needed? - If you are a sole proprietor, self-employed or an independent contractor without employees you will need to provide your 2019 Tax Return Schedule C and a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes you are self-employed. If you have employees, you will also need to provide 2019 Form 941 and state quarterly wage unemployment insurance tax, and evidence of any retirement and health insurance contributions, if applicable. Each bank may have a different requirement, so be sure to follow their instructions.
Use of funds - a) payroll costs, b) interest on mortgage, c) rent obligations, and/or d) utilities. These cannot be used for home expenses. You must have claimed or be entitled to claim a deduction for such expenses on your 2019 Form 1040 Schedule C for them to be a permissible use during the eight-week period following the disbursement of the loan (the "covered period").
Repayment - Recipients should be eligible for loan forgiveness on funds used the 8 weeks after the loan is made for qualifying expenses. Recipients will be responsible to requesting the loan forgiveness at the end of the 8 weeks and providing documentation proving the loan was used for qualifying expenses. When considering the forgiveness of owner compensation replacement, it will be calculated based on eight weeks' work (8/52) of 2019 net profit (or average monthly net profit amount used to calculate loan amount x 2). At least 75% of the amount must be used on payroll costs to be forgiven. The note is for 2 years at 1.0% fixed rate. Small businesses: Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness reduces if the number of employees and/or salaries and wages decrease.
Who's in charge here? - This is being administered by the Small Business Administration (SBA) but banks will be the origination for these loans. Most banks are only working with existing customers, so start with your current bank. If your bank is one that is further restricting who they are working with (i.e. - had to have an existing business lending relationship), check with smaller local or regional banks as they may take an application from a non-customer.
Where do I apply? - Any existing SBA 7(a) lender or through any FDIC Bank and Credit Union will be able to issue a PPP loan. All loans will have the same terms regardless of lender or borrower. Currently, many lenders are starting with their current customers so check with your bank.
Anything else? - Yes! a) Loan payments will be deferred for six months, however, interest will accrue during this period. b) No collateral or personal guarantees are required. c) The government nor the lenders can charge fees. d) There is also relief for existing loans. There is $17 billion to cover 6 months of loan payments for eligible small businesses who already have SBA loans.
Emergency EIDL (Economic Injury Disaster Loan) Grants and Loans
Who can apply? -Small business, sole proprietors, independent contractors, self-employed, and private nonprofits
Amount - Amount - As part of the application and submission, the business or nonprofit may request a grant of up to $10,000*. Under the full EIDL Loan, a business can apply for up to $2 million. *SBA recently released an email to those interested in the EIDL grant stating that to ensure the greatest number of applicants can receive assistance, the amount of the advance will be determined by the number of pre-disaster employees. The advance will provide $1,000 per employee up to a maximum of $10,000.
Use of funds - a) Provide paid sick leave to employees unable to work due to the direct effect of COVID-19; b) Maintaining Payroll to retain employees; c) Increased costs due to interrupted supply chains; d) rent or mortgage payments; e) repaying loans that cannot be met due to revenue losses. Covered period will be January 31, 2020 - December 31, 2020.
What documentation will be needed? - If you are a sole proprietor, self-employed or an independent contractor that files your profit or loss from business on your personal tax from (also known as a Schedule C), it is likely you will need to provide your 2019 Tax Return or Misc-1099 forms and documentation of expenses. Each bank may have a different requirement, so be sure to follow their instructions as they become available.
Repayment - Even if the EIDL is denied, the applicant will be able to keep the grant money if they already received the money. This grant money will not have to be repaid. More information may be coming to clarify this provision. Funds above the grant amount will continue to be a loan with terms up to 30 years and an interest rate not to exceed 4%. EIDL funds can be refinanced as a PPP loan to qualify for forgiveness (if used for specified expenses under that loans guidelines).
Who's in charge here? - This is and will be administered by the Small Business Administration (SBA). Here is the page with information and application for the COVID-19 EIDL: https://covid19relief.sba.gov/#/.
Anything else? - Yes, there is also relief for existing loans. There is $17 billion to cover 6 months of loan payments for eligible small businesses who already have SBA loans.
Pandemic Unemployment Assistance
For those of us that are self-employed, this is an uncomfortable option but it may be your best option. It's a blessing that the Pandemic Unemployment Assistance has been temporarily expanded to include sole proprietors, self-employed, and independent contractors. Millions of the people who are currently applying for unemployment assistance never thought they would ever be in a situation where they would be applying for unemployment and/or qualify because they didn't pay into unemployment insurance.
This temporary assistance program will help people who lose work as a direct result of the public health emergency.
The CARES Act expands the unemployment insurance benefits for individuals (including gig economy workers, independent contractors, and those who are self-employed). As I interpret this, for small business that are service oriented, if you lose clients as a result of COVID-19, you will qualify.
