The CARES Act: Benefits for Small Business Owners, Self-Employed Individuals, and Independent Contractors

Note: Our email from late last week focused on the most general aspects of the CARES Act. This week, we take a deeper dive into three affected groups to help them determine what benefits are out there. Today’s newsletter focuses on small business owners, self-employed workers, and independent contractors (1099s). Of other newsletters coming this week, one will focus on Federal student loan holders and their co-signors, and the other will address Medicare recipients and folks who by age or inheritance have RMDs (required minimum distributions).

We wanted to start off by saying thank you for the enthusiastic response we received to our newsletter last week. A few questions have come up regarding how to calculate your stimulus check amount, and we’re pleased that the Washington Post has put up a free online tool to help determine that. If you have not filed your 2019 taxes and are wondering if waiting might get you a higher benefit, we encourage you to plug in both scenarios to look at your benefit.

This week, we are starting off by addressing small business owner, self-employed workers, and independent contractors (who are paid via 1099, including gig workers). These are some of the hardest hit groups, and a lot of relief is available – but it may require some work on your end to access it. As before, we invite you to forward this newsletter to anyone you know to whom it may apply. A lot of younger folks are driving for ride share companies, delivering food or groceries, and otherwise participating in the “gig economy,” and this information may be particularly valuable to them.

There are three main provisions affecting this group in the CARES Act, and we will go over all of them one by one:

• Unemployment benefits have been extended to self-employed workers and independent contractors for the first time ever

• Payroll taxes for small business owners (with caveats) and self-employed workers can be deferred for the entire rest of 2020

• The Small Business Administration has received $350 billion in funding for a loan program to help keep small businesses (including self-employed workers) afloat, with some of the most generous terms we’ve ever seen

Unemployment Benefits

We want to start by mentioning to small business owners that the Families First Coronavirus Response Act (FFCRA), which was passed last week, requires that starting April 1st, small business owners who don’t meet exemption criteria pay sick leave for eligible employees, and expands paid family and medical leave coverage. This DOL fact sheet for employers covers the basics and we encourage you to review it.

Now, regarding unemployment benefits. Self-employed individuals and independent contractors have typically been ineligible to receive unemployment benefits, but the CARES Act now requires states to cover up to 39 weeks of benefits. Many states have a “waiting period” that tries to incentivize people to get a new job before their benefits start. However, recognizing that finding a new job has been made nearly impossible, the federal government will offer to foot the bill for states for that first week of benefits.

You can be covered for many different reasons, even if only partially unemployed, or unable to work for a reason attributable to COVID-19. Examples include having a household member with symptoms or a diagnosis, needing to care for a child whose school is closed, and being advised to quarantine by a health provider but unable to work remotely.
Perhaps the most important change to unemployment benefits for all workers, not just self-employed and independent contractors, is that the federal government will add $600 per week to all unemployment benefits for up to four months. The average weekly unemployment benefit nationwide is under $400, so this will make a meaningful difference to many families applying for benefits.

Deferral of Payroll Taxes
Payroll taxes are split between employer and employee, but small business owners (with caveats) and self-employed workers will be able to defer their portion of FICA taxes that would normally be paid for paychecks through December 31, 2020. Rather than paying these out of payroll, the employer should keep track of how much is owed, but does not need to pay it now.

Half of the funds will be due by December 31, 2021, and the other half will be due by December 31, 2022. This can be a boon to employers struggling with cash flow, but we urge you to start setting funds aside starting at the beginning of 2021 so you’re not caught with a big bill at the end of the year. We would also recommend reaching out to your payroll provider or bookkeeper now to make sure a strategy is in place to track these taxes, and that they know you would like to defer them.

The caveat for small business owners is that if you end up participating in the Payroll Protection Program, which we will cover next, you will not able to use this benefit. You must pick one or the other.

Loans to Small Businesses and Self-Employed Individuals

The Paycheck Protection Program is perhaps the most complex portion of the CARES Act. It is the very first section of the Act, even before the stimulus checks we covered previously. We believe that if we weren’t experiencing the current economic situation, it would still be a great deal for small business owners. Let’s review who qualifies, what is available, and how it will be paid back over time. And most importantly, we will explain the potential for getting a portion or all of the loan forgiven.

