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Small Businesses are Being Exposed by PPP

Apr 10, 2020 | News

The structure and model of your business matters. Many of the small businesses that you see on social media as being fully-staffed, full-time employee operations are being exposed.  For many short-sighted entrepreneurs the allure, and frankly, short-term profitability, of having entire organizational structures built upon temporary, or project-based help is now their biggest liability. Governor Lamont has recently announced that bars, restaurants and non-essential businesses will continue to be closed through May 20, 2020 and we expect to see other states follow suit. The reality is that this will be the new normal for some time. Due to high demand, the SBA Disaster relief’s fine print also keeps changing.

Upon closer inspection, the fine print seems to be designed to benefit larger, or more well-established businesses. What started out as a $10,000 completely forgivable loan for small businesses has now been reduced to a $1,000 per full-time employee maximum benefit. The Paycheck Protection Plan, or PPP, has even stricter requirements: business taxes must be filed and current, the business must have been operational prior to February 2020 and Tax Forms 941 (W2 Payroll Taxes) are required to be submitted for the past 12 months. 

So why aren’t ALL small businesses more excited about these requirements? Why are some even finding themselves forced to shut down? Many of them were operating as sole-proprietorships, or as a self-employed owner/operator, with an entire staff of independent or temporary contractors. These freelancers, if it was done ‘over’ the table, would be what’s known as a 1099 workforce. Why would some owners avoid W2 employees, or choose to 1099 instead? The reason is simple: to nab just a bit more money at a lower risk. When you W2 an employee, you as a business owner are required to pay Unemployment Taxes and other fees  (payroll company fees, etc.) that simply aren’t required with a 1099 contractor. When you have a 1099 worker, you can simply ‘cut them a check’ and the employee is responsible for the taxes, not the business owner. 

Obviously larger corporations of 500+ employees simply could not get away with doing this type of business structure, but many home-based, or perhaps Starbucks-based, businesses can and often do. This is not always a bad thing. Often they are in the early start up stages and navigating that precarious stage in their development when they are totally comfortable eating Ramen noodles themselves if they have must. During this fragile time it can seem unthinkable, almost reckless, to have a commitment to a full-time staff that relies on you to keep the lights on. I don’t disparage anyone that practices this, as I have in the past had some of my employees start as a 1099 independent contractor as part of the onboarding process. For a business owner, it can be a powerful tool to help make safe commitments. The problem is that many well-established businesses continue this practice because, in the short-term, it can be viewed as a more profitable, less-risky approach to scaling your business. However, it is all too often taken advantage of by business owners, and in the case of PPP, the chickens have come home to roost.

At Peralta Design, almost all of our team members started out as project based interns that grew into part-time W2 employees, that made the switch to full-time W2 employees when they were deemed to be a good addition to our team. Making an employee a W2 full-time employee is a commitment an owner makes to his staff. He is saying to them, “ I want you on board, and not only will I fight for you, but will play an active role in making your life better, because I value you as a team member.” You are, by way of the W2 employment model, paying into the unemployment benefit system. So if, God-forbid, you as an owner were ever put into the position where you had to lay someone off, that person would be entitled to unemployment benefits. A W2 employee can also control how much he/she wants to deduct in taxes and is part of the Social Security program – another long term benefit which we all pay into. Additionally, your new W2 employee can choose to partake in a company 401k plan, one like the one we have at Peralta Design. It’s one way of saying that you treat your employees like family, and in turn they will treat your clients like family as well. Employees will only provide their best work when you make their employment advantageous and validate the position on the team.

Can independent contractors that were receiving 1099s apply for PPP? Yes, they can – the SBA has a unique link reserved for such project-based workers that are in fact self-employed. Many freelancers in our industry fall under this. In these cases, the paycheck you are looking to protect is your own. SBA.gov has links for both business owners and independent contractors to begin the process of applying for their disaster relief loans. I would pay close attention to these pages in the coming days and weeks because as recently as just a couple of days ago, major changes in the EIDL (Economic Injury Disaster Loan) benefits were published. Although many feel these SBA relief packages are designed to benefit the larger, more well established companies, I would argue that even smaller firms, with 2, 3, even 10 employees that have everyone on W2 can benefit if they have been keeping current with their taxes and required documents.

We don’t know how long this ‘new normal’ will last, and unfortunately, many small businesses are counting on these funds coming through in order to survive. Many are operating payroll to payroll in the same way that some Americans are living paycheck to paycheck. If hindsight is 20/20, having a business line of payroll credit established with your local bank long before this crisis even hit would have come in handy. Much like the distance learning experience has revealed that the digital divide is still alive and well, with many lower income students still lacking internet access and desktop or laptop computers at home, the advent of the SBA and Government ‘disaster relief’ loans reveal that many small businesses just won’t qualify or meet the requirements of what the SBA has outlined.

Unfortunately, from a socio-economic standpoint, some small businesses, whether it be from a lack of resources, or financial literacy, still operate with an adversarial relationship to the government or to paying taxes in general. “Cash only’ signs are prevalent in many establishments that make it an obvious point to advertise that they are doing their best to avoid taxes. You see it in nail salons, restaurants, barbers shops, etc. But it’s not just small businesses that run the risk of cutting corners, there are plenty of multi-million dollar corporations that avoid W2 staffing and there are still others that may be exploiting foreign workers, who they consider to be at their mercy for getting work visas through their employment. 

How can employers expect loyalty from their staff if they treat them on a ‘don’t call us, we’ll call you” basis? My hope is that all business owners that were not prepared for this crisis, were caught off guard, or just don’t qualify for any of these programs learn what measures they need to take going forward. Having access to capital and/or credit in anticipation of that rainy day is always a good thing. Another thing that I’d like to see more of and encourage  is a return to the W2 employee business model, one that shows a commitment to the worker, is mutually beneficial to the company and starts a long term, loyal relationship yielding a prosperous future for both the worker, and the business. 

 

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