In this 3-minute read:
- What is California Prop 22?
- How does it affect app-based drivers who want to apply for PPP loans?
- What recent PPP rule changes have major impact on Schedule C applicants?
On November 2, 2020, California voters passed Proposition 22, allowing drivers for tech companies like Uber, Lyft, Doordash, and others to be classified as independent contractors instead of full-time employees.
But what does that mean? And are these independent contractors able to apply for forgivable stimulus loans through the Paycheck Protection Program?
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What is California Prop 22?
Also known as the 2020 App-Based Drivers as Contractors and Labor Policies Initiative, California Proposition 22 allows app-based driver and delivery companies to classify their drivers as independent contractors rather than full-time employees.
As you can imagine, there are a lot of details to Prop 22, but here’s the short version: In California, drivers for Uber, Lyft, DoorDash, Grubhub—and more—were reclassified as employees by a judge in August 2020. This ruling was made on the basis that the drivers for these companies didn’t qualify to be independent contractors under California Assembly Bill No. 5 (AB5).
Uber and Lyft threatened to end their west coast operations as a result of AB5, and when Prop 22 passed in November 2020, it effectively reversed the effects of AB5. This meant app-based drivers could be classified as independent contractors in California again.
With the impacts of COVID-19 and the release of additional rounds of funding through the Paycheck Protection Program, there’s a silver lining to Prop 22 for drivers: as contractors (and not W-2 employees), they are likely eligible for relief via forgivable loans under the PPP.
How does Prop 22 affect PPP loans for app-based drivers from Uber, Lyft, DoorDash, and other gig workers?
In order to be eligible for a PPP loan, a gig-worker must have been receiving Schedule C income prior to February 15, 2020. Because AB5 didn’t go into effect until August of 2020, even if Prop 22 had failed, it still would not have had any material impact on anyone’s eligibility for a PPP loan for 2021 (at least according to the current rules).
The short answer is: If you were receiving Schedule C income prior to February 15th, 2020, you may qualify for a PPP loan.
If you didn’t start receiving Schedule C income until after February 15th, 2020, you unfortunately do not qualify for a PPP loan.
Not all independent contractors or Schedule C earners are eligible for a PPP loan. There are still requirements that you must meet.
Eligibility requirements for first draw PPP loans (this is not an exhaustive list):
- You must certify that you actually need the PPP funds… specifically that “Current economic uncertainty makes this loan request necessary to support your ongoing operations” (Read more about PPP certifications)
- Beyond being an independent contractor, sole proprietor, self-employed, or other eligible type of business owner, you must also have been in business as of February 15, 2020
- NOTE: You will need to provide your Schedule C (IRS Form 1040) when submitting forms to the lender processing your PPP application.
Eligibility requirements for second draw PPP loans:
- You must have already received a PPP loan
- You must certify that you have spent, or will spend, your first-draw PPP loan funds appropriately by the time your second loan funds are disbursed
- You must be able to demonstrate that your revenue reduced by 25% or more in any 2020 quarter compared to 2019
- (You also can’t have more than 300 employees)
Check out these FAQs for special circumstances on PPP loan eligibility:
Additional PPP loan resources for independent contractors:
- Can I get a PPP Loan if I’m an independent contractor? | PPP FAQ
- Can I get a Second Draw PPP if I’m a 1099 worker, etc.? | PPP FAQ
- What are approved uses for second draw PPP loans? (how to maintain forgiveness)
- What happens if you don’t spend all of your PPP loan? (important forgiveness tips)
Will the Biden-Harris administration enact legislation to reverse CA Prop 22?
President Biden and Vice President Harris both opposed Prop 22, and during his campaign Biden urged Californians to vote no on Proposition 22 and also pledged to use Assembly Bill 5 as a model for future federal regulations..
But even if a future piece of legislation were to designate gig-workers as full time employees instead of independent contractors, it would not impact drivers’ previous status as independent contractors, thus making them still eligible for forgivable PPP loans under the current rules.
The current deadline for PPP applications is May 31, 2021, so don’t wait to apply.
What recent PPP rule changes have potentially huge benefit for Schedule C applicants?
On February 22, 2021, the Biden-Harris administration announced important PPP rule changes that will allow PPP borrowers who file using IRS Form 1040 Schedule C to use GROSS profits, rather than NET profits, to calculate their maximum PPP loan amount. Read more here, and see the new rules, and the new PPP application form for Schedule C applicants.
This rule change, along with a 14-day PPP application lockout for businesses with 20+ employees starting on 2/24/21, was intended to focus PPP relief on America’s truly small businesses, independent contractors, sole proprietors, and self-employed individuals, as well as bringing a greater portion of PPP funding to these types of applicants.
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