The CARES Act: What it Means for Self-Employed, Freelancers, Independent Workers

The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs.  Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.  This is a rapidly changing area of the law and will be subject to change and interpretation. 

In direct response to the COVID-19 crisis, Congress today approved the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Just what does this mean for the 41 million workers around America that today consider themselves to be self-employed, freelancers, and independent workers?

Of the more than $2 trillion in provisions, there are a number of items offering relief directly for self-employed professionals, sole proprietors, and pass-through entities.

For the purposes of this piece, we’ll focus on the provisions specifically for independents, not small businesses with W-2 employees.

Direct Payroll Relief

Through the CARES Act, all individuals, including independent contractors, with an adjusted gross income of $75,000 or less ($112,500 for head of household filers, and $150,000 for married filing jointly) will receive recovery checks of $1,200. These amounts increase by $500 for every child.

These checks are based on 2019 tax returns if filed, and if that tax return was not filed, on the 2018 return. The rebate amount is reduced by $5 for each $100 a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000, $136,500 for head of household filers, and $198,000 for joint filers.

Retirement Account Penalty Reduction

If workers need to draw on retirement savings, penalties have been reduced for a short time. Specifically, the ten percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts is waived.

In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.  Further, the provision provides flexibility for loans from certain retirement plans for coronavirus-related relief.

Expanded Unemployment Benefits

Through the CARES Act, unemployment benefits have been expanded for traditionally employed workers and self-employed workers and gig economy workers alike.

Notably, the delay (waiting period) and the job search requirements have been waived for all workers.

A $600 per week payment has been added to each recipient of unemployment insurance – known as Pandemic Unemployment Assistance – for up to three months. Unemployment insurance has also been extended by 13 weeks and includes a four-month enhancement of benefits to allow workers to maintain their full salaries of forced out of work due to the pandemic.

However, traditional unemployment caps apply, which are set state-by-state.

Because unemployment will now be available for self-employed individuals, reporting self-employment, when asked where you are employed, should not disqualify you for these federally funded benefits.  However, state agencies may take time to understand how to administer this, so be patient and simply make it clear you are filing for benefits as a self-employed or small business entity (if you have a corporate entity).  You will also likely be asked whether you can telework with pay, in which case you would not be eligible.

Individual Tax Deferral

The CARES Act bumps back tax deadlines for individuals and pass-through entities like Sole Proprietorships to July 15 from April 15. This includes payment of quarterly taxes.

Pass-through tax entities may also take advantage of the Net Operating Loss (NOL) provisions outlined for corporate entities below.

Corporate Tax Deferral

The CARES Act provides five-year NOL carrybacks for tax years 2018, 2019, and 2020. Since the year 2020 is likely to bring the largest corporate losses in U.S. history, the NOLs for 2020 could be unusually valuable. The NOL carrybacks provide an immediate tax refund from prior tax years.

Corporations may also defer paying the employer portion of certain payroll taxes through the end of 2020, and all 2020 amounts may be paid in equal installment, one half at the end of 2021 and the remaining half at the end of 2022. This is not available for anyone who uses the SBA 7(a) loans designated for payroll. Payroll taxes that can be deferred include the employer portion of FICA, the employer and half of SECA tax liability.

Small Business Administration Loans and Grants

The CARES Act includes provisions for $350 billion of federally guaranteed loans that would be offered through the Small Business Administration. While these loans are structured to apply to small businesses that pledge to keep their workers, these loans are also available for “sole proprietors, independent contractors, and other self-employed individuals,” according to the bill text.

While new information is emerging quickly about these provisions, it appears that personal guarantees for the loans may not be required, meaning, if you had a corporate entity as of January 31, 2020, the loan could be made to that entity and would not be a personal liability if that entity is liquidated.  Advances up to $10,000 may be available within three days of an application while the application is pending.  These advances are not currently subject to repayment even if the loan is later denied.

To indicate eligibility, workers must submit documents, including payroll tax filings reported to the IRS, 1099s, income and expense reports.