You applied for and received the SBA Paycheck Protection Program (PPP) loan through your bank or another financial institute. If you are like me, you see all the stuff about tracking payroll. That makes you wonder, what records do I need to keep?
What happens now? Will you have to pay it back? It seems like most of the language is talking about payroll and employees and FTE (full time equivalence), but the self-employed independent contractor seems left out of the mix.
I’ll be honest here. I took the loan, and I have it just sitting in the bank because I haven’t been sure what is going to happen. Some delivery platforms were slowing a lot. To me, it made sense to have a good backup plan, so I decided to apply. I see articles indicating you have to document how you spend the money, and that can make you wonder if you can get in trouble for NOT spending the money.
So what do we do?
How I approached it so far
It’s been almost two weeks since I received my loan. So far, it’s been sitting in the bank.
When you read all the different articles, you wonder, will I get in trouble for NOT spending it? What should I spend it on? Should I still be doing my deliveries as a contractor, and will that get me in trouble if I took this loan?
I took this as money that would serve as a backup if anything happened that I needed it. I looked at it with the expectation that I would have to pay it all back. While there was language that made it look like it would be forgiven, there was no specific information as to HOW that would happen or under what circumstances. So my decision was to play it safe. After researching and reading way more articles and documents than I ever thought I’d need to, I at least came to the conclusion that the worst that would happen is I would have to pay it back, but that I’d get two years and, according to the terms of my loan, it would be at 1% interest.
I can live with that kind of worst case scenario.
More information is coming out now that makes it look like a portion of the loan can and probably will be forgiven. I’m still not banking on it (literally or figuratively) and probably won’t until I have official word that it HAS BEEN forgiven. There’s still not enough specific language about this to feel 100% positive. But, it’s looking better.
More information was becoming available.
One of the frustrations I’ve had with all of this pandemic aid was that although independent contractors were given access to some of the relief measures, there was hardly any specific information about how that applies for us. Almost everything that I found was focused on employees. The few short lines that mentioned the self-employed were very vague.
I think this is because the government was still trying to figure it out. EVERYONE is still trying to figure it out. It’s not like this has been a common occurence, right?
These past few days though, I’ve been finding more information. It starts with the complicated legalese the government puts out, and then people make sense of it. One of the best articles I found was put out by Bench Accounting. It provided some hope that maybe some of this loan actually is forgivable.
Here is what it is looking like for loan forgiveness for the Independent Contractors for gig apps like Grubhub, Postmates, Doordash, Uber Eats, Lyft, etc.
There is some good news and some not as good but not horrible news.
The understanding that I’m getting is that the loan forgiveness is more or less automatic for those of us who have no payroll and no employees. The not as good but not horrible news is that part of it probably will have to be paid back. Maybe automatic is a bad word, because you will have to apply for loan forgiveness eight weeks after the loan was received. If you don’t take that step, you WILL have to pay it back. But there aren’t quite the hoops you have to jump through like you do as an employer.
For most of us, it looks like about 73% of the loan will be forgiven. A little more than a quarter will have to be repaid. If the loan wasn’t calculated properly, more may have to be paid back.
2-1/2 months compared to 8 weeks.
Here’s what it comes down to.
The amount you could borrow was based on 2.5 times the average monthly taxable earnings you had in 2019. You take your final profit off your Schedule C (that’s the amount that’s left after you deduct your miles and other expenses) and divide by 12 to get your monthly total. Take that by 2.5 and that’s the limit for what you can borrow.
I mentioned that it depends on if everything was calculated correctly. I heard from one reader who said they calculated his loan based on his 1099’s, not his Schedule C. In fact they didn’t even ASK for his Schedule C as I understand it. In that instance, there’s a good chance they’ll want a lot of that back. But if your loan amount was based on your TAXABLE earnings and not the amount you received from gig apps like Grubhub, Uber Eats, Doordash and Lyft, then you’re okay there.
But, for self employed individuals, they decided the forgivable amount would be capped at eight weeks worth of work. (It’s a little odd that they base the loan amount on months and the forgiveness amount on weeks. Then again, odd is par for the course with government stuff). So you could borrow 2.5 months (or 10.83 weeks) worth of your 2019 earnings, but the most you can have forgiven is 8 weeks worth.
What Has to Happen to Get That Forgiveness?
From what I can see, not much.
If you have a business with payroll, there are all sorts of records you have to keep track of. How much did you pay out before? What are you paying now? Are you paying less than you used to? Did you have to fire anyone and was it for cause? The whole idea for the loan was to encourage business owners to keep their employees on during this pandemic. If they could document that, they can get a good portion of the loan forgiven.
For the sole proprietor or the self employed independent contractor, the purpose of the loan is “owner income replacement.” The good news here is you don’t have to worry about all that payroll paperwork. But the question is, what exactly does that mean?
The Bench Accounting article I mentioned above did a good job of piecing things together. Now the SBA has released the loan forgiveness application form. Reading through that seems to have cleared a lot up.
I went through the application to try to fill it out. It’s a bit intimidating because you read through all the stuff businesses have to enter. The thing is, there’s not much that says “if you are self employed, SKIP THIS QUESTION.” There’s a lot of stuff where it looks like you just enter 0 because we don’t do payroll.
There is one line where it asks “Total amount paid to owner-employees/self-employed…” The instructions say the most you can put is 8 weeks worth of your 2019 Schedule C earnings.
And that’s about it.
The form is intimidating. It’s obnoxioius. It makes you wonder if you should enter things where you shouldn’t. Remember, you have no employees, so you don’t have to worry about a lot of that. Your payroll costs come down to that 8-week total you just figured out and that’s it. And when it’s all said and done, that’s what you can get forgiven.
I will tell you, I went through that form and was a bit nervous because at one point you have to multiply your 8-week total times what they call an FTE Reduction Quotient, and on first pass that looked like 0. That made it look like the total forgivable amount is $0.
Well, crap on a cracker.
It turned out I missed an instruction. And that’s the wonky thing about this: It’s very simple for us but it’s so complicated (kinda like tax forms) that you can miss something.
Is there anything else that can be forgiven?
For most of us, no.
The way it works is, 75% of the loan can go to payroll costs. You can get the additional 25% of it forgiven if it goes to: Business mortgage, business rent or lease, and business utility payments. In other words, if you have a place of business, you can claim those costs.
For some who are self employed, if you have a home office you can use the home office deduction rules to claim portions of your mortage and utilities. There’s been a little discussion on that but here’s a good article, also from Bench Accounting, on the use of the home office in PPP. If you didn’t qualify for home office deduction on your 2019 taxes, you won’t be able to use the money for those costs now. I would say most gig drivers don’t qualify for a home office deduction, because it requires the space be used regularly and exclusively for business purposes. That rules out most of us.
What happens to the parts of the loan that are not forgiven?
As I understand, you have the option to pay it back immediately, or to take payments. The interest rate is incredibly low, and that’s a good thing. Personally I’m looking at a 2 year payment term at 1% interest. I don’t like debt, so I’m expecting I’ll probably just pay it off early and be done with it. If there was an error like the one I mentioned earlier where the loan amount was based on his 1099’s, that’s one that most likely the overpayment portion (if not the whole loan) will have to be paid back immediately.
Right now, it looks like a good part of the loan will be forgiven for me. That said, I’m taking nothing for granted. There’s still just enough ambiguity and just enough about how it’s written towards employers more than self employed people that I’ll have my doubts.
In the end, it’s boiling down to me being hopeful that some of this will be forgiven, but I’m prepared to pay the whole thing back if it comes to that. Maybe that’s me being overcautious. I’d rather be that way than get hit with a big surprise later.