Unemployment Benefits and Paycheck Protection Program Loans FAQ

I'm a Sole Proprietor, Independent Contractor, or Freelancer. Should I Apply for both PPP and Unemployment as a worker at my own business?

We do not have guidance on this question from the state or federal government, and so our response is somewhat speculative.

PPP loans are intended to help businesses keep their workers on the payroll. Unemployment benefits are intended for workers who are no longer working and being paid. You may very well run into legal issues if you receive a PPP loan based on payments to yourself from your own business, and receive unemployment benefits for being out of work at the same time.

Another approach might be to apply for a PPP loan first, use the payroll benefits for the applicable 8 weeks to pay yourself, and then apply for unemployment benefits once the PPP funds are exhausted. But again, no government agencies have provided any guidance with regard to this course of action. LCA will continue to update these FAQs as the situation continues to develop.


Unemployment Benefits and the CARES Act

Before the federal CARES Act was enacted, a W-2 employee in Illinois was entitled to 26 weeks of benefits after losing their job. The CARES Act lengthened the period that an eligible worker can obtain benefits from 26 to 39 weeks. It also provided an additional $600 in weekly benefits for those receiving regular unemployment benefits, and provided an additional 13 weeks of unemployment benefits for those who had previously exhausted their unemployment benefits.

The Pandemic Unemployment Assistance (PUA) portion of the CARES Act recognizes the plight of laid off workers who are not employees, and provides certain benefits through the unemployment compensation system. 


I’m a Sole Proprietor, Independent Contractor, or Freelancer. Am I eligible for unemployment benefits?

Yes, but it's complicated. The PUA portion of the CARES Act provides benefits to workers not typically eligible for unemployment benefits, primarily, sole proprietors (SPs), independent contractors (ICs), and freelancers, who were laid off or lost work as a direct result of COVID-19.

The Illinois Department of Employment Security (IDES) is mandating that all SPs, IPs and freelancers apply for benfits using the existing application that is intended for W-2 employees. According to IDES, workers must receive a denial for regular unemployment benefits in order to be eligible for PUA benefits.

You may ask: "Why is IDES mandating that I apply for unemployment as a W-2 employee, if I'm an SP, IP or freelancer?" The answer is: We don't know for sure, but it may be because the IDES takes a very expansive position on who is an employee, and that position may be inconsistent witht he practices of both employers and employees. The key language in IDES's most recent guidance is: "Workers who are employees covered by the unemployment insurance system are sometimes told they're not. Even if an individual's employer does not consider the worker to be covered and doesn't pay unemployment taxes on the individual's wages, the individual can qualify for benefitsif IDES determines he or she is covered under state law." In other words, the IDES takes the position that it is not bound by the company's (or the worker's) view on who is an independent contractor and who is an employee. They reserve the right to make that decision based on the facts of each case, and they may well allow a worker paid as a 1099 independent contractor to receive unemployment benefits the same as a W-2 employee.

The Bottom Line is This: If you are an SP, IP, or freelancer, and your work has been reduced or eliminated because of the Coronavirus pandemic, you should apply for unemployment benefits through the existing IDES application for employees. The IDES will review your application, and if they decide that you should have been categorized as an "employee," they will grant your application under the existing law. If they decide that you are not a covered employee, they will deny your application, and that denial will allow you to apply for PUA benefits through the new portal.


I work a number of jobs. Most of my income comes from 1099 independent contractor work, but I also work a couple of hours a week as a W-2 employee. I hear that I will only be eligible for unemployment benefits based on the small amount that comes from my W-2 work. Is that true?

Unfortunately, that appears to be the way the CARES Act is currently being interpreted. Right now, everyone applying for unemployment beneefits must start by filing for standard W-2 unemployment benefits. If enough of your income during the relevant period is from W-2 work, the IDES will grant your application and calculate your benefits based entirely on your W-2 work, even if that is a small part of your income.


Okay, but why can't I then apply for PUA benefits based on my 1099 income?

The PUA provides benefits to workers not eligible for standard W-2 unemployment benefits. On the first page, the PUA application asks whether you've applied for and been denied standard W-2 unemployment benefits. If you were not denied benefits entirely (due to your W-2 employment), you would have to answer "No" to that question, and your application will automatically be denied.


But, that doens't make any sense! The purpose of PUA is to give benefits to Independent Contractors, Sole Proprietors, and Freelancers. Why should a small amount of W-2 income lock me out of PUA benefits?

That very question was posed to Governor Pritzker at his press conference on May 12, 2020. He noted that his office is aware of the issue and is pursuing a fix.


So, what do you recommend?

