Maybe you’ve heard about this small-business relief program and assumed it was only for companies with employees—or that it was too late to apply? Neither is true. Congress just added $310 billion in funding to it—and freelancers are welcome to apply. A dancer-turned-finance professional explains how it works.
Note: See “Paycheck Protection Program Update: It’s Not Too Late to Apply” for changes made in June and July to some PPP terms mentioned in this article.
On April 10, applications for the Paycheck Protection Program (PPP) opened to independent contractors and eligible self-employed people. This is good news for the many solopreneurs who work in dance as one-person businesses (sole proprietors) or independent contractors. Whether you’re a freelance dancer, choreographer or teacher, an independent lighting designer or costumer, or another kind of one-person dance business or gig worker, this program is designed to replace income you’ve lost due to COVID-19—to protect your paycheck.
Although there’s been overwhelming demand for the loan and some confusion about the application process, the U.S. Small Business Administration (SBA) last week issued additional guidance that clarifies many details, especially for applicants who are self-employed. Here’s what you need to know.
What is the Paycheck Protection Program?
The Paycheck Protection Program (PPP) is an SBA loan, administered by banks and credit unions, that is designed to help companies keep their workers employed during the COVID-19 crisis. If you’re self-employed, that worker is you—PPP is designed to replace your income. One of the biggest benefits is that this loan can be forgiven—that is, it turns into a grant. If you believe you may qualify, you should apply for this program.
What are the basic terms of the loan?
- It funds up to 2.5 times your average monthly payroll, which, if you’re self-employed, is based on your net income in 2019.
- It has a 2-year term, with a 1 percent interest rate.
- It’s fully forgivable if 75 percent of the loan is used toward payroll over the eight weeks following the disbursement of the funds.
- It does not require a personal guarantee or collateral.
Because of these generous terms, including being potentially fully forgivable, the demand for this loan is astronomical. If you want to apply, don’t delay. The final deadline is June 30, 2020, but funds are offered on a first-come, first-served basis and could run out before then.
Do I qualify for this program?
If you’re a dance professional who receives W-2s at tax time…
No. If you are an employee of a store, studio or other company (and you receive a W-2 each year), you do not qualify for this program. If you’ve been laid off or furloughed from that job, apply for unemployment insurance through your state.
If you’re a dance professional who receives 1099s at tax time…
Yes, you do qualify. Your 1099s are the record of your income from various freelance gigs or contracts.
If you’re self-employed and do not receive 1099s…
If you receive income from your business, you qualify. For instance, if you are a one-person business (self-employed) and you receive income from selling goods you’ve made, like dance costumes or T-shirts, the income reported in Schedule C on your 2019 tax return qualifies you.
If you’re a dance professional currently receiving unemployment compensation…
If you are receiving unemployment benefits, you may not qualify for the program. The latest guidance isn’t completely clear. It doesn’t strictly rule out getting both unemployment and a PPP loan, but it cautions that you should be aware that participation in the PPP may affect your eligibility for state-administered unemployment compensation or unemployment assistance programs.
Are there other requirements to be eligible?
Your business has to have been in operation on February 15, 2020; you must live in the United States.
How much can I borrow?
For a self-employed individual or independent contractor with no employees, you may wonder what qualifies as “payroll.” It’s your net income, based on figures from Schedule C of your 2019 tax return. So you’ll have to prepare your 2019 tax return to do these calculations, even though you don’t have to file your return until July 15.
Here’s how to calculate the amount you qualify for.
Step 1: Look for your net income on line 31 of your Schedule C of your 2019 tax return. (If it’s greater than $100,000, reduce to $100,000.)
Step 2: Take this number, divide it by 12. This equals your average monthly income.
Step 3: Multiply the average monthly income by 2.5 and this is what you qualify for.
How can I use the loan?
You can use it to:
- Replace your own compensation (based on your 2019 income).
- Pay business rent or business utilities (if you claimed a deduction for them on your Schedule C).
- Pay interest on a mortgage or loan (such as auto payment) that is for business (if included in Schedule C expenses).
Where can I apply?
The best place to start is your current bank. An established relationship is likely to help expedite the processing of your application. However, many businesses and individuals are running into roadblocks with their banks—for example, their bank is not making PPP loans or has exhausted their lending capacity, or the borrower does not qualify based on some internal guidelines at a bank. If this is the case, don’t give up. Call other local or community banks and lenders to see if they are accepting applications from new clients.
What documents do I need to provide for my application?
To apply for the loan, you will need the following documentation prepared:
- Signed Paycheck Protection Program application.
- Copy of your driver’s license.
- Your 2019 tax return, including Schedule C.
- 1099s for 2019, if applicable.
- A 2020 invoice, bank statement or book of record to establish you were in operation on or around February 15, 2020.
Will a credit check be required?
There is no requirement within the PPP rules for a credit check. However, ultimately it is the bank or credit union that approves the loan, and it may require a credit check. This is less common than for most other business loans, because PPP is backed by the full faith and credit of the U.S. government.
Will my loan be forgiven?
In order for the loan to be forgiven, at least 75 percent of it must be used toward payroll. If you are self-employed or an independent contractor, this is very easy to achieve, since you are the only employee and the funds are going to you. But if your own compensation is your only eligible expense, be aware that “loan forgiveness will be limited to a proportionate eight-week share of your 2019 net profit, as reflected in your 2019 Form 1040 Schedule C.” Since the amount you’re allowed to apply for is two and a half months of payroll, you’ll need to budget to repay the remaining amount. (Payments are deferred for six months.)
What documents do I need for the forgiveness?
Be sure to keep good records. Eight weeks following the loan, your lender will request that you provide them with information to determine if you qualify for loan forgiveness. You will likely be asked to provide the following:
- Bank statements that show the funds went to you, the sole employee.
- 2019 Schedule C.
- Receipts for funds put toward eligible expenses.
The bank may require certification that the documents are true and correct and that the amount of funds requested for forgiveness were used to pay yourself.
Will I have to pay taxes on the forgiven loan?
No, you do not need to pay taxes on any portion of the PPP loan that is forgiven.
Is this the best resource available to me?
Many independent contractors may qualify for expanded unemployment insurance. Under the CARES Act, new federal law—Pandemic Unemployment Assistance (PUA), Federal Pandemic Unemployment Compensation (FPUC) and Pandemic Emergency Unemployment Compensation (PEUC)—allows states to extend benefits to self-employed and gig workers, and to provide an extra $600 per week, as well as an additional 13 weeks of benefits. But states each operate their own unemployment insurance benefits, so you’ll need to consult your own state for specifics.
It is important to evaluate which option works best for you based on your individual needs. Each option may vary by amount and length of time. For example, the PPP is a one-time loan that covers 2.5 times the average payroll amount for the past year. Unemployment is ongoing for a period of time and has a set weekly rate. Consult with your accountant or other financial advisor if you need help deciding. Remember, you may not be able to apply for both.
Sara Judd Borazan, a ballet dancer and teacher who is now a finance professional, is managing director of North Capital Investment Technology where she manages its Paycheck Protection Program platform, P3Loans.