Independent and struggling? How to choose between unemployment and the paycheck protection program
As of Friday, the two main stimulus programs for small businesses – the Economic Disaster Loans (EIDL) and the Paycheck Protection Loan Program (P3) – both ran out of money. PPP loans dried up just days after they became available to gig workers, freelancers, and freelancers. At the same time, advances from EIDL were reduced to $ 1,000 per employee and tSBA revised what would be needed for PPP requests and forgiveness.
Don’t give up yet, though, if you’re self-employed. There is still help available. The PPP seems likely to get additional funding and unemployment insurance is available for the self-employed for the very first time. Today I am going to look at unemployment options and help you determine if unemployment or the P3 loan will work best for you.
Extended unemployment benefits
The CARES (Coronavirus Aid Relief and Economic Security) law provides for three significant extensions of unemployment:
These expansions are federal programs, but they will be administered by the states. This means that each state implements the policies through its own unemployment insurance program. You will need to apply directly to your home state to get your benefits. Most states offer 26 weeks of unemployment assistance. Benefit amounts are calculated on the basis of previous earnings. The CARES Act establishes a minimum benefit equal to 50% of the state’s average weekly unemployment insurance benefit. In February 2020, the average weekly benefit was approximately $ 387 and the minimum benefit approximately $ 194.
These provisions are applicable until the end of the year (12/31/20) except for extension of services.
Are you eligible for additional benefits?
Your state decides if you are eligible for unemployment. For the PUA program, the CARES Act provides guidance on covered persons who are not eligible for regular compensation or extended benefits under state or federal government.
First, to be eligible, you must certify that you are capable of and available for work within the meaning of state law. The “within the meaning of the state law” means that you will also have to research what your state says. The Illinois State defines these terms as:
- An individual is considered employable if he is mentally and physically capable of performing a job for which there is a labor market.
- To be considered available for work, a person cannot impose conditions on the acceptance of a job if those conditions leave him essentially without reasonable prospects of work.
- For Illinois, you must also register with the public employment service and actively search for work, which means “making a reasonably calculated effort to get the person back to work.”
CARES also provides exceptions to the general rules and allows you to qualify for the following reasons:
- You have been diagnosed with or have symptoms of COVID-19 and are seeking a diagnosis
- A member of your household has been diagnosed with COVID-19
- You are caring for someone diagnosed with COVID-19
- You are caring for a child or other household member who cannot attend school or a care facility because it is closed due to COVID-19
- You cannot come to your workplace due to a quarantine imposed as a direct result of the COVID-19 public health emergency
- You had to start a job and you no longer have the job or cannot reach the job due to COVID-19
- You became the breadwinner of your household because the former main income died as a direct result of COVID-19
- You had to quit your job as a direct result of COVID-19
- Your workplace is closed as a direct result of COVID-19
- You meet other criteria defined by the Ministry of Labor
You are not covered if you can telecommute for pay or receive paid sick leave or other paid leave benefits.
The new law removes the seven-day waiting period for newly unemployed people to start receiving benefits. However, you may still have to wait a little while to get your benefits. Many states are not set up to accept applications from sole proprietorships and independent contractors. In addition, in the past four weeks, more than 22 million people have filed for unemployment. So, there may be a long queue to get benefits.
The good news is that you will be eligible for retroactive benefits and can receive benefits for up to 39 weeks (26 weeks plus the 13-week PEUC extension), including any weeks in which you received regular unemployment insurance. . Many states are also backdating the FPUC program, the additional $ 600 per week, to allow 16 weeks of this benefit, which ends July 31.
The best way to find out how your state is going to deploy this is to search the Pandemic Unemployment Assistance Program page for your state or Google Pandemic Unemployment Assistance and your state.
Can I get unemployment and these loans?
Many people have asked me if a self-employed person or an independent contractor can get both an EIDL or PPP loan and unemployment insurance. Like many provisions of the new law, this is a gray area; a lot will depend on your specific situation. Plus, we don’t have much advice yet on how these programs will work together.
The most recent guidance for the PPP loan released last week gave a very general warning “you should be aware that participation in the PPP may affect your eligibility for administered unemployment benefit or unemployment assistance programs” but did not provide any details as to why or what that would mean .
Without any guidance, the best thing you can do is look at the details of your specific situation and build your best case as to why you should be able to get both. For me, it starts with the fact that unemployment is about your inability to work, not the amount of your assets.
If you are a hairdresser and cannot see clients for the foreseeable future due to stay-at-home orders, it seems to me that you are 1) able to work, 2) available for work, and 3) looking a job. You simply don’t have any rights right now because of COVID-19. You tick all the boxes.
On the other hand, states may say that the purpose of unemployment is to provide short-term financing until your business can get back on its feet. And they may consider something like a PPP or EIDL “other paid leave benefit” loan, which would make you ineligible for unemployment.
We should get more details this week as states like Illinois, Ohio, and California roll out PUA programs. Hope they are flexible because I know a lot of business owners have applied for loans in the past.
How to compare your benefits if you have to choose
If it turns out that you need to choose one or the other, here are three steps you can take to compare your benefits under each.
Step 1: Determine the maximum amount of your PPP loan
For self-employed workers and independent contractors, your maximum loan amount is calculated based on your average monthly income from your Schedule C: line 31 divided by 12 and multiplied by 2.5. Your income is also capped at $ 100,000 for the year, so the maximum amount you will receive under the loan is $ 20,833. I take you through step by step scenarios here.
Step 2: Estimate your unemployment amount
The unemployment amount is based on your state’s specific calculation. You can find each the breakdown of the state here. Many states also have online calculators that you can use to try to estimate your benefits. For example, here are the calculators for California, New York and Florida. This calculator provides estimates for each state, including state benefits and the additional $ 600 / week through the CARES Act.
The CARES law specifies a minimum benefit of $ 194 / week. That multiplied by 39 weeks is $ 7,566. In addition, you can add an additional $ 600 per week for 16 weeks, which is an additional $ 9600. In total, you envision $ 17,166 in benefits over 39 weeks, assuming you remain unemployed that entire period.
States also have a maximum amount of benefits. For Illinois, it’s currently $ 484 per week. Using the same calculation, you could get $ 18,876 in regular benefits plus $ 9,600 in PFUC benefits. That’s $ 28,476 in total benefits. Again, this assumes that you qualify and accept the full duration of unemployment.
Step 3: Reduce unemployment based on taxes you may owe
Finally, before you can compare the numbers, you need to consider the tax impact of each payment.
Your unemployment is taxable income for you and will be included with your other income on your tax return. The PPP loan will not be included in your return. It is discounted up to your average eight-week payroll (Schedule C, line 31/52) * 8). An additional 25% of the loan may be forgiven if it is spent on the operating expenses of the business. What is left is loaned to you at an interest rate of 1%.
Most states offer to withhold a flat rate of 10% for federal taxes and regardless of the state rate (for example, 4.95% for Illinois). You can subtract these two numbers to estimate what your net amount will be.
If you’re feeling very ambitious, you can use a free online tax calculator to figure out how adding unemployment will make a difference in your total tax owed, then subtract that amount from your benefits to compare the numbers.
To take into account the possibility that you will not be unemployed for the maximum period allowed, you can calculate the total amount of your PPP loans and determine how many weeks you will have to stay to receive a similar benefit (of course taking into account the withholding tax).
I will continue to update this article as more information becomes available. In the meantime, keep moving. I know it is a stressful time.