Written By Travis Hornsby, CFA®, CFP®
The Paycheck Protection Program will give countless businesses with W-2 employees a much needed lifeline, assuming they can successfully navigate the maze. However, millions of 1099 jobs are about to be lost, some permanently, because of the incompetence of the SBA and US Treasury Department.
Two thirds of the economy is now service based. Additionally, the number of workers getting paid via 1099 increased from 18 million in 2001 to 26 million in 2016. In 2019, the IRS reported receiving over 35 million 1099 forms from individuals across the country.
The Treasury Department has stated that business owners cannot include 1099 contractor compensation for the PPP program. This does not take into account how drastically the economy has shifted in the past decade, and it will result in millions of layoffs in the coming weeks because of the Treasury Department’s interim final guidance.
1099 Jobs Are Much Higher Paying than You Think
Sure, companies like Uber or Lyft might not be paying workers a living wage. However, according to Zip Recruiter, the average wage of a 1099 contractor is $4,626 a month.
There are many businesses that pay workers via 1099 just to get around having to pay the employer’s share of the FICA tax. Clearly, that’s not ok.
That said, I think most employers are indifferent to whether they pay FICA tax or the worker does, because they care only about the total cost of paying someone to do a job.
Many Small Businesses Start with Contractors Before Getting Bigger
White collar workers are also expensive. If you’re a small business starting out, can you afford to pay someone $100,000 per year plus expenses like health insurance and retirement matching?
What’s more likely is that worker would operate their own small business and work for 3 or 4 small businesses, each of which might pay him or her $40,000 a year.
Many workers and employers choose to use 1099 contractor arrangements because the internet happened, and you don’t have to show up to a dull office park at 8am Monday – Friday to do good work anymore.
By paying contractors to do part time work, small businesses get services they couldn’t afford if they had to pay a full time worker. The worker gets flexibility, the ability to work from anywhere, and diversification of their income streams.
Even better, that worker now operating her own business might hire an assistant who lives in another state on a very part time basis, also paid via 1099.
Allowing small businesses to pay eligible workers under 1099 arrangements creates millions of flexible jobs, many of which turn into permanent roles long term.
How Will the PPP Destroy Jobs?
The Treasury Department guidance pulled a bait and switch on millions of small business owners that thought they were going to be keeping their teams on the payroll.
Before the interim final guidance of the Treasury Department, our lawyers said the CARES Act specifically stated contractors could be included in payroll costs.
Full disclosure: the average worker on our team is a 1099 contractor, works about 15 hours a week that they choose, and makes an average of $50 an hour. We clearly have a reason to care about this ruling from the Treasury, as do many of our readers who will also have to lay off most of their staff.
On April 2 and April 6 in their FAQ, the Department of Treasury and the SBA said not to include payments made to 1099 contractors in the monthly payroll, which determines your eligible PPP loan amount.
The reason given? 1099 contractors can “apply on their own.”
Contractors Are Having a Lot of Trouble Getting Approved
Obviously you don’t want people to double dip, but who’s more sophisticated to get through the mess of the pathetically implemented PPP program? Small businesses with six and seven figures of revenues, or their contractors with five figures of revenue?
Also since many small businesses start with 1099 contractor arrangements before adding W-2 employees, you are effectively killing off a big part of the job creation cycle at its infancy, which will further depress job creation long term.
If the guidance had allowed us to include 1099 contractors for our own business, we could have easily calculated the amount based on the 1099 forms we gave everyone on our team.
Unfortunately though, most lenders want to see Schedule C and other documentation from contractors that confuse them greatly in the application process.
For example, my brother edits YouTube videos for our company channel. He didn't even realize he was technically a small business owner since he's a solopreneur.
We have tried to help our 1099 contractors apply, but a lot of contractors have no clue how to begin. They don't do payroll, they don't have a large business banking relationship, and they're trying to navigate a program in absence of legal or tax advice that small businesses with at least seven figures of revenue can access.
Many Contractors Do Not Have the Banking Relationships Needed to Apply
Hence, all the millions of contractors around the country can no longer be covered by the larger businesses they work for.
They must pray they have a bank account, maybe a line of credit at a bank that’s accepting PPP applications, and hope that they don't bank with Wells Fargo.
These PPP applications need to be approved too, with many banks placing phone calls to applicants. Instead of letting businesses that employ dozens or hundreds of contractors apply on their behalf, the guidance means millions more people will need to apply, which gums up the system and slows down applications for an emergency program.