Self-employed, independent contractors, and sole proprietors seeking assistance will most likely need to provide 2019 IRS Form 1040 Schedule C. This may be up to each state to determine what documentation they will require of these individuals.
$600 per week will be added to normal state benefits for up to four months. Coverage will be effective as of January 27, 2020 and will include up to 39 weeks of regular unemployment insurance through the end of 2020.
If you have had substantial lost income, compare the loan options with the unemployment benefits and see which one makes more financial sense for you. If you are approved for the PPP (Payment Protection Program), you (and/or your employees) can not be on unemployment for the duration of the 8 weeks the funds are used. Since the intent of the loan it to keep people employed, it would be considered double dipping to use the PPP and the Pandemic Unemployment at the same time.
Unlike normal unemployment, those that are applying for pandemic unemployment do not need to be actively seeking new employment opportunities. If you've seen a partial reduction in business, you can apply for reduced benefits. There is also no need to tell your current clients that you have filed for unemployment if that is uncomfortable.
Delayed Payment of both Employer Payroll and Self-Employment Taxes
Estimated Self-Employment Taxes - Earlier this month, it was announced by the IRS that the 1st and 2nd Quarter estimated self-employment tax deadline was extended from April 15th and June 15th (respectively) to July 15th.
Self-Employed Individuals - Must continue to pay 50% or their estimated self-employment taxes during 2020. As I understand it, the remaining 50% can be deferred similarly as businesses, with 25% of the remaining balance due by the end of 2021 and the final 25% due at the end of 2022.
Businesses - Can defer payments of their 2020 payroll taxes, with 50% due by the end of 2021 and the remaining amounts due at the end of 2022.
Exclusion - The above does not apply to any taxpayer who has had indebtedness forgiven. As I understand this, that includes the PPP (Payroll Protection Plan).
Modifications for Net Operating Losses
Non-corporate Businesses -The TCJA (Tax Cuts and Jobs Act) implemented a new rule that disallowed the deduction of excess business losses for non-corporate businesses for tax years between 2018 and 2025 and forced them to carry forward losses. The CARES Act allows businesses to carry back losses for 2018 and amend their tax return and receive a refund.
Corporations - Businesses can carry back losses (NOL) from 2018, 2019, and 2020 by suspending the 80% taxable income limitation to allow a taxpayer to fully offset taxable income and access to immediate tax refunds.
If You Have Employees: Employee Retention Credit for Employers Subject to Closure due to COVID-19
What is it? - A credit based on the strain COVID-19 puts on the business.
Amount - For wages paid after March 12, 2020 through the end of the year, businesses and nonprofits would be eligible for a payroll tax credit of 50% on qualified wages with respect to each employee for each calendar quarter. Total qualified wages for each employee shall not exceed $10,000 (a max credit of $5,000 per employee).
Eligibility - a) must have been carrying on business during the 2020 calendar year. b) with respect to any quarter in 2020 - operations were fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 OR c) the gross receipts for the calendar quarter in 2020 are less than 50% of gross receipts for the same calendar quarter in 2019.
How long? - This credit ends when gross receipts are greater than 80% of gross receipts for the same calendar quarter in 2019.
Qualified Wages - For businesses with more than 100 full-time employees in 2019, an employee must not be able to provide services due to the eligibility criteria mentioned above. For businesses with 100 or less full-time employees, the credit isn't dependent on whether services were provided as long as they met the eligibility outlined above.
Limitations - Qualified wages paid or incurred by an eligible employer may not exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period.
Exclusion - Businesses receiving SBA interruption loans are not eligible.
Tax Time Dedication - Charitable Contributions Deduction Modifications
Individuals - In the case of taxable years beginning with 2020, individuals can deduct up to $300 in donations to qualified charitable organizations. All taxpayers will be eligible, even if they choose the standard deduction over itemizing. The CARES Act identifies a qualified charitable organization as described in section 170(b)(1)(A), which includes 501(c)3 public charities, schools, hospitals, some private foundations, and medical research. For those that do itemize their taxes, limitations are suspended for 2020, but unfortunately excludes donor-advised funds.
Food donations - In cases of food donation, during 2020, the 15% limitation will increase to 25% of taxable income.
Excess contributions - May be carried forward to future years based on existing charitable contribution carry-forward rules.
Disclaimer: There is so much in these bills and, as we mentioned before, they are still writing the rules. The intent of this article is not to provide an overview of the entire bills mentioned nor to provide legal or tax advice but rather bring attention to and provide a quick synopsis of items of particular interest to consultants as we understand them. The information provided currently is open to interpretation and is subject to change as the bills are more defined. We highly encourage you to discuss with your CPA, lawyer, or bookkeeper and look to the the SBA, US Treasury and IRS for more information and to determine what the right option is for you and/or your business.