Unemployment Insurance vs. Paycheck Protection Program: What’s Best for the Self-Employed?

Calendar Icon Updated May 05, 2020
Unemployment

The tsunami of joblessness created by the coronavirus pandemic prompted the federal government to extend financial relief to the self-employed—a segment of the workforce that doesn’t usually qualify for help. That includes gig workers, freelancers, independent contractors and sole proprietors.

If you’re self-employed and suddenly out of work because of COVID-19, you are now eligible for unemployment insurance. You can also apply for the Paycheck Protection Program (PPP), a forgivable loan program designed to help small businesses stay afloat—even if your business consists of only one employee.

While uncertainty still exists around who will get approved for benefits and when approved applicants will receive money, both of these assistance programs—unemployment insurance and paycheck protection—are historic in scope and could provide the financial lifeline you need right now.

Which option is best for you? This article will help you figure that out.

Unemployment Insurance vs. Paycheck Protection Program Comparison

Unemployment Insurance (UI)Paycheck Protection Program (PPP)
Who's eligible?Anyone who has lost their income because of the COVID-19 Small businesses with 500 or fewer employees—including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors
How do you apply?Through your state’s unemployment officeThrough banks, lending institutions, loan marketplaces
How much money can you get?Benefits vary by state; state payouts augmented by $600 per week from federal government2.5 times your average monthly payroll
How long can you receive payouts?Up to 39 weeks, depending on the state where you live2-year loan term
RepaymentNoneUp to 100% of the loan may be forgiven if you use funds for qualifying expenses. Any amount not forgiven will have an interest rate of 1%. Payments deferred for 6 months.
Take actionFind your state's officeSubmit PPP application

Who is eligible?

Unemployment insurance: Everyone who has lost income because of the COVID-19 pandemic can now apply for unemployment insurance. So if you are an Uber or Lyft driver, a freelancer, an independent contractor, or otherwise self-employed and have seen regular work vanish, you are eligible.

PPP: As its name implies, the Paycheck Protection Program is intended to help small businesses keep employees on their payrolls. Businesses with 500 or fewer employees are eligible to apply—but so are self-employed individuals, sole proprietorships, and independent contractors.1

How do you apply?

Unemployment insurance: You must apply for unemployment through your state’s unemployment insurance office. Many states are overwhelmed with unemployment filings, so applying via your state’s online system is probably a better option than applying by phone. For tips on how to file your claim—including a detailed list of what you’ll need for the application—check out our Guide to Unemployment Benefits and Eligibility.

PPP: While these loans are federally backed by the Small Business Administration, you must apply for them through a bank or other lender. If you already have a relationship with a lender, start there; if not, you can search for participating lenders in your area on the SBA website—but be aware that large banks and credit unions might not take new customers.2

First steps to a Paycheck Protection Program loan without a large bank or credit union

One way to streamline the process is to apply online through a small-business loan marketplace like Fundera and Lendio, which have relationships with multiple PPP lenders.

“Our network of lenders is accepting applications from new customers,” says Meredith Wood, Vice President of Marketing & Communications at Fundera. “So, for businesses that can’t get a PPP loan through their bank, it’s a great option.” Wood also recommends calling community banks in your area and asking if they’ll accept your PPP application if you move your deposit into an account there.

To see what information you’ll need to provide, you can download the PPP borrower application form.

How much money can I get?

Unemployment Insurance: Unemployment benefits vary from state to state. For example, in New York you can receive up to $504 in assistance per week, while in Florida the maximum weekly benefit is $275. But everyone who qualifies under the new rules will get an additional $600 a week from the federal government until July 31.3

PPP: You can get a loan amounting to 2.5 times your average monthly payroll.4 So, for example, if your average monthly payroll is $5,000, you would qualify for a $12,500 loan.

How do I determine my payroll costs if I’m self-employed?

The CARES Act, which established the Paycheck Protection Program, defines payroll costs as “wage, commissions, income, or net earnings from self-employment or similar compensation.”5 For most independent contractors and sole proprietors, that number will be your net income (that is, your gross income minus business expenses).6

If you need extra help figuring out what counts as payroll costs, check out these Paycheck Protection Program loan details.

How soon can I get money?

Unemployment Insurance: Under normal circumstances, according to the US Department of Labor, after you file a claim, it takes two to three weeks before you see your first benefit check. But these are not normal circumstances. Unemployment offices across the nation are seeing historic numbers of applications, so it will likely take longer to process your request.