The saddest part for contractors is that many small businesses cannot afford to pay them now. So they are left on their own to apply and pray that they receive a PPP loan.
Treasury and SBA Wants Contractors to Sit on the Couch and Do Nothing
How can a small business ask a graphic designer to make a logo they need to close a new business deal when that designer got her pay from the SBA instead of that small business?
The answer is you can’t expect that at all from a worker. Would you work for someone when the government was paying your salary instead of that employer?
Furthermore, since you have to spend PPP funds mostly on payroll, many contractors are scared to apply because they don't know if they qualify since they don't technically issue themselves formal W-2 statements.
Small businesses don’t have nearly as much revenue right now. So the Treasury has created an incentive structure for people to sit on the couch and not do work.
You’re going to see millions of business owners make the hard choice and lay off their workers because the government loan program does not support them unless they had everyone on W-2 payroll.
That leaves most of the “new economy” out in the cold.
Workers Now Are Quitting to Get Unemployment
When the economy does start to reopen, many of my fellow business owners report that they won't have a labor force to help them get things moving.
The owner of my favorite sandwich shop where I live told me that his entire staff had decided to apply for unemployment benefits because he had to reduce their hours.
They were all approved, and as soon as that happened, they all quit at the same time.
You're not supposed to get unemployment if you can actually work, but there's very little due diligence being done right now. People are just applying to see what happens and then once they get funds, they don't need to work.
In fairness, if you could relax and watch Netflix or go into work for less money, you'd choose Netflix too.
For 1099 contractors who are successful in claiming unemployment, that might be even more advantageous than applying for PPP since enhanced unemployment benefits last until the end of July.
Hence, the federal government created an extremely strong incentive for businesses to pay workers in cash under the table. That's going to be the only way for many small businesses to attract the labor they need back to their positions prior to August.
Some Businesses are Applying with Contractors Included in Payroll Anyway
If you read the text of the actual CARES Act, you have to do some creative gymnastics to get to the conclusion that you're not allowed to include 1099 contractors you paid in your monthly payroll calculation.
In fact, one lawyer I spoke with was enthusiastic about the idea of suing Treasury over this interpretation of the law.
Of course, if you're a small business strapped for cash, the last thing you can do right now is turn over thousands to a lawyer for a lawsuit.
So what are businesses doing that disagree with Treasury's interpretation of PPP? Applying with 1099 contractors included anyway.
And the crazy part: many are getting approved for this full amount.
I've heard numerous stories from customers of Chase bank who applied with contractors included who received the full higher amount based on that much higher payroll.
I don't blame the business owners, but the process is extremely unfair and leading to outcomes where some business owners get six and seven figure loans that easily could be forgiven with lax oversight of guidelines.
Other businesses that follow the guidelines might literally lose out on hundreds of thousands of dollars, which could have kept their businesses afloat.
So if the Treasury and SBA doesn't force businesses that included 1099 contractors in payroll to give the money back, anger over the poorly implemented program among businesses that followed the guidance will only grow.
Destroyed 1099 Contractor Jobs Might Not Come Back
Some small businesses will be able to pick up where they left off, hopefully ours included, but others will go out of business because they can’t afford to pay their team.
The idea of the PPP was to “freeze small business in place.”
Instead, many small businesses will die off because of the Treasury Dept’s guidance on PPP. If you don't have a team for the next several months, productivity growth in the economy is totally shot at the micro level.
Add millions of businesses going through the exact same problem because of the bureaucrats at the Department of Treasury and SBA, and you can expect to see the 6 million layoff number get even worse.
The contractors that do get lucky enough to receive a PPP loan will get paid until the money runs out. But for the millions of small businesses that employ them, the jobs might not be there when this is all over because many will have gone out of business.
I’m hopeful that the government will realize this problem and allow small business owners around the country to save as many jobs as possible during the Corona recession.
Are you a business owner? Comment on your thoughts about the PPP below.
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Annoyingly, many banks are requiring a BUSINESS BANKING relationship to even qualify to file for the PPP. Meaning if you’re a 1099 operating sole prop with your SSN as your EIN (which many many are) then you’re out of luck with places like BoA, TD, et al. BoA also required an existing business lending relationship, meaning if you hadn’t taken out business loans with them previously then they would not be willing to help you file. As a bank honestly this is understandable since the Treasury basically pushed this whole disaster of a plan onto private banks with little to no guidance about how liability would be divided up in the end. But 100% agree with your point that countless contractors who desperately need help are left out in the cold here.
