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Accounting

Need to Know: COVID-19 Unemployment Benefits for the Self-Employed

For decades, the traditional mantra was that self-employed individuals could not receive unemployment benefits. For sole-proprietors and partners, the traditional reasoning was that they are not employees and therefore their ‘employers’ do not pay into the unemployment system on their behalf. 

However, even S-corporate shareholder-officers whose S-corporate employers do contribute to the system on their behalf have traditionally found it difficult to collect unemployment benefits in most states, including North Carolina, because even when business is slow, they still have a payroll attachment, which impedes the collection of unemployment benefits.

In this article, Richard Barnes, lecturer in Poole College of Management’s department of accounting, shares issues self-employed workers should consider when deciding if they should apply for unemployment benefits on their own or seek to participate in the Paycheck Protection Program (PPP) on behalf of their business.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) makes three critical changes to the  traditional notion of unemployment compensation for individuals impacted by COVID-19:

  1. It adds $600 per week to an impacted worker’s weekly benefit amount.
  2. It expands coverage to explicitly include certain self-employed workers who were traditionally excluded and explicitly cannot work due to COVID-19. 
  3. For certain workers, it alters the requirement to look for work while unemployed.

In addition to changes to unemployment compensation, the CARES Act created the Paycheck Protection Program (PPP). PPP is structured as a forgivable loan program where up to 100% of the loan will be forgiven if the proceeds are used to permitted purposes. In order to qualify for forgiveness, 75% of the loan proceeds must be used to fund payroll costs. Payroll costs include salaries, wages and commissions, of no more than $100,000 for any individual employee, employee benefits (including paid time off), state and local taxes on compensation, and net earnings from self-employment up to $100,000.

That final item means that the normal net profits of the self-employed sole proprietor or partners in a partnership, but not the profits of a C or S corporation, are considered to be payroll costs.  The remaining 25% of the loan proceeds can be used for payroll costs, or for mortgage interest, rent and utility costs. In order to be forgivable, the loan proceeds must be used for payroll costs or other permitted expenses within eight weeks of when the loan is disbursed.

As of this writing, the North Carolina Division of Employment Security has yet to indicate when it will begin processing unemployment claims for self-employed individuals, and while the PPP program is presently accepting applications, banks and credit unions are indicating significant real and anticipated processing delays for PPP loans.

What Choice Should Self-employed Taxpayers Make?

Because of the CARES Act, self-employed taxpayers now have a choice between unemployment compensation and the PPP loan. Most of the self-employed are now grappling with that question:  Which option should the self-employed taxpayer choose unemployment compensation or a forgivable PPP loan? The answer depends on the number of employees the taxpayer has and the intended use of the proceeds. Almost all self-employed taxpayers with their own employees will receive more money through PPP (not counting shareholder-employees of C or S-corporations).

For self-employed North Carolinians whose normal profit and ongoing business expenses combined are less than $950 per week, and who do not have their own employees, the simplest course is to seek unemployment compensation. These taxpayers will be able to fully recover their lost income and business expenses through unemployment compensation with no limitations on how they spend the received funds.  

However, for taxpayers whose normal profit and ongoing business expenses are more than $950 per week or have employees, they can likely receive a larger amount in the form of a forgivable loan through PPP.  

Taxpayers whose normal net earnings from self-employment are more than $100,000 per year ($1,923 per week) can still receive PPP loans, but should not expect to have their PPP loan fully forgiven or their income fully replaced by PPP. 

For example, a sole proprietor with no employees who has $1,000 per week in net earnings from self-employment and ongoing business rent expense of $1,000 per month can receive a PPP loan of $10,000,  which is intended to provide for eight weeks of funding. After they pay their rent, they are left with $8,000 for eight weeks, which is automatically forgivable— the full income they would have realized from normal operation of their business. Additionally, under current law, none of the $10,000 received from PPP is taxable income even after the loan is forgiven. If this sole proprietor had elected unemployment, they would have received $7,600 and would need to include that $7,600 in their income for tax filing purposes (and deduct the $2,000 of two months’ business rent paid from their income). This income inclusion may or may not have tax consequences depending on the taxpayer’s other income during the year and how rapidly normal economic activity resumes following COVID-19.

On the other hand, a taxpayer with net earnings from self-employment of $150,000 per year is eligible for a PPP loan of $20,833 (the $100,000 PPP wage cap/12×2.5=$20,833.33). Of that amount, if they use all of it to replace their earnings, then they will have a forgivable loan balance of $16,666.67. The remaining $4,166.66 may also be forgiven, but only to the extent the borrower pays business mortgage interest, rent and utility costs in the eight weeks after the loan is received. If their business has no such costs, then that portion of the loan will need to be repaid with interest. This same taxpayer could, alternately, receive unemployment compensation of $7,600 for this same period.

