The United States economy has changed significantly over the past decade. More and more workers are participating in what is known as the “gig economy” or “sharing economy,” allowing them to set their own schedules while completing tasks such as transporting passengers or making deliveries. While these types of arrangements have benefited many workers and those who use their services, questions have been raised about worker classification and whether certain types of gig workers should be considered independent contractors or employees. While several states, including California, have implemented laws to address this issue, the federal government has also weighed in on the topic. A recent rule change from the Department of Labor created a test that should be used to determine whether a worker is self-employed or is dependent on an employer.

The Department of Labor’s “Economic Reality” Test

Employees have a number of protections under the Fair Labor Standards Act (FLSA), including the right to receive a minimum hourly wage and overtime pay when working more than 40 hours a week, as well as benefits such as unemployment insurance, healthcare, retirement plans, sick leave, and family medical leave. Independent contractors are not protected by the FLSA, and rather than having payroll taxes withheld from their pay, they are usually required to pay self-employment taxes. 

To ensure that workers are classified correctly, the Department of Labor has created a new rule that specifies that an “economic reality” test should be used to determine whether a worker is dependent on an employer. Under this rule, there are two core factors that are considered:

The COVID-19 pandemic has led to struggles for many people and businesses. While the rollout of vaccines in 2021 will eventually allow for a return to normal activities, many businesses will continue to experience a loss of revenue due to requirements to close, scale back operations, or lay off employees. Fortunately, the federal government has implemented programs meant to provide relief to businesses and taxpayers who have been affected by the pandemic. The Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (CRRSAA), which was signed into law on December 27, 2020, made a number of changes that may benefit both small businesses and individual taxpayers. These include:

• Additional PPP loans - The Paycheck Protection Program, which was implemented as part of the CARES Act of 2020, provided loans for businesses, and these loans were forgivable so long as a business could show that a certain percentage of the loan was used for payroll purposes. Under the CRRSAA, businesses that had previously received a PPP loan will be able to receive an additional loan, although to qualify, a business must not be publicly owned, it must employ fewer than 300 people, and it must be able to show that its gross receipts in any quarter of 2020 were 25% less than in the same quarter in 2019. First-time loans will also be available to businesses that had not previously taken a PPP loan, and eligible businesses include self-employed individuals, independent contractors, and sole proprietors.
• PPP loan forgiveness - Loans of $150,000 or less may be forgiven if a business used at least 60% of the loan for payroll expenses, including wages and benefits. The remaining 40% can be used for operational costs. In addition to rent, utilities, and mortgage interests, operational costs have been expanded to include software, personal protective equipment for employees, and modifications necessary to meet health guidelines.
• Tax deductions for business expenses - PPP loans are treated as tax-free if they are forgiven. In addition, businesses may claim tax deductions for payroll and operating expenses, even if a PPP loan was used to pay these expenses.
• EIDL Grants - Businesses in low-income communities may be able to receive up to $10,000 in Economic Injury Disaster Loan grants. Businesses that receive both grants and PPP loans will no longer be required to deduct an EIDL advance from the amount received in a PPP loan.
• Employer tax credits - If a business were required to close due to government orders or experienced a decrease in gross receipts of 50% in 2020 compared to the same period in 2019, it will be eligible for a 50% payroll tax credit, which will apply to wages of up to $10,000 per employee. This employee retention credit is not available for those who have received a PPP loan.

Contact Our San Jose, CA Small Business Tax Attorney

If you have questions about what forms of COVID-19 relief you may qualify for or how this will affect your taxes, John D. Teter Law Offices can provide the legal help you need. We will work with you to make sure you can make use of the tax benefits available to you, and we will help you determine the best strategies to minimize your tax burden and address any taxes that you owe. To learn more about how we can help, contact our San Jose tax lawyer at 408-866-1810.

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Employers and employees throughout the United States have been affected by the COVID-19 pandemic. Many businesses have been forced to close, reduce hours in operation, or lay off employees. While some programs have been implemented to provide relief to both businesses and individual taxpayers, many people and businesses continue to struggle financially. In response to these concerns, a recent presidential order has been issued that will allow employers to defer certain payroll taxes.

Payroll Tax Deferral Available from September through December of 2020

On August 8, 2020, President Trump issued a Presidential Memorandum, “Relief with Respect to Employment Tax Deadlines Applicable to Employers Affected by the Ongoing Coronavirus (COVID-19) Disease 2019 Pandemic.” This order allows employers to defer the withholding of employees’ share of Social Security (FICA) taxes on wages paid between September 1, 2020, and December 31, 2020. Deferrals are available for any employee who earns less than $4,000 on a biweekly basis before taxes are withheld.

Over the past few years, California’s employment laws have been in flux due to court decisions and legislation that have affected how workers are classified. Specifically, Assembly Bill 5 (AB5) has required some companies to classify their workers as employees rather than independent contractors, which will allow workers to receive a minimum wage and benefits. However, companies such as Uber and Lyft have fought against these requirements, and voters will be able to decide whether to implement a measure in the upcoming election to determine whether certain types of workers will receive an exemption from the requirements put in place by AB5.

NOTE: AB5 has very recently been renumbered as AB2257 and clarifies current definitions of employee versus independent contractor and enumerates a number of exemptions for certain industries. Prop 22 was placed on the ballot prior to this change in numbering and therefore refers to the old AB5. 

The COVID-19 virus has impacted every facet of our lives. Schools across the country have been canceled and replaced by online classes, employees have been laid off from their jobs, and business owners have lost valuable income. From restaurants to doctor’s offices, business owners are suffering. If you are a small business owner, you may be extremely concerned about the effect “shelter-in-place” directives are having on your business. You may even wonder whether or not your business will survive. One option that may be beneficial is business interruption insurance.

What Is Business Interruption Insurance?

Business interruption insurance covers business losses caused by a disaster. It is an optional form of coverage that may be included in a business owners’ policy or a comprehensive multi-peril commercial policy, or it can be issued on a standalone basis. This insurance is intended to protect against losses resulting from disruptions to normal business operations. In addition to replacing lost income, business interruption insurance may also cover:

• Estimated profits based on previous months’ profits
• Fixed costs such as operating expenses
• Employee wages and worker training costs  
• Civil authority ingress/egress
• Taxes
• Loan payments
• Other reasonable expenses

Will Business Interruption Coverage Cover Losses Due to COVID-19?

There has been a great deal of uncertainty and confusion regarding business insurance coverage and shutdowns caused by COVID-19. Recently, the Pennsylvania Supreme Court made a ruling in the case of Friends of Danny DeVito v. Wolf that may influence business interruption insurance claims. The plaintiff in this case was asking for the shutdown order to be set aside on the grounds that the mandated shutdown was an overreach. In the end, the Pennsylvania Supreme Court ruled that the order should not be canceled, because the coronavirus is “a natural disaster and a catastrophe of massive proportion.” If other states, including California, agree with the Pennsylvania Court’s classification of the coronavirus pandemic as a natural disaster, insurers would likely be required to pay business interruption claims based on COVID-19.