It is possible that Congress or the federal Department of Labor will address this issue through amendment or waivers. In the meantime, we recommend that you apply for benefits through IDES, include all your sources of work-related income, including 1099 work. You should receive benefits based on your W-2 work, as well as the additional $600 in weekly benefits provided by the CARES Act. You should then file an appeal with IDES within 30 days of the benefit determination, arguing that you're entitled to additional benefits based on your 1099 work. Two of our fellow Chicago legal services organizations, CARPLS and Legal Aid Chicago, can assist you with the appeals process.


What unemployment benefits are available to Sole Proprietors, Independent Contractors, and Freelancers?

PUA provides up to 39 weeks of benefits to workers, including SPs, ICs and freelancers that were not previously eligible for unemployment benefits. Benefit payments under PUA are retroactive, providing benefits for weeks of unemployment, partial employment, or inability to work due to COVID-19 reasons starting on or after January 27, 2020, and continuing until December 31, 2020.

The calculation of benefits requires a calculation of the weekly base benefit by reference to the two highest pay quarters during the four quarters preceding the application. The earnings during those two highest quarters are added together, and the sum is multiplied by 47%. Finally, that product is divided by 26 to yield a weekly payment.

To take an example, Worker A earned $13,000 (Q1), $12,000 (Q2), $11,000 (Q3), and $13,000 (Q4) during the four quarters before filing for unemployment benefits. The two highest quarters are Q1 and Q4, during which Worker A brought home $13,000 (approximately $1,000 per week), and so they are used to calculate the base benefit, using this calculation:

  • Add Q1 earnings + Q4 earnings: $13,000 +$13,000 = $26,000.  
  • Next: 47% x $26,000 = $12,220
  • Finally, $12,220 ÷ 26 = $470

Worker A would be entitled to the weekly base benefit of $470.

The maximum weekly base benefits are as follows: $484 for individuals, $577 for an individual with a spouse they support, and $669 for an individual and child.


I’m a Sole Proprietor, Independent Contractor, or Freelancer. Am I eligible for an SBA Paycheck Protection Program (PPP) loan?

Yes.  The CARES ACT states that SPs, ICs and freelancers are eligible for PPP loans, so long as they certify that the loan is needed to pay workers during the COVID-19 crisis. The Small Business Administration has issued various clarifying comments as SBA lending banks seek to implement the statute through their loan application portals.

Applicants for PPP loans need to document their payroll history to calculate an average weekly payroll during specified periods. In the case of SPs, ICs and freelancers seeking benefits based on the loss of their own income, the application must document payments to yourself for work you performed. Form 1099s can substantiate your payment history. Without that documentation, you may need to show your business income, less business expenses, from your personal tax returns. In any case, you’ll need to work with your SBA lender bank for more guidance, at least until the SBA provides specific procedures that apply to SPs, ICs and freelancers.


What loan amount is available to Sole Proprietors, Independent Contractors, and Freelancers through the SBA Paycheck Protection Program?

The PPP program looks at the history of payments to your workers during various periods specified under the CARES Act.  Typically, for businesses with a substantial history of payroll, the relevant period is the calendar year 2019. For businesses (such as seasonal businesses) without a standard 2019 payroll, the SBA has specified alternative timeframes that can be used to calculate average weekly payroll (See Answer to Question 14 on the SBA’s PPP FAQ)The amount of the PPP loan is determined by calculating the average monthly payroll during the relevant period. Payments to workers exceeding $100,000 have to be excluded from the calculation of average monthly payroll, as do other payments under federal employment laws, although state unemployment taxes can be included.

The PPP permits loans up to 2.5x the average monthly payroll during the relevant period. The maximum loan amount is $10 million.


Are SBA Paycheck Protection Program loans forgivable?

Yes. The PPP loans are intended to keep workers employed. Therefore, the SBA will forgive the loan if the employer:

  • Expends the funds over the covered period of 24 weeks;
  • Maintains levels of compensation; and
  • Uses at least 60 percent of the loan for payroll. Up to 40% of the loan may be used for rent, utilities, or mortgage interest.

The amount forgiven will be reduced if the employer:

  • Reduces full-time employee headcount;
  • Decreases salaries and wages (under $100,000) by over 25%.

Employers can regain forgiveness eligibility if they restore their full-time employment and salary/wage levels before December 31, 2020.


What are the terms of the SBA Paycheck Protection Program loans?

If it is not forgiven, the loan must be paid back over two years (five years for loans obtained on or after June 4, 2020) at an interest rate of 1.0 percent. Loan payments are deferred until the amount of forgiveness is established.

No collateral or personal guarantees are required to receive a PPP loan. Neither the government nor lenders will charge applicants any fees.