Thx for commenting! Yeah it’s going to be a hard time for everyone. Especially the banks which will now get multiples more applications bc of treating every 1099 person as their own business.
I am an independent contractor in the healthcare service industry and work through 2 different clinics. I ended up finding a bank that would accept my application on day 2 of the PPP being released but have yet to hear anything. I fear my application was continually being pushed back by other applicants that had more revenue and assets. Now the funds are gone and my only hope is to file unemployment which pays barely half my income. Even that is difficult because I am not allowed to file a claim as an independent contractor until the end of April. We are definitely overlooked.
They’re talking about releasing another round of funds. But I’m not sure our luck will be any better.
Try kabbage.com. I got approved as a sole proprietor within 24 hours and had my money in a week.
Do you think they will change this soon! Me myself along with other business owners who have mostly 1099 employees will be done if they don’t
I don’t think they will bc they’re a bunch of Fortune 500 ppl that are clueless to the realities of small business.
If you are giving them a 1099 they aren’t “employees”. Figure out the difference!!!
Great Piece, Travis. I think we need to refresh the SBA and Department of Treasury about the way the “new economy” that has actually been around for a long time, works, by having them read this article. I hope it was just an oversight by them and they’ll remedy it soon, but I’m not going to get my hopes up like I did when I first heard about PPP and EIDL.
Sadly I don’t expect that they’ll be able to get their head out the ground to realize it in time to help many of us.
I totally agree with your points here. For many sole-proprietors it makes more sense to simply apply for the $10,000 EIDL Grant (not the loan) and avoid PPP altogether — especially if the loan amount is going to be less than $10,000 (which is what it likely will be for anyone with a net income of less than $120,000 per year). Another hurdle is that you can not use the PPP & EIDL funds for the same expenses and will have to keep accurate spending records in order to have the loans forgiven later. A large portion of sole-proprietors and contractors will lose money and work over the coming months and it’s such a shame.
Agree thanks Carrie for sharing!
EIDL is now only available for agricultural businesses.
Is it possible for a dentist with an s Corp paid on 1099 to apply for these loans?
Yes bc you can apply using your eligible payroll expenses you paid yourself w your S corp
Thanks for this perspective, Travis. I just had two conflicting thoughts that I wish I had earlier. Unfortunately, the guidance on 1099 contractors was not made clear until a day or two before the loan program opened up so it didn’t leave businesses with a lot of time to prepare. Here are my thoughts:
1. 1099 contractors should act like business owners because they are. This is a lesson to take to heart. At a minimum, create a business checking account and get a business credit card to make it easier to track your business expenses separately from your personal expenses.
2. Small businesses might want to consider hiring their 1099 contractors as W-2 employees if you will need their services in the next couple of months. The downside of this strategy is that your entire team may take a hit to their income for 2 months since the loan amount will have to be spread between more people, but that is a relatively small sacrifice.
You need revenue to be able to hire anyone right now, and businesses that have been decimated don’t have that level of revenue to hire folks. Most 1099 contractors aren’t really business owners. They’re workers that choose to work for different businesses on their own terms. It’s just a different and more modern employment arrangement than factory workers of 1950 that have no choice but to report at 8am because I tell them to. Also just bc folks should have thought of themselves as business owners doesn’t mean they’re all about to lose their jobs.
thats so true, my installers are not business owners they just our installers and we pay them as we complete job, we cut checks every Friday but at the end of the year we gave them 1099s, and this happens a lot on construction companies, now I sent all my paperwork to Bank of America, without explaining they ask for payroll reports, 1099s and now at last documents I have sent my draft 1040 schedule C, so they approve loan amount on my net profit without looking on the line for payroll expense,
I have not sign promissory note because I amp not agree, so hopefully this change dont know if I can applied with another lender, my step dad has same situation he jus fill application and ended 1099s forms for employees he did got a pormissory note with the amount he was eligible for payroll so dont know what to do at this moment.
Sucks
Michelle, but didn’t they suppose to be W2 starting from February 15th to qualify?