PPP: When the Paycheck Protection Program was rolled out on April 3, federal officials suggested loans might be made available the same day as an application was processed. That was not the case. Applicants initially encountered confusing applications and unwilling lenders,7 then, on April 16, the Small Business Administration announced that the program had run out of funds after 1.4 million loans were approved.

But on April 23, Congress approved a coronavirus relief package that will replenish the loan program, so funds should be available again soon. In the meantime, the advice from most lenders is to apply and be patient.

“It may take longer than expected, but we are confident relief will come,” says Brock Blake, CEO of Lendio. “My advice to business owners is to make sure their application is thorough and complete, including any payroll documentation they have, a copy of the front and back of their driver’s license, and a signature on the full application.”

How long can I receive payouts?

Unemployment Insurance: The amount of time you can receive unemployment benefits varies by state. New rules in response to COVID-19 allow for extended benefit periods—up to 39 weeks in some states. And, in most cases, you’ll have to renew your claim each week to keep state officials up to date on your employment status.

PPP: This loan has a maturity of 2 years and has an interest rate of 1%. And perhaps the biggest perk of the Paycheck Protection Program is this: the debt can be completely forgiven if you use the money for payroll, rent, mortgage obligations, utilities, and other fixed-debt obligations. Specifically, at least 75% of the loaned funds must be spent on payroll, and you must keep your business’ headcount and wages the same in the first eight weeks after the loan funds.

Bottom Line: Unemployment benefits vs. Paycheck Protection Program loan

If you are self-employed, the logical way to determine which of these relief options is best for you is to compare the potential payout of each.

Recovering lost income through unemployment

A good pace to start is comparing your weekly income to the unemployment benefit you’re eligible for in your state. If your weekly income isn’t more than the sum of your state’s unemployment payout plus the extra $600 in federal COVID-19 aid, applying for unemployment compensation is probably your simplest course.

“For most small businesses and self-employed people, if they can cover their fixed costs and lost income through unemployment (insurance), the analysis ends there,” says Richard Barnes, a tax lawyer and accounting lecturer at North Carolina State University. “And there’s a fairly large population—including gig workers and independent contractors—who can have their income fully replaced by unemployment insurance.”

Going the unemployment insurance route also means you can recover your lost income with no limitations on how you spend the money you receive.

 Recovering lost income through a PPP loan

If you can’t fully replace your income through unemployment insurance—and not just your income but also your ongoing self-employment expenses—Barnes says a forgivable loan through the Paycheck Protection Program is likely going to make more sense for you. Self-employment expenses might include rent, utilities, insurance, web hosting, etc.—all the fixed costs associated with running your business.

Barnes says almost every self-employed taxpayer whose business employs at least a few people will receive more money through a paycheck protection loan than from an unemployment claim.8 And financial planner Natalie Taylor told Business Insider that a PPP loan is “a great option if you make more than $50,000 annually.”9

A PPP loan also might be a good choice for you if you’ve set up your business as an S-Corp, C-Corp, or LLC, and pay yourself a relatively small wage to minimize payroll taxes. But, in this case, it’s best to consult your accountant. “The CARES Act is very clear about sole proprietorship and partnerships,” Barnes says, “but it’s not as clear about S-Corps and C-Corps.”

What is clear is that a loan through the Paycheck Protection Program can deliver relief to small businesses and the self-employed with relatively few strings.

“There has never been a program like PPP before, which has led to some operational kinks, but overall it’s incredible for borrowers,” says Fundera’s Wood. “We’re talking about 100% guaranteed loans, which really incentivizes lenders, and 1% interest rates.” She also points out that a PPP loan doesn’t require usual qualifying criteria such as revenue, credit score, or time in business.

You down with PPP? Learn more and apply for a loan with this Guide to the Paycheck Protection Program.

Take action

To be frank, neither of these new assistance programs had a smooth rollout. The inherent complexity of quickly getting federal funds into the hands of millions of newly out-of-work people—during a time of crisis—has stressed computer systems and human administrators alike.

But, even if you still have lingering questions about how these programs will help you replace lost income during the COVID-19 pandemic, begin the application process as soon as possible. If you can’t get through to your state’s unemployment office, keep trying. The time and effort you put into the process is worth the potential payout—because you can’t get relief if you don’t seek it.

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