If you’re a freelancer, you’ve probably heard about all the assistance that became available to you when the $2.2 trillion coronavirus relief bill became law.
But you’ve also probably found by now that actually getting that assistance can be incredibly complicated.
On April 10, another such type of assistance will open up to freelancers, gig workers and self-employed people: Paycheck Protection Program loans.
If you’re among this category of workers, you could borrow up to 2.5 times what you make after expenses each month — and have the loans forgiven after eight weeks if you abide by certain rules.
How PPP Loans Will Work (When You Can Get Them)
The loans had a rocky start when they rolled out to small businesses on April 3, with many applicants finding that their banks were unprepared to deliver a piece of the $349 billion loans in the bill.
But here’s how they’re supposed to work:
Small businesses (defined as 500 or fewer employees), sole proprietors, freelancers and self-employed people can apply to borrow the lesser of $10 million or 2.5 times their monthly payroll cost. Salaries used to calculate payroll are capped at $100,000.
You have to use at least 75% of the loan on payroll costs, which shouldn’t be hard if you’re a freelancer. The remaining 25% can be spent on rent, mortgage and utilities, though the rules for how you can use the other 25% are still unclear. (More on that shortly.)
The ultimate goal of the program is to keep employees on payroll, rather than sending them into the unemployment system. If at the end eight weeks, all employees are still on payroll (that’s you, freelancer), you can have the loan forgiven. It won’t even count as taxable income.
How Much Can Freelancers Borrow With a Paycheck Protection Loan?
If you’re a freelancer, your payroll cost is essentially the money you earn as an independent contractor. Technically speaking, it will probably be defined as your net self-employment income, which is how much you bring in after expenses.
So if your net income is $30,000, the math works out like this:
$30,000 divided by 12 = monthly payroll cost of $2,500
$2,500 times 2.5 = maximum loan of $6,250
Lenders will calculate the average based on either your 2019 tax returns or the past 12 months’ worth of income using bank statements.
6 Tips for Freelancers Seeking Coronavirus Loans
According to Brad Paladini, a New Jersey tax attorney who’s helping clients navigate the PPP approval process, the challenge for many freelancers will be properly documenting their income.
“The issue is going to be that a lot of freelancers don’t keep books and records,” Paldini said. “The banks are going to need some sort of verification based on your tax returns.”
1. Make a Draft of Your Tax Returns if You Haven’t Filed
You now have until July 15 to file your taxes due to the coronavirus tax extension, but if you haven’t filed your 2019 return, Paladini suggests completing a draft to provide the bank with the documentation it needs.
Most freelancers report income using Schedule C. You can draft a return using one of the tools on the IRS Free File website.
2. Open a Separate Business Account Now
If you use your personal bank account for your freelance business, open a separate business account now if you can. That will make it easier to show you’ve spent the money for allowable purposes when you apply for loan forgiveness.
“If you open a separate bank account, you can trace where the money is going,” Paladini said.
3. Apply With Your Own Bank First
The decision about where to apply first is a pretty simple one:
“Apply with whoever you have an account with,” Paladini said. “Banks have been so overwhelmed that even local banks are prioritizing customers who already have an account with them.”
You can see if your bank is an eligible lender using this search tool on the SBA’s website.
4. Apply With a Local Bank or Online Lender if Your Bank Says No
If your financial institution isn’t offering PPP loans or rejects your application, you probably won’t have any luck with a major bank, according to Paladini. Try a community bank or an online lender instead.
5. Be Cautious About Applying for PPP Loans if You’re Getting Unemployment
Another area of uncertainty: whether you can get unemployment benefits as a freelancer and also have a PPP loan. Remember: If you’re a freelancer, you’re using at least 75% of the loan to replace your wages. It’s especially complicated since unemployment rules vary by state.
Paladini suggests caution on applying for a PPP loan if you’re a freelancer who’s receiving unemployment benefits. But if you’re among the many freelancers who are finding it tough to get unemployment, “I’d go ahead and apply [for a loan] at this point,” he said.
6. Wait for Guidance From the IRS if You Can
There are a lot of gray areas that freelancers are waiting for the IRS to provide guidance on, Paladini said on Thursday, April 9.
One area that’s especially unclear is how they can use the 25% of the loan that doesn’t have to go to payroll costs. Example: You’re a freelance photographer with a small home studio. Can you use the PPP loan to cover the percentage of your mortgage equivalent to the percentage of your home’s square footage that the studio eats up?
Another point of clarification is health insurance. The law allows group health insurance to count as part of payroll costs. But how would that apply to freelancers?
“Of course, as a freelancer, you might have individual health insurance,” Paladini said. “Can you use the money for that? Yes, that’s my guess, but we really don’t know at this point.”
Still, you’ve probably heard about how important it is to apply ASAP for PPP loans. After all, $349 billion doesn’t go that far when you consider that there are tens of millions of small businesses in America.
But Paladini believes it’s highly likely that Congress will approve more funding. So he thinks freelancers are better off waiting to take out a loan until the IRS gives more guidance.
“Without that, you’re just guessing about how this is going to apply,” he said.
Robin Hartill is a senior editor at Codetic and the voice behind the Dear Penny personal finance advice column.