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Coronavirus Relief for Small Businesses, Freelancers and the Self-Employed

COVID-19, commonly called coronavirus, has also affected small businesses, freelancers and the self-employed. 

They don’t regularly get to collect unemployment benefits like many American workers. Instead, they have to rely on their reserves, if they have them. 

If they don’t, they have to scramble to find ways to keep their businesses afloat. The alternative is often shutting them down altogether.

Their revenue could dry up quickly without a program to help them weather the financial storm that was coming.

Thankfully, Congress has tried to act. They passed legislation, including the CARES Act, to help solve some of these problems that small businesses, freelancers and self-employed individuals are facing in these unique times.

Many programs have been made law by Congress. The details of how they work in practice haven’t fully been figured out yet. 

That said, here are some programs Congress has passed intending to help these people.

Changes to Net Operating Loss Carryback Rules

If you have or think you’ll have a net operating loss in 2018, 2019 or 2020, a new rule allows you to carry back the losses for five years. 

The previous 80% of taxable income limit is also suspended. 

This allows you to amend previous tax returns. This new rule could result in an immediate benefit to your business’s tax situation.

Amending a tax return can be an annoying process. It could be worth it if you can get a tax benefit from this change, though.

Payroll Tax Deferral of Due Date

Social Security payroll taxes owed for the employer portion of payroll taxes can be delayed.

This is to help businesses deal with cash flow problems from reduced business.

Unfortunately, the amount owed still has to be paid. 

The employer pays 6.2% Social Security tax. In addition, the employee also pays 6.2% Social Security tax. This results in a total tax paid of 12.4%. 

The employee portion is still due when owed. Only the employer portion can be delayed.

The employer side Social Security taxes that can be delayed run through December 31, 2020. Starting then, you need to pay the current employer side Social Security taxes when regularly due.

Half of the delayed tax owed is due on December 31, 2021. The other half is due on December 31, 2022. 

This is in addition to any amounts you would regularly owe during these times.

This change can help you pay other expenses today.

Future concerns

Unfortunately, it could put you in a rough spot down the road. 

Some people may end up spending the money now to cover expenses.

The problem comes when they can’t afford to pay it on top of their ongoing expenses in the future.

Employee Retention Credit

Small businesses may be able to claim an employee retention credit. This is a refundable tax credit that can be used for certain payroll tax liabilities. 

The credit is equal to 50% of qualifying wages of up to $10,000 per employee that qualifying employers pay from March 12, 2020 to January 1, 2021.

In order to qualify, your business must meet one of these two criteria:

  • Your business has been disrupted due to virus-related shutdowns 
  • Your business has a decrease in gross receipts of 50% or more compared to the same quarter in the prior year

Employees must be retained by the employer and paid, but cannot be working due to the crisis if your company has over 100 employees. 

Businesses with 100 or fewer employees are allowed to include all qualifying employee wages.

Freelancers and Self-Employed People Gain Access to Unemployment

Freelancers and self-employed people don’t usually have access to unemployment benefits. The CARES Act changes this. Now, independent contractors and self-employed workers qualify.

Benefits are increased by an additional $600 per week over traditional unemployment benefits. 

If your state has a one week waiting period, that will not apply.

The federal government will cover the costs of the first week.

Benefits are extended for an additional 13 weeks beyond what your state normally offers in many cases. These benefits last through December 31, 2020.

All of this sounds great in practice.

Sadly, state unemployment benefits administrators are extremely overwhelmed due to the high volume of claims. 

To put things in perspective, the highest weekly jobless claims before this pandemic was 695,000 in 1982. 

For the week ending on April 4, 2020, weekly jobless claims were approximately 6,600,000. That’s almost 10 times the highest amount ever seen prior to the pandemic.

To say unemployment programs would be overwhelmed before the new CARES Act changes would be an understatement. 

Some confusion ahead

With the new changes, things are even more complex. The addition of self-employed workers and freelancers is a new process for the state programs. 

This has resulted in a confusing mess. The state programs must wait for guidance on how to enact these new rules. Then, they have to adapt their systems to make it work. 

Finally, they have to find out how to make sure these new categories of people get the correct benefits.

States should follow the federal law and provide the benefits listed in the CARES Act. It may take some time to get this done in practice.

Paycheck Protection Program

The Paycheck Protection Program offers a lot of promises. Even so, it hasn’t gotten off to a great start.

This program was allocated $350 billion to help small businesses. In some cases, the loan is forgivable.

In particular:

It is for qualifying businesses with less than 500 employees who continue to make payroll.

It is also intended to cover certain other expenses such as rent, interest payments on mortgages and utilities.

Independent contractors and sole proprietorships are included in the definition of a small business.

It can cover compensation for employees making up to a maximum of $100,000 per year.

These loans are backed by the Small Business Administration (SBA). 

That means the banks that make the loans generally aren’t on the hook for them. This should make the loan process less risky for the banks.

The program was only first accessible to clients of particular banks that acted quickly. These banks often required you to have banking and loan relationships to even apply.

The program is available until June 30, 2020.

There is fear the $350 billion will run out long before all businesses that want to apply can do so.

Loans can be up to $10 million per small business and are calculated using a formula that includes your payroll costs. These loans can be forgiven under certain circumstances.

The money is supposed to cover certain coronavirus related issues from February 15, 2020 to June 30, 2020.

The forgivable amount is reduced if you don’t use the funds according to the criteria of the program.

This program is extremely complex. Consult a lender or other professional for how it applies to your situation.

Emergency Economic Injury Disaster Loan Advance

Some small businesses can apply for an Economic Injury Disaster Loan (EIDL). 

Those that apply are also eligible to get an EIDL advance of up to $10,000. This $10,000 advance is essentially a grant that does not have to be repaid.

You’re supposed to be able to get the $10,000 advance whether you’re ultimately approved for an EIDL or not.

The program is for businesses that have less than 500 employees. This program also includes sole proprietorships, independent contractors and self-employed people.

According to the law, these $10,000 advances are supposed to be paid within three days of applying. In practice, that hasn’t happened.

EIDL loans can be up to $25,000 without providing collateral and up to $200,000 without providing a personal guarantee.

Stimulus Checks

Depending on your income, you may qualify for a stimulus check. This even includes small business owners, self-employed individuals and freelancers. 

Calculations for the checks use adjusted gross income (AGI), your filing status and certain other criteria to determine how much you could get.

People with a single filing status can get $1,200 plus $500 per qualifying child if their AGI is $75,000 or less.

People with married filing jointly filing status can get $2,400 plus $500 per qualifying child if their AGI is $150,000 or less.

Learn more about the stimulus checks and how they work in detail here.

Early Withdrawal Penalty Waived for Certain Retirement Withdrawals

Early withdrawals from particular retirement accounts come with a 10% penalty. If you meet the guidelines in the CARES Act, that 10% penalty won’t be incurred. 

Read more about this in our post that covers all of the details. 

Should You Take Advantage of Any of These Programs?

These programs were created to help small businesses survive financially through these rough times. 

However, some of these programs may not be a good fit for you. Others may be a great option to help your business survive.

If you’re not sure which programs are a good fit for you, talk to a professional that has experience with the program. They can help you determine if you qualify. 

If you do, you must decide if the risk or cost is worth the benefit.

Make sure that one program doesn’t disqualify you from using another. Many of these programs do not allow you to double-dip.

That means you’ll need to find the best combination of options for you.