At the end of March, the United States Congress passed the CARES Act (aka Coronavirus Aid, Security, and Economic Security Act) to provide $2.2 trillion in stimulus money to help individuals and small businesses get through the COVID-19 pandemic.
There has been a lot of discussion and confusion around the different programs offered and what the CARES ACT means for freelancers. Sole proprietors and independent contracts are explicitly mentioned in the act and told that they are eligible for this stimulus package too – not just employers.
Treasury Secretary Robert Mnuchin said:
“If we run out of money and this is a huge success, we will absolutely go back to Congress and ask for more money.”
So what does that mean for the sole proprietors, freelancers, and single-member LLCs who want to take advantage of this opportunity?
Below is everything I’ve been able to learn so far, and where I think the biggest opportunity may be for freelancers.
This began as a tweet thread here:
There are four major forms of support and economic relief that are worth talking about:
- Individual stimulus money
- Paycheck Protection Program (PPP)
- Economic Injury Disaster Loans (EIDL)
- Unemployment
Let’s dive into each of them…
**Big disclaimer: I am not a lawyer or CPA and this is not legal or financial advice**
**UPDATE 4/23/20**
A few key takeaways that have occurred since the original publishing date of this post:
- The first round of funding that was appropriated has already been exhausted.
- There appears to be more funding imminent, so remain hopeful that you have options!
- When new funding is released, apply ASAP for the programs below if you haven’t already.
Individual Stimulus Money
Business owners, freelancers, employees, and those on social-security will all receive a one-time payment from the federal government. That equates to $1,200 for single tax filers or $2,400 for joint filers (plus an extra $500 per dependent child). These benefits start to phase out for single filers at $75,000 and joint filers at $150,000 of annual income.
If you earn above those thresholds, you will have your check reduced proportionate to how far above that threshold you are.
You can spend this money however you want, and there is no action required on your part to receive it.*
Everybody wins!
*If you haven’t received your stimulus money yet, the IRS now has a portal to allow you to check the status. It will tell you if you’re eligible as well as if they need your banking information. Click here to check your status
Paycheck Protection Program (PPP)
This one is a little tougher. This is intended for small businesses, but freelancers, sole proprietors, and independent contractors are explicitly being told that they qualify.
In short, this program is meant to help employers maintain their payroll (and incentivize them to retain jobs) for the next couple of months.
The money that is provided via the PPP has a level of forgiveness as well.
Certain expenses, if paid within the first 8 weeks after receiving the loan, are able to be forgiven and therefore not repaid.
Those expenses include:
- Payroll costs (this includes your own salary as a sole proprietor or independent contractor)
- Mortgage interest payments
- Rent
- Utilities (electricity, gas, water, transportation, telephone, internet)
- “Interests on other debts”
Those are the only types of expenses that the PPP money can be used for and forgiven. Otherwise, you’re personally liable to pay that money back.
Determining how much you are eligible to receive is a little tricky.
The calculation itself is pretty straightforward: Average Monthly Payroll x 2.5 = Loan Amount
Below is the top of a sample PPP Application Form. It’s really quite brief. Check out the full form here via Stansbury Weaver.
The million dollar question: How is “Average Monthly Payroll” calculated for freelancers, contractors, and sole proprietors?
If you already have a process and practice in place for paying yourself regularly, monthly – that’s great. That should make things easier for you.
If you don’t, I don’t have a hard answer here. Two ways you may look at it:
- Schedule C – Net Income/Profit from your Federal Tax Return
- The sum of 12 months of ownership draws (transfers)
Schedule C – Net Income/Profit from your Federal Tax Return
In the graphic above from the US Chamber, the “Payroll Cost” says:
“For Sole Proprietors, Independent Contractors, and Self-Employed Individuals: The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self employment, or similar compensation and that is in an amount that is not more than $100,000 in one year, as pro-rated for covered period.”
Huh?
Well, the key point here is “Earnings from self employment” which generally means your Schedule C (Net Income/Profit) from your tax return.
If we use this number, look at your 2019 Tax Return (if you have completed it, 2018 if you haven’t) and divide by 12. Multiply that number by 2.5, and you have your PPP Loan Amount.
Example: If you earned $43,000 of Schedule C Profit: $45,000 / 12 months = $3,750/mo x 2.5 = $9,375 in a Paycheck Protection Loan.
The sum of 12 months of ownership draws
Again, this is speculation, but you may be able to make a case for the 12-month average of your ownership draws from the business. Also unclear is if this should be Jan. 1, 2019 through Dec. 31, 2019 or the 12 months prior to receiving the loan.
The same math would obviously apply.