In each of these examples, it is assumed that PPP and unemployment compensation would both run for eight weeks. That eight-week period is determined by the current period of time defined by PPP; however, the expanded pandemic unemployment benefits are actually available for 13 weeks. Currently, it is unclear how Congress will resolve these discrepancies or if Congress will intervene at all. 

At worst, Congress will do nothing, which means that the correct comparison is between a taxpayer’s PPP amount and 13 weeks of unemployment. This raises the switchover point for a taxpayer from $950.00 to $1,543.75 per week in combined normal net earnings from self-employment, plus continuing business rent, mortgage interest and utilities. Taxpayers normally earning more than $1,543.75 per week, plus continuing business expenses, will prefer PPP, while taxpayers earning less than that amount, plus continuing business expenses, will prefer unemployment compensation.

If Congress does further intervene, then they will likely maintain the $950 threshold discussed above for the duration, though it is possible that Congress could do something else. Congress may make all or some unemployment compensation non-taxable during this time of crisis (as was done during the 2008 Great Recession), effectively removing this as a concern for taxpayers receiving unemployment compensation.

All self-employed taxpayers, regardless of size, should seek the advice of appropriate business advisers to guide them in these decisions. Each of the income breakpoints described in this article may be slightly imprecise for certain taxpayers due to their unique tax circumstances.  Taxpayers who are close to the $950 or $1,543.75 breakpoints should consult with a tax attorney or certified public accountant for advice appropriate to their specific circumstance.

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  1. Although I’m pretty sure the answer is no. I’m curious if anyone knows whether or not your eligible to receive a PPP loan solely based on your Self-Employment income shown on your 1040 schedule c, and concurrently receive unemployment insurance benefits based on separate employment earnings paid to you by a private employer which is reported via W2 on your tax return?

  2. Hi Mr Barnes,
    If you are a sole proprietor and you file a joint tax return with your partner (husband/ wife) are you both eligible for unemployment under this program? If not what alternative do you have to claim a wage for your partner during this time? There do not seem to be any programs that cover this scenario. Thanks.

  3. Mr. Barnes,
    I’m a self-employed childcare provider that was approved for the PPP. However, the loan goes off my net and not my gross which is about 1/2 my gross because many things are deductible..basically the time/space percentage of everything I purchase since it is all used in some degree for childcare. Additionally expenses such as food and cleaning supplies have increased. My enrollment (and private pay clients) have decreased dramatically but I’m working quite a few more more hours because of cleaning and extending hours to care for the children of essential personnel. If I were only to pay myself my 2019 net income divided by 12 for 8 weeks I would barely be paying myself enough to cover expenses. Can I pay myself more each week so I can cover the expenses and still have it forgiven? If the monies from the PPP I received are depleted because of my pay, mortgage interest and utilities before the 8 weeks is up can I apply for PUI earlier than 8 weeks. I thought getting the PPP was a good thing but truthfully the partial unemployment might have been a better option.

  4. I am a S-Corp Sole Proprietor in the retail industry. I have a shop. I have no employees except vendors that I sell their items for along with mine. I have not received any money that I applied for. EIDL, PPP, Unemployment and not even a stimulus check even though I qualify. I know several shop owners who are experiencing the same dilemma. I don’t feel like the government is working for us shop owners. What can we do?

  5. In NJ, as the only employee and owner of an S-corp, I pay unemployment taxes on the business and personal side, and the wonderful state of NJ will not let me file for unemployment even though my work has basically stopped. No wonder people are leaving NJ.

  6. Nowhere else, I mean: NOWHERE else have I seen this ‘positive’ info re. sole proprietors being able to apply for Forgivable PPP (since article says paying myself is considered ‘payroll’). Am I reading this correctly? Everywhere else it says 75% must be payroll and paying independent contractors (which I have) cannot be considered ‘payroll’.

  7. MR Barnes, I am an Uber driver I applied for unemployment,I applied for PPP,i have also applied for sba loan nothing worked out and I have not received a stimulus check and I am out of options I have two kids I don’t know what to do,please advise me.thank you

  8. I am wondering the same thing as Tamara as to whether a self-employed person (actually a sole proprietor owner of a hair salon with W-2 employees) can get unemployment for the time period prior to when the PPP loans would be available?

  9. What if I am.self employee but I’m under a contract working for another company. But they dont take out taxe

  10. I work a full-time job and unemployment from the virus situation I’m also self-employed independent contractor as a DJ in a club that closed due to the virus can I also collect the PPP for my part time business as a DJ?

  11. Hello I have the same question as Tamara: Is it possible to get unemployment insurance UNTIL the PPP goes into effect? So perhaps 1 month of unemployment until the loan goes through and then 8 weeks of PPP loan forgiveness? Of do you have to flat out choose one or the other? Thanks very much.

