Paycheck Protection Program Loan Applications for Independent Contractors
TOMORROW is the day that Independent Contractors can apply for the Paycheck Protection Program loan made available via the new legislation recently passed to address the economic fallout from COVID-19. In anticipation of that, I thought I’d provide some basic information to assist those of you who are independent contractors as you consider whether this is something you are going to do or not. Here are the things you need to know:
Make sure that you have a good bank relationship
Many banks are only receiving applications from existing customers, which means:
Make sure that wherever you do your banking is receiving PPP applications – the program has not been easy to implement and lenders have concerns about whether they are going to get stiffed.
IF you do not have an established bank or the one that you have an account at is not participating in the PPP loan program, GO OPEN A BANK ACCOUNT TODAY! To be clear, this loan is given to you through your banking institution and they are giving it out on behalf of the federal government. So you MUST apply via your banking institution (as long as they are accepting PPP loan applications). Applications should be found on your bank’s website and if you don’t see it on the homepage, try your bank’s website and then add /CARES (e.g. www.chase.com/CARES).
A special note about Wells Fargo account holders – there has been publicity about a notice sent out by Wells to many applicants at the beginning of the week that indicated that WF was not taking any more applications or had already hit its limit. Due to some past issues with the federal government, WF had limitations imposed on its participation in small business lending. However, they have now obtained a waiver from those total dollar limitations with regard to the PPP loans.
Some bankers are confused and are stressed out by this program – Treasury, SBA, and IRS have been changing the rules and have not provided either consistent or clear guidance on what the banks are supposed to do, so they have been working long hours trying to keep up with the changing landscape. They are receiving a lot of anxious and frantic calls and questions from their customers. If you show some patience and understanding with the banker who you are dealing, they will likely greatly appreciate the kindness.
“Payroll”
The maximum PPP loan amount that an applicant can request is based on the applicant’s average monthly “payroll.” Any compensation above $100,000.00 per year per individual canNOT be included in the calculation of the applicant’s average monthly “payroll” (So, if that’s you, you are capped at $100k for your annual payroll). PPP loans are 2.5 times the average monthly payroll figure for the applicant. To simplify: take your annual income, divide it by 12 and then multiply it by 2.5. That’s the amount you’ll be applying for when you fill out the loan application.
Small businesses are used to having a payroll and paying payroll taxes quarterly, so they have a clearer idea of what their payroll numbers are. However, for independent contractors and self-employed, it is not as clear what figure to use. Before addressing the payroll numbers, an important question is what is the relevant time period, from April 1, 2019 through March 31, 2020 or calendar year 2019? The law and official guidance have not been fully clear on this issue. Having talked with several bank representatives, it appears that this depends on the bank – some are going with the last 12 months, some want 2019 information only, and some will take either. Make sure that you know for which period your bank is asking their applicants to provide information.
Independent contractors should also recognize that “net earnings” are most likely going to need to be used. Thus, if you have business expenses that you are claiming as an independent contract or self-employed individual in determining your reported annual earnings, you will likely need to deduct those from what you were paid in calculating your “average monthly payroll” amount.
Records
If you are using calendar year 2019 and your 2019 tax return has already been prepared, probably the most straight-forward figure to use will be your Schedule C, where your self-employment income is reported.
As many have not yet prepared their 2019 tax returns since the April 15th deadline to file has been postponed for 3 months until July, determining what records can be used is a little more challenging.
Independent contractors should have received their 1099s from their customers/clients that will document the amount of pay that they received. For whichever 12-month period the applicant uses, the total of the 1099 amounts divided by 12 will give the applicant what his/her monthly average income is.
If an independent contractor did not receive a 1099 from all of their customers, copies of checks or paid invoices may have to do to substantiate the independent contractor’s wages.
Another alternative that lenders may accept is documentation from your CPA or bookkeeping service that supports the receipt of the wages.
Use of Proceeds and Forgiveness
The enticing part of the PPP Loan Program is that the proceeds from the loan may be forgiven. In addition, the forgiven amount need not count as income. As an independent contractor is not going to reduce themselves or the amount of their own pay, they should only need to ensure that they use the loan proceeds on eligible expenses to obtain forgiveness of the full loan amount.
PPP Loan proceeds are only to be used for the following purposes: payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020.
Recognize that the rent, interest on mortgage, and utility payments are generally considered to be those associated with the applicant’s business – not personal rent, mortgage interest, or utilities
However, if the money is used for the “payroll costs” to the independent contractor, the IC can of course use their wages for their personal use. Thus, as an independent contractor, if you maintain a separate checking account for income and expenses associated with your work, the loan proceeds should probably first go there, then paid out to your personal account (and any rent, utilities, or interest on mortgage associated with your business). In other words, pay your company first, then pay yourself from your company. The proceeds should then be able to be used from the IC’s personal account for his or her personal expenses.
These are difficult days. I’ve counseled employers and employees as well as friends and family who own businesses or have been furloughed. I’ve spent countless hours talking through all of the different scenarios these circumstances present. But, these have also been days where I have connected with good people who have hearts of gold, who want to do right by their employees or their employer, who are creatively working through as many solutions as they can. It’s been a reminder to me of the shared kindness and humanity people have for one another. That’s been a true gift in these long and scary days. I hope you’re finding that too along the way.
Here to work with you,
David Quan
DISCLAIMER: The Law Office of David J. Quan provides this communication for general information only. This communication does not, nor does it intend to, provide legal advice or create an attorney-client relationship. Each legal problem is unique, and past performance does not guarantee future results. Persons with legal issues should consult their attorney for specific advice regarding their individual situations