CARES Act and Payroll Protection Program: What IECs Need to Know
Unless you’ve been living under a rock, you’ve probably heard about the CARES Act and specifically the Payroll Protection Program, which provides small businesses like ours with loans that are, in part, forgivable.
First, please know that I am NOT an accountant. I am also not an attorney or any type of professional qualified to provide advice on the matter. This is just my own interpretation of the legislation and how I plan to use it in my own practice, which I am sharing with you for informational purposes.
Have you read the entire full text of the document?
If not, you can read it here.
4/3/20 Update: You should also read the additional Interim Final Rule guidelines here.
There are a million summaries of this on the internet, most of which are written by people far more knowledgeable than me - so I’m not going to try to summarize it all. Instead, I am going to share a few points that other IEC colleagues or I did not find to be obvious from the summaries. I hope this helps you!
1. Much of this loan is forgivable. Whether WE have a lot of overhead or not, whether WE are in need of a loan or not, nearly every one of US will benefit from THE FORGIVABLE ASPECT. DON’T LOOK AT THIS AS A LOAN BECAUSE YOU RAN OUT OF MONEY OR SOMETHING NEGATIVE OR SHAMEFUL.
One of my IEC coaching clients said that she was not initially planning to pursue the Paycheck Protection Program because she did not want to take out a loan. She really seemed to think this would be a failure on her part as a business owner to take out the loan. As I said to her - friend, this is NOT a loan you have to pay back! Yes, you can use it for that purpose too - but so much of this is forgivable. I will absolutely be taking this loan and using it for any purposes that can be forgiven - payroll, rent, utilities, etc. Every one of you should do this, assuming you qualify!
2. The $100,000 per person compensation limit does not appear to apply to profit distributions - just salary.
I swear to God, I have never been so thankful in my entire life for my accountant. When she suggested that I switch to an S Corp a while back, I had to start paying myself a salary, and she recommended that I keep it to what she considered a fair-market wage and take the rest in distributions. Profit First makes it very easy for me to allocate all of my funds to separate accounts each month for this purpose. You will notice that I allocate the same percentage amount to profit and owner’s pay each month; I do this for bookkeeping purposes to make sure that my “owner’s pay” account is fully funded (over-funded, really) throughout the year. At the very end of the year, I transfer the excess to myself in a final profit distribution. I don’t mind being very up-front about what I pay myself: I take a salary of $70,000 per year, which is what I would pay someone else in my role who does not have an ownership interest. Since I am the owner, though, I also take regular profit distributions throughout the year that amount to substantially more than my base salary. If you have a similar structure, you are set and you can still have two months of your payroll salary covered (this is what I was told, anyway).
3. (((We can include independent contractors in calculating our monthly “payroll expenses,” even though mainstream media keeps referring to employee payroll. ))) <— This is sadly not the case anymore as of 4/2/20
Here’s what I originally posted:
When I first read the online summaries, I was not sure as to whether the term “payroll” covered independent contractors or just employees. Nearly all of the analysis makes it very clear that independent contractors and anyone else in the “gig economy” is eligible for the loan, but at the same time, nearly every single summary I read over the weekend excluded independent contractor costs from the section on payroll. Most of my team is made up of independent contractors and I know that many of you are in the same position. This will make a big difference in my bottom line and many of yours too, I’m sure.
If you read the full text, you will see that “ the term ‘payroll costs’ … means … “the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period…”
4/3/20 Update: They changed this in additional Interim Final Rule guidelines - we can’t include independent contractors in our payroll after all. So bummed.
4. WE don’t need to have full time employees to have full-time-equivalent employees.
This was also confusing to some of my coaching clients, who believed that they did not have full-time-equivalent employees (or independent contractors) because they did not have full-time employees/ICs. The key word here is equivalent - you need to calculate the full-time equivalency of your staff using your time-tracking system and their hours worked. I did this yesterday by listing out each staff member and their hours worked per week between February 15, 2019 and June 30, 2019. I then added up all of those hours to get one amount per week, which varied from week to week. For each week, I calculated my # of FTEs using 40-hour increments. For example, if your team works a combined total of 20 hours per week, that’s .5 FTE. If your team works a combined total of 120 hours per week, that’s 3 FTE. Don’t forget to include yourself in that number if your payroll is under $100k. You then need to average the weekly FTE numbers to find your average FTE for the period in question, and make sure that your average FTE for the upcoming 8-week period will be similar. I would suggest printing out documentation from your time-tracking software, as well as copies of your 1099s, so that you are able to substantiate this when filling out the loan paperwork.
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I don’t have all of the answers yet, myself - there are still quite a few questions I have, actually - but I’m learning more by the day and will be happy to share everything with my readers! Our industry is so small that it’s difficult to find specialized information relating to our unique situations.
In the meantime, I added a new (very) low-cost template to the online store that you can use with your clients during this time. Check out the Virtual Research Comparison Chart if you’d like to have a done-for-you document to provide students to assist with their virtual research. I am using it with juniors to help finalize their lists, and with seniors to help finalize their enrollment decisions! As always, you can swap out my filler logo with your own and provide it to your clients as if you were the one who came up with it!