Applying for the PPP was easy and I had all the backup documentation in 2 hours. But you would t know because you didn’t apply. The 1099 employees are not left in the cold, they simply apply for their own. There needs to be some accountability. Tell me how you would solve the logistics of 10 companies claiming part of 1 individual. Y’all about opening up for corruption. See, You don’t have a paycheck from the W-2 employer, you present a bill/invoice that is paid. This first rollout is for those that have a steady paycheck (W-2) every week or two. Why wouldn’t they go first? How often do you pay your 1099 taxes? Quarterly? Annually? Well, these people have always given the government cash flow. You’re an independent contractor and it comes with the “freedom” territory of the life and income strategy you’ve chosen. 1099 contractors apply a week later on 4/10. As for banks, big banks suck anyway and they reached their market cap almost immediately. Now, if you don’t have a banker and call yourself a contractor, shame on you, but on April 10th, the 1099 contractor gets to apply for a $10K forgivabke Grant. Employers don’t claim those people because they apply on their own AND they don’t “employ” them anyway. I’ve long competed with the 1099 employer that uses it as a means to escape the large cost of an employee. Here’s the difference between you and your 1099 employer bs those of us that W-2
1. We match 7.5% of the employee‘s taxes to the federal government. You know, the one that everyone wants something from.
2. We pay unemployment insurance. (we business owners pay for every payroll)
3. We pay medical insurance(used to pay 100% until ACA “fixed” it)
4. We pay Workers Comp insurance and liability insurance. BTW, if you’re 1099 sub doesn’t have it, we have to pay their too.
5. We pay benefits like PTO, vacation, cash bonuses, press, etc.
See, the 1099 is all about the individual, the freedom it gives that individual and the person that pays them. The relationship between the two Is like a one night stand or dating scene.
But when you’re part of a business that provides a W-2, it becomes about that commitment to one another- employer and employee. It’s more like a marriage or a family.
Obviously I disagree. Our wages are more than 3 times the 15 an hour “livable wage” that politicians advocate for. I pay for all those things indirectly by paying higher wages and letting our workers decide how they use those funds. Most would have their own S corps that would pay payroll tax and unemployment and all those expenses for themselves individually. Also 1099 workers can put a lot more into retirement than if we had a 401k.
Bottom line: That doesn’t help the small companies themselves that pay 1099 people to stay in business.
This is going to open up the Pandora’s box of non-compliance that has been going on since 1913. As you said, not only are many businesses paying individuals on a 1099 that they should be paying on a W-2, but many businesses are paying individuals more than $600 per year and not issuing a 1099. Which of course means that that individual is probably not reporting that income, and likely not filing a return at all. Many of these individuals do not have existing lending relationships — they probably do not even have bank accounts. They simply will not get a PPP. We saw this in Louisiana after the BP oil spill — many individuals and businesses affected by the spill and otherwise eligible for relief could not substantiate their prior years’ income because they had never filed a tax return.
That makes sense. I think the virtual economy and burdensome state rules has pushed the 1099 more than anything.
Thanks for this article. Many businesses and workers screwed by this. Meanwhile large corporations that aren’t affected are getting hundreds of thousands of dollars in free money.
I’m hearing a bunch of huge companies having meetings w their lawyers just to figure out the optimal strategy for this.
Great article. About 90% of the people that do work for me are 1099, and the majority of them do NOT even have checking accounts. I know this b/c I can’t tell you how many times my wife and I have co-signed for contractors, for their personal things like a vehicle purchases, Christmas loans, rental/lease agreements, etc. There’s no way these guys are going to be able to wade through this madness. Heck, I can barely get through it. So now, instead of me getting the PPP funds and keeping these guys fed until we get back rolling, they’ll likely have nothing, and I’ll also have less funds to keep afloat (e.g. the 25% that can be used for rent/bills/etc). And even if some do qualify and get through the process, what keeps them motivated to do anything and/or from searching for another job.
I can’t stand that they specifically TOLD us we could count it. We’ve based everything off of that. We’ve (all small business owners) have assured our guys that we’d be able to keep ’em going until this passed.
Also, the “$10,000” EIDL emergency funds…the 1099 thing affects that as well. They’re only going to give $1,000 (I think) per employee, not counting 1099. ***I may be off on that amount, so don’t quote me***. Regardless, it sucks–for everybody. Another example of the absolute disconnect between Congress and the real world.
Yeah the fact they pulled the bait and switch on us was BRUTAL. Thinking for a few days you were going to keep everyone paid and protect them from the psychological toll of losing their paycheck and then finding out the next day that Treasury changed their mind, I seriously will remember this for a long time.
My reading of the law is that for a self-employed individual with no employees, your “payroll costs” for purposes of the maximum PPP loan is based on the net income from last year’s Schedule C. This same definition is applied to the 8-week period after you get the loan for purposes of the forgiveness amount. So if you are not able to go back to work and generate any income during this 8-week period, then no income = no payroll costs = no forgiveness.