Small business owners and self-employed individuals will self-certify that the loan is necessary due to the impact of COVID-19 on their business. You can apply through any SBA lender, and to ease the process given an anticipated surge of applications, if you have applied for an SBA loan before we recommend you go through the same lender.
The generous terms we were referring to above are these: the maximum interest rate you can be charged is 4%, extremely low for a small business loan, and you can spread the payment term over a maximum of 10 years. No personal guarantee is required.

The maximum amount you can receive is the lesser of $10 million or 2.5 times your average monthly payroll over the past year, excluding compensation over $100,000. Let’s look at an example:

Martha operates a gas station, but because so many people are in quarantine, she’s selling much less gas than normal. She has four employees and from 4/1/19 to 4/1/20, they’ve made the following:

• Lacey made $114,000 ($9,500 a month)

• John made $54,000 ($4,500 a month)

• Susan made $42,000 ($3,500 a month)

• Wayne made $42,000 ($3,500 a month)

Martha will adjust down Lacey’s compensation so it’s only $100,000 on an annual basis, to $8,333.33 per month. That takes her monthly payroll to about $20,000 and 2.5 times that makes a cap of about $50,000. That’s the maximum loan amount she qualifies for.

Let’s quickly look at how this would apply to a self-employed individual. Greg is a bookkeeper for restaurants, but several of his clients have closed so his business is struggling. He makes $80,000 a year and will be eligible for a loan of $16,667.

Now, payroll isn’t the only expense Martha has. She generously provides health insurance to her employees, and of course she needs to pay rent and utilities, and she has outstanding invoices for her most recent delivery of fuel that was before February 15th, so these funds will go towards those expenses too. All of these are covered expenses.

The most important potential benefit through the Paycheck Protection Program is the potential for Martha’s loan to be partially or fully forgiven. The government is trying to incentivize keeping people employed, and so the forgiveness is based on how many people you keep employed, and how much you are paying them. If you have had to lay off employees, hiring them back as soon as you get your loan is an important part of loan forgiveness.

You start with 100% forgiveness, and that gets reduced based on two things:

• Dividing the number of full-time employees you have during the first two months after you receive your loan disbursement by the number of full-time employees you had from 3/1/19 to 6/30/19. Important note: in general, employees who are rehired by June 30th aren’t included in this calculation.

Example: Martha gets her loan on April 15th and uses it to keep paying three of her four employees through June 15th. 75% or $37,500 of her loan is forgivable.

• Cutting compensation more than 25% for a worker who was paid $100,000 or less on an annualized basis during 2019 (this is a different metric than we used previously!) will reduce your forgiveness by the dollar amount employees’ compensation was cut compared to the first quarter of 2020 during the two-month period following the loan disbursement. That’s a mouthful – let’s look at an example.

Example: Martha gets her loan on April 15th and decides to keep everyone employed, even though she has to cut everyone’s compensation by 35%. Lacey earned more than $100,000 in 2019, so she doesn’t count here, but John, Susan, and Wayne’s pay cuts exceed the 25% threshold. In total, their pay was cut by $2,300 over the threshold, so $2,300 will not be forgivable.

If you partially or fully qualify for debt forgiveness, it will not count towards your taxable income for the year. This is a big boost. And lastly, payments will be deferred for at least six months after the funds are disbursed, but no more than one year.

Small business owners and self-employed individuals who end up participating in this loan program won’t be able to defer their payroll taxes as we discussed up top, but this may be an excellent option for business to keep cash flow going, and if structured correctly, most business won’t end up owing much, if any, with very reasonable repayment terms.

Because only $350 billion was allotted to this program, we recommend that you get the legwork done on applying soon. Lenders are getting set up to accept applications soon, and getting your foot in the door expediently could determine whether you are able to participate or not. As we said above, this is a very generous benefit, and we anticipate a lot of interested small business owners wanting to make use of it. We recommend organizing your last 12 months of payroll and contacting lenders to indicate your interest now.

This is quite a lot of information, and while in many ways we are acting as a messenger and translator from trusted sources, we are happy to try to help find answers to any questions you may have regarding the provisions in this section of the legislation.

As before, we encourage you to pass this information along to anyone you know who may be eligible. So many businesses we have a strong relationship with are in danger, particularly neighborhood restaurants, and we want to do what we can to make sure these important parts of our community stay afloat.