In the last two weeks, even as Congress passed various relief and stimulus bills, you may still be wondering exactly what help they bring. Here’s a summary, including cash for businesses, unemployment payments for gig workers and a new payroll protection loan that converts to a grant (and is also open to independent contractors and self-employed people).
Whether you own a dance studio or a dancewear store, make dancewear or work as a dancer, you’ve likely been impacted by the coronavirus. Studios and stores have closed, performances and conventions have been stopped, dancewear orders have been cancelled, and there’s no clear end to this business crisis in sight. To help you get through these tough times, the federal government is offering specific financial and tax breaks through the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Families First Coronavirus Response Act. Here are highlights.
What can you do about employees?
If you currently have employees, in addition to the Paycheck Protection Program loans, which we talk about below, there are a number of incentives to enable you to keep staff on the payroll and help them through this crisis. (If you are an employee yourself, it’s useful to know what help may be out there for you.)
Employee retention credit
Employers can take a credit of 50 percent of wages (plus health insurance coverage) paid after March 12, 2020, through December 31, 2020, for employees you are paying but who are not working due to your partial or complete cessation of business or a significant decline in revenue. The credit is applied against the employer share of Social Security taxes on a quarterly basis. But the credit is limited to $10,000 per employee for all quarters.
Payroll tax deferral
To help with your cash flow, instead of depositing the employer share of Social Security taxes (part of FICA), you can defer it through December 31, 2020. Then 50 percent becomes payable by December 31, 2021, and the other 50 percent by December 31, 2022. But remember, the normal penalties for not paying payroll taxes are severe, so be sure to plan ahead and build a reserve so you can make those payments starting in December 2021.
Required paid leave
If you are a small business (fewer than 500 employees), you must provide certain paid sick and family leave. (Businesses with fewer than 50 employees can claim exemption if the payment would threaten the viability of the business. It’s up to the U.S. Department of Labor to define this exemption.) But paying the benefit shouldn’t cost you anything because it’s offset by payroll taxes (federal income tax withholding and the employer and employee share of FICA). If these payroll taxes are insufficient to cover the cost of this paid leave, employers can request an accelerated payment from the IRS (procedures for this have not yet been announced).
What if you’re self-employed?
If you are self-employed (i.e. a gig worker, or freelancer) and don’t have any employees, you still qualify for some new breaks, including the Paycheck Protection Program, described below.
Usually self-employed individuals are ineligible for unemployment benefits. However, new federal law supports states in offering these benefits for gig workers and freelancers who are independent contractors. The amount available varies by state, so contact your state unemployment office.
Deferral of self-employment tax
Usually, you must pay self-employment tax to cover Social Security and Medicare taxes as part of your estimated taxes. But now you’re allowed to defer 6.2 percent of the 15.3 percent self-employment tax (what represents the “employer” share of Social Security taxes) through December 31, 2020. You then pay 50 percent of this deferred amount by December 31, 2021, and the other 50 percent by December 31, 2022.
What if your business needs cash: What funding is available now?
If you have a business and need to borrow money to stay afloat and keep your staff on board, here are some loan programs to consider.
Paycheck Protection Program (PPP) Loan
This is a loan—equal to 250 percent of your average monthly payroll expenses (there’s a $10 million cap)—that you apply for through an SBA-certified lender (most commercial banks and certain other lenders). There are no fees, credit checks, personal loan guarantees or collateral required. The beauty of this program is that the loan will be fully forgiven if the funds are used for payroll costs (up to $100,000), interest on mortgages, rent, and utilities for any eight weeks between February 15, 2020, and June 30, 2020. Eligible payroll costs include payments to employees on the payroll, as well as those you’ve brought back onto the payroll. If you’re a studio transforming your curriculum to online dance classes or a brick-and-mortar store adding or improving your e-commerce while your store is closed, this staff help may be life-saving.
Note: Loans under this program are also available for sole proprietors and independent contractors or self-employed individuals.
PPP applications for small businesses and sole proprietorships start April 3; for independent contractors and self-employed people, April 10. Find more details here and at the SBA website. And here’s a sample application form, so you can prepare for your talk with your banker. The program is open until June 30, 2020, but it’s best to submit your application as soon as possible.
Economic Injury Disaster Loan (EIDL) and Cash Advance
This is a direct loan program through the Small Business Administration to cover payroll and certain other expenses. Interest rates are low, with repayment spread up to 30 years. The loan is based on your credit score, with no personal guarantee needed for loans under $200,000 and no collateral. Interest and principal can be deferred for the first year. This loan is now also available to self-employed individuals and nonprofits (the terms are not yet clear). Apply here. Once the EIDL application is in, it’s possible to get a cash advance. That doesn’t have to be repaid as long as the money is used for a set purpose (e.g. increased costs due to supply-chain disruption, maintaining payroll, etc.).
If you currently have an SBA-backed loan, you can obtain six months of debt relief. Interest, principal and fees are deferred for this period.
State and local loans and grants
Check your locality for financial assistance. For example, New York City has programs to help small businesses, such as an employee-retention grant program to cover payroll costs for two months for businesses with fewer than five employees (no repayment required), and zero interest loans up to $75,000 for businesses with fewer than 100 employees.
And Don’t Overlook These Sources of Cash
To meet your business’ cash needs during this crisis, you don’t want to miss any option. Here are some resources to consider.
While the IRS has extended, until July 15, 2020, the filing deadline for 2019 returns for individuals and calendar year C corporations, if you are owed a tax refund, file as soon as possible. Also consider CARES Act changes that may entitle you to file amended returns for previous years. For example, the net operating loss rules for 2018, 2019 and 2020 have been changed to allow you to carry back losses incurred in these years to the five prior years and offset 100 percent of taxable income in those years; this generates an immediate tax refund from those years. Or if you made certain improvements to your retail store after September 27, 2017, “qualified improvement property” has been given a 15-year recovery period, which qualifies it for 100 percent bonus depreciation and may entitle you to a tax refund claimed by filing an amended return for the applicable year.
While funds in your retirement accounts are designed to provide income during retirement (and normally it’s never advised to tap into them for anything else), you are permitted to tap them now with favorable results. There’s no 10 percent penalty on coronavirus-related distributions up to $100,000. This taxable income can be spread over three years to lessen the tax impact from the distribution. And you can recontribute the distribution (hopefully things will turn around to enable you to do this), and it won’t diminish your ability to make new contributions. You also can borrow from your 401(k) plan (if the plan allows it) to a greater extent than usual. What’s more, required minimum distributions are waived for 2020, whether or not you are impacted by the virus.
There’s still much guidance needed from the Internal Revenue Service, the Department of Labor and state agencies to flesh out the details of these tax and financial breaks. Check with the IRS, DOL and your state for updates. Work with your CPA or other financial adviser to determine which breaks apply to you and to help you with the paperwork needed to get the financing you need to ensure your business survival.
Updated April 30, 2020.
Barbara Weltman, an attorney and small-business expert, is the author of J.K. Lasser’s Small Business Taxes 2020: Your Complete Guide to a Better Bottom Line and publisher of “Idea of the Day” at bigideasforsmallbusiness.com.