  12. Hello, i am selling clothes on the street , like i am going firm to firm giving my clients credit and pay me weekends fortnight and monthend, and now as is lockdown all sitdown and also me in lockdown situation, no rent, no food for kids no money for my policies and they phoned me sending messages telling that policies are lapsing as i was buzy with registration and stalk knowing i’m gonna cover end of march, tuision fees , really need a way forward as we are considered, and thats how i am surviving, need held plz

  13. Hello I’m a self employed Hairsylist and want to apply for the covid-19 unemployment benefits
    Emelia Ybarra
    P O Box 868
    Three Rivers Texas 78071

  14. If we are a self employed S-Corp and do have employees except for the owner – do we apply for the PPP and unemployment or just one or the other? We are very confused on how to handle this. We don’t want to apply incorrectly. Thank you

  15. Mr. Barnes. In the event, there are individuals who are all members of an LLC- and ONLY take guaranteed monthly disbursements from the LLC- which are run through each individuals S-Corp, my assumption is that those individuals would be considered “self-employed” and would only be eligible for unemployment compensation. Is that accurate? Thank you, Mr. Barnes.

  16. I claimed a small amount on a 1099 because My job started in November. IS there a certain time frame of self employment an/or amount for eligibility?

    1. That’s a complex question. There are special rules for seasonal and newly started businesses. You can still seek unemployment benefits and PPP (but not both for the same time period). The unemployment benefits will be a flat dollar amount ($600) plus whatever state unemployment benefit you are entitled to (which will be very small because of the short period).

  17. Where do I apply for the PPP if I use my personal account for my income?
    As far as I know banks will only accept applications if you have a business account that associates with the business you are applying for.

    1. Banks have been overwelmed with PPP loan interest. While the PPP program ran out of funding yesterday and is closed now, it may reopen if Congress provides additional funds for the program. Banks will likely will be overwelmed if there is a phase two. A number of financial technology companies have become non-bank PPP lenders (Paypal, Square, and Intuit/Quickbooks to name three) and you may have a better experience there.

  18. When will self employed hairdressers be eligible to apply for benefits in Texas. They are told they are not eligible as soon as they say they are self unemployed.

    1. You have to tell them you are unemployed because of COVID-19 shutdown and you are eligible. I feel your pain. I own 2 salons.

    2. Thanks for your question, Susan! A self-employed hairdresser will be eligible if you have income that is reported on either a form 1099-MISC or a Schedule C as part of your 2019 tax return. You will need to provide copies of those documents to the state unemployment agency if requested. In North Carolina, self-employed individuals cannot apply for unemployment until April 25, 2020.

  19. Mr. Barnes – Thank you for you timely article on this topic. My husband and I were just discussing this very scenario with a friend, and tenant in a building we own. He is a barber, earning his income directly from his own clients as well as renting “chairs” in his business to other self-employed barbers. His business is organized as an LLC, and I am assuming this would fall under the “sole-proprietorship” provisions you discuss above. Is this a correct assumption on my part? Again – many thanks for helping to provide clarity in these rapidly evolving times. Best regards – Judy Whiting

    1. Thanks for your question! It likely can your friend can tell if they are eligible by studying their tax return. As a salon collecting booth rent they will split their income on their personal tax return between Schedule C, Schedule E page 1, and, possibly, Schedule E page 2. The amounts shown on Schedule C are eligible for a PPP loan and if the friend reports income on Schedule C then they can seek unemployment compensation if they choose. If their income is on Schedule E page 2 the answer becomes more complex. I also sent you an email on this and we can discuss in more detail there.

      Mr. Barnes – Thank you for you timely article on this topic. My husband and I were just discussing this very scenario with a friend, and tenant in a building we own. He is a barber, earning his income directly from his own clients as well as renting “chairs” in his business to other self-employed barbers. His business is organized as an LLC, and I am assuming this would fall under the “sole-proprietorship” provisions you discuss above. Is this a correct assumption on my part? Again – many thanks for helping to provide clarity in these rapidly evolving times. Best regards – Judy Whiting

  20. Hello. Thank you for this very helpful article. Is it possible to get PUA unemployment UNTIL the PPP goes into effect? So perhaps 1 month of unemployment until loan goes through and then 8 weeks of PPP loan forgiveness? Of do you have to flat out choose one or the other? Thanks very much.

    1. Great question, I would love to have clarity on this as well. I have been approved for the PPP but it will only supplement the eight week period and I have already been off for over three weeks. So wondering if I can get the PUA for time lost.

    2. Yes it is. A self-employed person can receive unemployment until their PPP loan funds, then stop receiving unemployment for 8 weeks during the PPP loan period and then, if needed, switch back to unemployment after that.

      1. Richard, can you please direct us to a source to verify that you can claim PUA before your PPP loan funds?