I have a question. I have a trucking business (S-Corp) and all my truck drivers are 1099. Am I eligible for PPP? or is there other program other than EIDL to weather this though times through? or am I just out of luck getting help because of how my business is set up?
You can apply for your S corp if you paid yourself but you wont be able to include your contractors.
OMG–The EIDL thru SBA is a total disaster. SBA is incompetent and cannot administer the tying of their shoes. The agency needs to be disbanded and restarted in some other form after the dust settles. The EIDL loan was to supply cash, when revenue dries up. As the PPP money and EIDL money has not hit the street, nobody is paying anybody!!! If a small business cannot collect revenue, that small business will not pay their contractors. If all a small business gets is their net income, they cannot afford to run their business, as they cannot afford to pay their 1099 contractors. You are spot on! Congress has zero idea. They are incapable of nickel solutions. Everything in their hands is a dime.
This is a GREAT article. I’ve been trying to explain this to anyone that will listen, the Wells Fargo banker, and the SBA for the past two weeks. I googled this topic to see if anyone else was facing the same thing and found this perfectly summed up recap.
Brilliant piece. Absolutely Brilliant. You took my rambling ranting disjointed fury and put it all in a terrific piece. My 1099’s make 120k to 200k a year.
Sure they can apply on their own BUT we won’t see a dip in revenue for another 12 weeks. They will apply now to not get left out but they will likely give it right back due to the 8 week period post funding for showing a reduction in wages.
I could go on but thank you so much for this article.
It’s a mess of a program, that’s for sure.
I’ve been a 1099 for a small business for about 5 years. The owner of the company wants to switch me to a W2 immediately so she can fulfill the PPP requirements and count my new “salary” into the 75% payroll rule. For a few reasons I’d prefer to stay on 1099 but I also want this company to stay afloat. Was there an earlier deadline I had to be on a W2 by or is it correct that if she switches me right away that will help her qualify for the loan forgiveness.
I dont think that qualifies to add you to payroll
I believe Travis is correct. You don’t get forgiveness for adding new positions. However, if the employer has had to cut loose a W-2 employee and he now wants to pay you on a W-2 to “replace” that individual, even if you are in a different position, then he would get forgiveness for the wages paid to you. Like from the moment that he reclassifies you through the end of the 8-week period after his loan funding date.
My business is a dayspa and it will be hard to survive with this PPP program! I provided 25 jobs for independent contractors last year! And why do I pay my workers 1099 instead of W2 cause they like the flexibilities; they gave me the hours they want; whenever they take vacation or not going to work with any personal reasons ; I just have to show up to cover for them. I pay my workers 55% of services they provide; the 45% I have it is hardly enough for me to pay for rent, utilities, insurance, supplies…. So yes all of my workers want to work under 30 hours, want to be flexible and want to make good money ( not $10-$15 per hours like other jobs) so I only can have them under 1099 forms! Either they are W2 workers or 1099 independent contractors; my business should be appreciated by creating 25 jobs for 25 people; and still paying taxes every year! Your article is completely correct!
Thanks Sammy! Total oversight by the ppl in Washington rushing to get a law done
Is there any chance that govt will change the guidance to include 1099 contractors in the forgiven amount for employers moving forward? I am a small business owner with 10 contractors on payroll, in addition to 5 W-2 employees. When applying for my loan amount, I included ALL payroll (1099 and W-2) in my loan application AND was approved for that amount. Only recently was I made aware that only W-2 employees will be forgiven (which accounts for roughly 20% of my total payroll), meaning I will be responsible to repay roughly 80% of my loan. I was wondering if there could be any potential changes moving forward, to include contractors in the forgiven amount. This whole process has become more of a headache than anything else
I would definitely not give the money to the contractors bc youll owe the entire amount, havent seen any guidance change yet
Doubtful about them changing the guidance, especially since, as Travis has previously pointed out, they put that guidance in there in the first place. But there guidance concerning 1099 contractors is wrong — it directly contradicts what’s in the law. So the prudent thing to do would be to not pay your 1099 contractors with any of your PPP loaned funds and just pay that money back. Don’t spend it on anything else, either. In fact, although there’s really no one there to stop you, the law and rules say that you can’t spend it on anything else, other than on W-2 payroll, rent, utilities and interest on pre-existing debt. On the other hand, if you are an especially litigious type, and since you have the money, you could pay your 1099 contractors as planned, include these amounts in your forgiveness application, get denied, and then sue the SBA to force them to follow the law (but I wouldn’t count on any lawyer taking that case on a contingency).