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If you DID receive a PPP loan, and your total was the $9,375 above, you’d want to spend that on the list of acceptable expenses from earlier within the first 8 weeks of receiving the loan:
- Payroll costs (this includes your own salary as a sole proprietor or independent contractor)
- Mortgage interest payments
- Rent
- Utilities (electricity, gas, water, transportation, telephone, internet)
- “Interests on other debts”
An easy way to do that would be divide the $9,375 by 8 (approx. $1,172) and pay that to yourself weekly for the next 8 weeks (and document it!)
As a payroll expense, the total of your loan should be forgiven.
And, the forgiven amount of your loan is NOT considered taxable income.
IMPORTANT: These loans are administered by FDIC-insured banks and other approved SBA partners. The form above is an example, and not an official application.
As of this writing, they had not begun lending yet as more guidance is coming in. It appears that banks will begin lending on April 3, 2020 to small businesses, but sole proprietors and freelancers may need to wait until April 10.
BE ON THE LOOKOUT FOR SCAMS. If it seems faster or too good to be true, it probably is.
UPDATE (4/5/20): Few banks have begun processing these loans. On Friday, US Bank, Chase, Bank of America, and Kabbage opened up their own online forms. But, it’s still slow in processing. Huntington Bank seems to be personally taking applications and moving quicker than most others,.
Start the process sooner than later, but don’t expect it to move as quickly as we originally thought.
From one unnamed bank:
UPDATE (4/23/20): Personally, I bank with Chase for Business. I applied for a PPP loan, was told I’d receive word “soon” via email, and did not receive any word for 13 days until it was announced that the program was out of funding.
It would appear that Chase (and most big banks) heavily prioritized large businesses, and are already becoming the subject of class action lawsuits.
For individuals with smaller banks, credit unions, and existing relationships, you have a better shot.
The good news is, more funding appears imminent.
Economic Injury Disaster Loan (EIDL)
Disaster loans are typically reserved for areas affected by natural disaster. With the COVID-19 pandemic, we are all located in a disaster area, opening up the opportunity for Economic Injury Disaster Loans.
These can be pretty big loans, and even up to $200K loans can be granted without a personal guaranty. But, that’s likely much more than you need.
The interest rate is 3.75% (this is very low) and the maximum term of the loan is 30 years.
These loans can be used for much the same purposes as above:
- Maintaining payroll
- Sick leave for employees
- Increased costs of operations
- Rent or mortgage payments
- Other obligations that “cannot be met due to revenue losses”
These loans are meant to provide very quick economic relief. And in applying for these loans, you can ask to be considered for a $10,000 cash advance on the loan. And if that is approved, it can be direct deposited within three days.
The interesting thing about that cash advance is that it’s not really an advance on that loan. If you received the cash advance, but ultimately do not qualify for a full loan, you will not be required to pay the advance.
You may also ultimately decide not to take a loan. In which case the advance doesn’t appear to need to be repaid either.
But if you are granted an EIDL cash advance, it would be wise to use it on the list of approved expenses above and document it, just to be safe.
This application is open and available now via the SBA
UPDATE (4/5/20): It seems that there has been little to no movement here thus far. Very few have heard any word back on this (no word for me yet, after submitting the application on 3/30/20). Worse yet, those who have heard have not received a full $10K loan – one employer with 7 employers claimed that he received $4K as a cash advance. You may want to turn your attention towards the PPP.
UPDATE (4/23/20): I received $1K of funding as part of the advance on the EIDL, but no follow up information about an actual loan. It appears that the EIDL advance total is being determined as $1k per employee.
Unemployment for freelancers
This act expands unemployment to sole proprietors, freelancers, and independent contractors too…but it may not be easy to actually access.
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With 6.6 million Americans applying for unemployment as of this writing on April 2, 2020 – there is a lot of demand on unemployment. And frankly, I haven’t heard of anyone making headway here yet. You can try to get in touch with your state’s office of unemployment to see what is available.
But since I don’t know any more than that, this section is going to be pretty short.
Conclusion
I know it sounds scary to take on debt. So do your own diligence here with any lawyers, CPAs, or bankers you trust.
There does seem to be some real opportunity here, but you need to decide what makes sense for YOU.
You can apply for both the Paycheck Protection Program and Economic Injury Disaster Loans, and they will theoretically take each other into account if you do. For example, if you receive a cash advance on the disaster loan, and also receive a PPP loan, the amount your PPP loan can be forgiven will be reduced by the amount of EIDL cash advance you have received.
It would be wise to try and get in touch with your bank to talk about the Paycheck Protection Program, if you qualify, and how you can be at the front of the line (remember: it may be the week of April 10).
You can apply for the EIDL program now via the SBA
And if you take no action, you will still receive your general stimulus check in the coming weeks.
To go deeper, check out this wonderful Q&A with Adam Lehman of The Wonder Jam and Mark Stansbury of Stansbury Weaver:
Questions? Disagreements? Leave them in the comments below.
