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Independent Contractors and the Paycheck Protection Program

Where 1099 Workers Stand With COVID-19 Small Business Loans 04.13.20

The Paycheck Protection Program, or PPP, as a component of the COVID-19 stimulus bill has put billions of dollars of relief money for small businesses on the table. Here is what organizations that employ independent contractors need to know about the program.

The cheers from the small business community after the initial passage of the Paycheck Protection Program as a part of the mammoth $2 trillion Coronavirus Aid, Relief, and Economic Security, or “CARES” Act have been quickly replaced in recent days with a chorus of confusion and frustration as the details of the implementation continue to come into focus.

The PPP makes nearly $350 billion worth of low-interest small business loans, regulated by the Small Business Association but administered by private FDIC-insured lenders, available to businesses with fewer than 500 employees to cover primarily payroll, but also other costs such as rent and utility payments. (Some businesses, including hotel and fast food franchisors, are notably exempt from the maximum employee requirement).

What initially got small business leaders so excited about these loans, however, was the promise that as long as the funds are spent on eligible expenses, the U.S. government will forgive all or part of the loans at the end of the eight-week period starting on the loan origination date, making these loans effectively a small business grant. There are of course a number of restrictions and requirements, such as that employers who reduce staff or wages will have less of their loan forgiven, to ensure that the law isn’t abused and that it goes toward what it’s intended: keeping money in the pockets of working Americans.

That is the intention, at least, but the roll out of the bill has been far from smooth, with many businesses finding the application process confusing and the language of the bill confounding throughout. But there is one section in particular that is giving people a lot of consternation, and that is the passage regarding independent contractors — Section 1102(a)(2)(A)(viii)(I)(bb) of the CARES bill, to be precise.

According to this section of the bill, the definition of “payroll costs” is stipulated to include, among other expenditures, “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 1 year, as prorated for the covered period.”

Many readers have optimistically interpreted this proviso of the bill to mean businesses that pay compensation to independent contractors can apply wages of up to $100,000 annually per 1099 worker, prorated over this two-month period, to their forgivable payroll expenses. That would be huge in industries where work is completed by independent contractors. But others have been more conservative, interpreting the definition to mean that only $100,000 total paid annually to all 1099 workers (again, prorated) qualifies as a forgivable expense. Who is correct here?

No Double-Dipping

Unfortunately, neither of these interpretations matches the true meaning of the passage. The short answer to the question of whether compensations paid to independent contractors qualify as payroll expenses for purposes of this bill is no.

We know this because this question has come up a lot in recent weeks, prompting the Small Business Administration to release a clarificatory Q&A . In short, the language in this section is meant only to reassure 1099 workers who apply for loans themselves that the payments they receive during the eight-week period count as payroll for the purposes of the PPP.

This is not great news for businesses that utilize a lot of contract labor. But there is a logic behind it. Because independent contractors are — much to everyone’s surprise — eligible to receive these small business loans, allowing businesses to count compensation paid to 1099 workers as payroll expenses and receive grants for it would constitute double-dipping, from the government’s perspective.

How 1099 workers can apply for and use the loans is an enigma unto itself, but perhaps the best thing businesses can do right now is make sure contractors they work with know they are eligible for their own loans. It is likely that 1099 workers are going to see reductions in work for the foreseeable future, so alerting contract-partners to this aspect of the PPP could help them supplement their income during these difficult times and achieve the benefits intended by the bill.

First-Come, First-Serve

As soon as the earmarked $349 billion has been doled out, these small business loans will run out —once they’re gone, they’re gone. And if the rush of small businesses, independent contractors and sole proprietors applying over the past few weeks is any indication, they will not be around for long.

BPM is fully equipped during these turbulent times to promptly answer all your PPP and CARES Act-related questions so you do not miss out on your share of the pie. Using our advanced tax knowledge and our deep understanding of our clients’ businesses, we serve as valuable business partners ensuring that your business gets all that it’s entitled to. For more information about PPP and how we may be able to help, contact BPM Partner Terry Hill.