I applied using a combination of both my 1099 contractors and my w2 employees. I was approved for the total amount. If I start paying those contractors as w2s, would I be eligible to have the loan forgiven?
I don’t think so based on the guidance from the Treasury Dept but you need to seek legal counsel. Clearly contractors do not qualify for PPP calculations for business owners according to the Treasury Dept.
Small business owner here who out a PPP loan…. we have only 1099 contractors who all have worked for us virtually since the beginning of our business (2015) (we don’t have a physical office), some making 6k a month sometimes, some only a few hundred bucks. We got the PPP funded for our full requested amount, including all of our 1099 contractors averages + owner distributions. The bank rep who processed us and spoke with us throughout the process was perfectly okay with the fact that we only had 1098 and 1099s to provide as documentation. I know that another bank we have a small loan with had other rules that only would accept W2 numbers. There is nothing in the legislation or the application we filled out that said 1099 contractors were not to be included. Perhaps the law changed after we submitted our application. I doubt it. It’s all about legal interpretation.
The Treasury Dept issued extremely clear guidance that businesses could not apply with 1099 contractors included. We’re in the same boat considered suing over the incorrect interpretation that’s not in the law. But we opted to go W-2 only. Hopefully you get yours forgiven.
Can you link where the treasury dept issued clear guidance that business could not apply with 1099 contractors included? In my ppp contract I signed, it mentions I had to be in business and I paid employees or independent contractors 1099-misc
I agree Eric. My paperwork clearly stated that “you pay employees or independent contractors”. It was inclusive. And I was funded.
I’m not certain that 1099s cannot be used for forgiveness.
Here is the statement taken from your Interim Final Guidance link above:
“You were in operation on February 15, 2020 and either had employees for whom you paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.”
If you look lower in that interim guidance I think letter (h) it very clearly says 1099s are not allowed to be included in payroll, but it’s contradictory I agree. Treasury and SBA have only said that this is language showing that you qualify not what you qualify for.
I wish we knew which bank did it, so we can apply for our business.
I am a 1099 contractor and I just received my PPP deposit yesterday. I did not have a business bank account (just a personal account) bad so my bank (BofA) would not help. But I didn’t give up. I went to and on line lender with all of the required documentation and was able to get approved. The only thing that I am nervous about is documenting that I used the funds to replace what would have been my payroll. Due to the nature of my work, I don’t get a regular payment of the same amount. My pay comes in a large chunk when I complete my work. There hasn’t been official guidance released yet on how to document correctly for loan forgiveness. And the lenders can’t answer those questions right now because they are too busy processing applications and payments. My current plan is to put the entire loan into savings and then document “payments” (transfers into my other account) as my payroll. If anyone has better guidance, I’m all ears.
You could always do a payroll process by hiring a CPA to document it if youre worried. But my guess is that they wont be checking this very carefully for 1099 contractors because by definition it’s confusing.
I too originally thought that a self-employed would have trouble obtaining forgiveness if they had no income coming in during the 8-week period after their PPP loan was funded. I’ve since seen guidance that they will pretty much automatically grant forgiveness for 8 weeks of your 2019 net income (bottom line of your Schedule C). No particular record-keeping for income or “paying” yourself will be required.
Wow, this is very depressing. I am an LLC and own 95% with my partner owning only 5%. I have been building this business for 3 years with zero profit for myself. Emptied my 401K to get it going (Bad decision I know). I too got approved for the PPP loan based on my 1099 employees that have been with me for over 3 years. Without it , I will crash and burn. Rent , utilities , insurance ect.. all still due and been keeping my employees afloat expecting this to be forgiven. I am also with a big bank who accepted my 1099 forms along with a copies of checks with “Contractor Pay” and payment date in the Memo line. So they knew exactly what they were looking at and approved it anyway. Maybe being an LLC with 1099 employees is different. Travis do you have any insight on this.
They aren’t “employees” if you give them a 1099.
If I have to carry workers comp on my employees which in florida I have to , I cut checks, I make schedules their an employee 1099 or not. It’s even in the laws. All my employees have been 1099 so to them their not. They’ve tried to apply as they asked and none of them can figure it out. They dont have a business account, or payroll summary, or a profit loss form. This is nonsense. I own a bar and everyone is screwed all 13 of them.
