A question frequently asked asked by independent contractors/sole proprietors whose income has been adversely impacted by Covid-19 is "which government program should I apply for benefits".
We researched the advantages for an independent contractor filing for unemployment versus applying for the Paycheck Protection Program (PPP). The considerations are outlined below. At the end of the day, modeling must be done under each program with specific financial information to determine which program is best for you. This financial information will need to be verifiable back to the most recently filed tax return and its supporting documents.
Normally, an independent contractor cannot file for unemployment benefits. However, there are several programs in the CARES Act - the Federal Pandemic Unemployment Compensation (FPUC) under which the Federal Government is allowing such independent contractors to file for unemployment benefits, the Pandemic Unemployment Assistance (PUA), and the Pandemic Unemployment Emergency Compensation (PUEC).
The provisions are:
1. An additional $600 will be added to the weekly benefit amount that an eligible (laid-off or furloughed) employee would otherwise receive. An employee who is eligible for $700 in unemployment benefits would therefore receive $1,300 each week. This is available for all weeks of unemployment between April 5, 2020 and July 31, 2020 and will be paid out for any week where the individual receives unemployment benefits.
2. An additional 13 weeks of unemployment benefits - This is an increase to the normal maximum of 26 weeks, extending it to 39 weeks. These additional weeks will also include the an additional payment of $600/week as outlined in the PUEC, through July 31, 2020.
3. Unemployment benefits for self-employed individuals and contractors - The PUA provision expands the program to apply to workers who would otherwise not qualify for unemployment benefits. Now, self-employed individuals and independent contractors are eligible for unemployment benefits if they find themselves unemployed, partially unemployed, or unable to work due to the COVID-19 pandemic. Self-employed workers with a limited liability company or S Corporation qualify as well. PUA benefits may be claimed for full or partial weeks of unemployment experienced between January 27, 2020 and December 31, 2020 (up to the maximum of 39 weeks). At a minimum, newly eligible workers will receive half of the average unemployment benefit in their state. On top of this, they will receive the additional $600 per week. These benefits will last until July 31, 2020, after which the additional $600/week benefit will end. The recipient will then receive the average for the remainder of their 39-week benefit window.
Since these programs are state administered, it is best to reference your home state Department of Labor guidelines to estimate the full amount of unemployment benefits for which you may be eligible.
4. Here in Illinois the Department of Employment Security (IDES) website has been modified to allow self-employed workers to apply for benefits. As of late last week, such workers were being told not to apply for benefits in Illinois at the present time. On April 9, 2020, Governor Pritzker stated that IDES would be able to handle independent contractors and other workers not traditionally eligible for unemployment benefits in the “coming weeks”. It was later announced that unemployment insurance would be available to independent contractors beginning on May 11th. It is our understanding that many of the other states are struggling with the same issues.
The PPP is a key coronavirus loan that provides eight weeks of cash flow for business owners to cover payroll, rent, and utilities costs. The best part is, if you use at least 75% of the funds on payroll costs (and the other 25% on rent and utilities), the loan is 100% forgivable, making it a tax-free grant. All small businesses qualify for this program. This includes sole-proprietors who report income and pay taxes on a Schedule C in their personal tax return, independent contractors who collect 1099-MISC forms, and gig economy workers who take on-call jobs provided by companies such as Uber, Lyft, TaskRabbit, and Instacart. The only stipulation is that your business was operational as of February 15, 2020. If you started your business after that date, you are not eligible for the PPP.
The high-level mechanics of the PPP are:
1. The payout you receive will be based on your average monthly payroll expense multiplied by 2.5. Under the PPP, the payroll expense can include your salary and all health insurance premiums.
2. Businesses structured as C Corporations or S Corporations must generally use payroll to pay their owners because the corporation is taxed separately from the individual. If someone owns a corporation and has not been paying themselves a salary through payroll, they will not have a salary covered through the PPP. This is because distributions or dividends from a corporation are not considered to be a salary or self-employment income. Payments made to contractors are not considered payroll and are not eligible under the PPP.
3. Sole proprietors - If someone runs a business on their own, their business is a sole proprietorship. This means that their business income will be reported on a Schedule C within their personal tax return. As long as their business was operational prior to February 15, 2020, they can apply to the PPP. Their salary will be determined by their net profit. Their monthly average payroll expense will be their annual net profit divided by 12. If their annual net profit is over $100,000, they may only claim up to $100,000 divided by 12.
4. Sole proprietors who are married and run the business together informally can only apply to the PPP once, and your spouse would not be considered to have a salary through the business unless he/she was paid as a contractor prior to February 15, 2020.
5. If you own more than one sole proprietorship you can apply separately for each - but only if these sole proprietorships have separate EINs.
6. If you work as an independent contractor you are, by default, considered to be a sole proprietor in the eye of the IRS.
7. Sole proprietors could begin applying under the PPP on April 3, 2020. Independent contractors and self-employed individuals could start applying April 10, 2020.
8. You have until June 30, 2020 to submit an application, but are encouraged to apply as early as possible, as there is a funding cap.
New funding is available to replenish PPP for small businesses. The first $349 billion was allocated in less than two weeks time, with a lot more demand behind that.
Our suggestion is that you work with your financial advisor, accountant, or banker to determine which program is best suited for you, and one that will yield you the most relief during this crisis.