[…] Hornsby wrote that the Paycheck Protection Program was not adequate for independent contractors. The […]
Im staggered at the misinformation you are spewing in your article
1099 workers ARE business owners
1099 Workers and sole proprietors CAN and should apply for PPP on their own — they were eligible to do so April 10th
Small Businesses that use contractors that they would hire if they could are misclassifying those workers as Contractors when they are really employees and would have been covered by PPP if the small business owner had followed established laws and regulations to begin with.
Take the day spa owner who replied — 90% of the time day spas are misclassifying workers as contractors. Sure, they WANT the flexibility to work when they want, but you can’t have it both ways — being employee means you give up freedom in favor of the security of a regular paycheck, WC coverage, UI coverage etc. Plus, in MOST states, providing a service that is within the CORE BUSINESS of the company contracting you is the very definition of being an employee (CA, WA, IL, MA, NJ, FL and NY are amongst the most notable states) and even the IRS’s wishy washy guidelines state that providing a workplace, and tools/supplies/equipment makes one an employee, not a contractor, and I guarantee you those massage therapists dont drag their table into the spa every day and take it out at the end, they dont set prices, schedule the appointments, collect payment and operate under the spa’s name.
Finally, your point about people quitting their jobs to get UI because it pays more it 100% wrong. Voluntary Quit is an indisputable reason for denying UI benefits. Every employer gets a notice of any worker who files for UI, and they get to protest the claim since UI is paid 100% out of employer’s contributions.
Similarly, someone who refuses to come back to work when offered a job loses their UI benefits.
I think you make some valid points, but the point of the bill was to “freeze small businesses in place.” Most of the small businesses classifying ppl as 1099 arent Uber or Lyft paying below minimum wage in some cases. They’re just regular mom and pops trying to stay in business and navigate extremely complicated local rules and regulations. The bill said 1099s should have been included in payroll and then SBA rolled that back unilaterally, all while many business owners received funds including their 1099s, so it’s manifestly unfair the way they applied it.
Salon owners have been misclassifying workers because it benefits them financially. Well now it doesn’t. Know the law! So sad, too bad.
I too applied and was approved at a time when I was under impression that 1099 contractors would qualify if you provide them with payroll report. We have 10 people receiving 1099 and agree with many here that most if they applied as individuals (if they get approved ) they would likely receive much less than unemployment. The main issue I am concerned about is allegations of false claims or intent to do something wrong which was not the case.
so I own a nail salon, paid my girls 1099, I applied PPP twice. 1st time they said I was missing document so the fund ran out. Then now the second time around, I send them my 1099K and my schedule C. I am currently at stage 4 (initialing closing). After reviewed the banker from PNC told me that there are fund approved for me but they can’t loan to me because I show a net loss. And therefore I am not qualified. I was thinking that once I get the loan, I can pay my girls and use some of that to my for rents and utilities. she just flat out saying that she is just following the rules that she must use line 31 and line 31 showed net loss. Therefore I am not eligible to apply, even though SBA already approved my application. PNC bank, not sure if I care to have them as my banker.
Great informative article Travis. I am a small business owner, who like several others on here, applied under the “1099s can be included as employees for your payroll calculation” rule – which was then changed after the application was sent in to BofA. I have one W2 (myself) and 14 1099s. I uploaded individual 1099-MISC 2019 for every 1099 I paid in 2019, and 940 and 941 for myself the W2. BofA approved it and funded the PPP Loan. I am in two minds about using the funds for 8 weeks of payroll but surely the onus was on BofA to reject my application? I could argue the application was made in good faith and as such I intend to use the funds 75% minimum for payroll, and the other 25% to pay rent and utilities, and then I will ask for full forgiveness. Worse case scenario will be 100% of the PPP Loan will have to be paid back. I am concerned about any possible allegations of false claims or intent to do something wrong following my original application. I guess nobody really knows what will happen in the future?
That’s so frustrating for you sorry you’re going through that. I don’t think you can spend the money unless you get clarity you wont owe it back bc once it’s paid to your contractors you cant ask for it back.
If a company wants to hire me as a W2, do I have to return PPP if I receive it?
You’d have to ask your attorney or CPA
Great article, my company pays 1099 workers the same way I pay W-2 workers. They each get a direct deposit for the number of hours they work weekly. They set their schedule and work the number of hours allotted. I am a small company with a meager profit therefore, I cannot afford to make them all W-2 employees. I spoke with my bank prior to completing my application and was told to include them because the history shows them as employees. Now, that the forgiveness application is available I cannot include the 1099 workers. I have paid the 1099 workers from the PPP funds and have my payroll documentation. So, I am now responsible for paying people that brought in no revenue. This is really put me in an extremely bad position.
Call your senators and congressperson and ask them to take action! That’s the only way any relief can happen for small business owners.
Travis, thank you for this informative article. I’d like to get your take on this situation. I was a 1099 employee for a pass through company that bills a client, takes a cut and then pays me. This company applied for, and received a PPP loan, and in the meantime required me to switch over to W-2 without (I believe) disclosing the reason why – although given the timing I am certain it has something to do with this loan. I am still being billed to the client through this company, they pay the company and the company pays me. How do these loans distinguish this situation where the company is getting paid by the client but is also getting paid through this loan (assuming it will be forgiven)? Or is up to the business owner to do the moral thing and not try to collect on this kind of payroll set up? This is probably not exactly the right venue for this question but perhaps someone has some idea around where I can find out more information about this?
Travis, I appreciate the fervor and spirit in support of the 1099 compensated community. Agreed, the PPP outlined in the actual CARES Act vs the outcome and administration of the program via the SBA and Treasury were indeed divergent and created a new dynamic for businesses, employers, indy contractors, self employed, partnerships and most certainly the delivery channel, the banking system. The unilateral pivot is unfortunate for those 1099 recipients in terms of what their responsibility ended up being in order to participate.
However, I am aligned with Conan Owen’s comments from May 7 on this thread, and agree that the presentation of your argument, while laid out as fact, is mostly conjecture. The masses were sufficiently riled up as viewed in the comments thread, via conjecture, and that is not responsible in my opinion.
The documents that a 1099 indy contractor would have to submit for PPP would be:
– Schedule C and/or
– Copies of their 1099’s from the review period (most cases, 2019)
That’s not a high hurdle for getting free/low cost money with no recourse, collateral or creditworthiness qualification.
The fact that lenders had to revise the program delivery on a near daily basis was not helpful to borrowers, nor their delivery. True, some lenders did not adhere to the guidance though most have gotten it “right” (right: meaning they are following the program as the SBA/Treasury intended) at the close of the program now. The unfortunate part for borrowers who included 1099 nonemployee comp and were awarded the requested amount… they will not achieve forgiveness under the current law and guidance. My hope for these folks is the forgiveness is expanded with coming legislation, however that will set off a firestorm of borrowers who could not obtain the loans through lenders applying the guidance correctly.
If there is a gripe with the lending community, it ought to rest on the lenders that did not adhere to the guidance and therefore have facilitated loans to borrowers who won’t be able to achieve forgiveness. There were bad actors in lending too, who prioritized certain clients over others, and that ought to generate recourse for their practices… but a lender who followed the guidance is not to be chastised for acting properly under the guidance of the government’s program. Lenders did not make the government rules.
The reply comment made on the Owen post of “… manifestly unfair the way they applied it”, is true on face value. To change the rules and misalign from the bill was a very difficult shift. However, it is also unfair to the taxpayers to facilitate a loose system wherein an employer COULD include 1099’s and also provide the same access to any 1099 recipient. With anecdotal evidence, I know this has been done already and we will all pay for this with our future economy. To bring the line closer to fair, those affected 1099 recipients were given the opportunity to engage in their own process, with submission of a Schedule C or copies of 1099’s as the basis for eligibility. Still not perfect, but please challenge me with a perfect solution that has risen out of the COVID pandemic.
Side note – Owen made a great point in comparing W2 employee and 1099 indy contractors in terms of obligations, requirements, flexibility etc. Since the business and 1099 recipient have agreed by way of working together that this arrangement works, there are material differences, including the requirements placed on a W2 employer in terms of responsibility for the employee. In a 1099 relationship, the business benefits from lower requirements/standards, and the indy contractor has no obligation outside of their contracted terms to the business.
As a taxpayer, I’m glad that this program required SOME work and attention. Anyone who’s borrowed legitimate monies understands there is effort required from all parties in the transaction. It’s frightening the amount of “I’m the victim”, declarative but incorrect statements made, and “it’s too hard to understand” that I’m hearing from business owners. The actual mechanics of this offering are simple, as were the requirements, notwithstanding the government pivots that enhanced complexity.
Being personally responsible still is a thing… does seem that is on a diminishing trendline though.
But in this world we live in, why can’t everyone just have it all with no strings? Everyone should get a trophy.