Understanding PPP Funds

The first round of stimulus during Covid included PPP loans for small businesses. PPP is short for Paycheck Protection Plan. This program was intended to help employers retain and pay employees during this pandemic. PPP funds were released to employers with less than 500 employees. Employers could only receive PPP funds for non-1099 employees. Employees had to be employed during the period specified in the loan application. The PPP loan is calculated based on the amount of payroll paid in an 8 week period during the beginning of 2020 or end of 2019.

PPP loans are special as they can be forgiven under the following guidelines:

  1. Owners/officers of the company receiving PPP funds cannot be compensated above certain thresholds. If an owner/officer receives more than $100k in compensation annually, they may have restrictions as to how much they can be approved for in PPP funds.
  2. To be eligible for forgiveness of the loan, 75%+ must be used to pay W-2 payroll employees and taxes.
  3. 25% of the loan can be forgiven if used for rent and or utilities and or transportation costs.
  4. The loan will not be forgiven if used for business expenses other than those listed above.
  5. Payroll must be run for 8 weeks following receipt of the PPP loan. Earlier PPP loans specified the 8-week period as the 8 weeks immediately following the receipt of loan funds. Recent changes to this requirement extended the time frame for running payrolls after receipt of the funds.
  6. A loan forgiveness application must be filled out after the 8-week period has elapsed in order for the loan to be forgiven. A copy of the loan forgiveness application can be found here.
  7. PPP loan funds will not be forgiven if used to pay 1099 workers. Under PPP guidelines, 1099 and self-employed workers are to apply for a sole-proprietor type PPP loan.

PPP loans should be classified for accounting purposes as other income per guidelines. PPP funds are currently not considered taxable income for a business. Any PPP funds that are not forgiven should be moved to an other current liabilities account as they will need to be repaid.

Since its inception, the PPP loan program has had hiccups and undergone a series of changes. The PPP program is still changing. Currently a blanket forgiveness is being considered for PPP loans under a specific dollar amount although this has not been approved. For further questions about the PPP loan program the SBA has set up an FAQ’s document which can be viewed here.


Business growth often means hiring employees. Since there is no manual for running a business, it can be difficult to know what type of employees to hire. Failing to pay an employee properly or issue the correct tax form can also have hefty financial ramifications. To help avoid any legal or financial issues knowing the difference between a 1099 versus a W-2 employee is a must.

1099 Workers

1099 workers are a tricky subject in terms of employment. A true 1099 worker is considered a subcontractor or Independent Contractor. Subcontractors are not considered employees of a business. A subcontractor is typically a person or company hired to fulfill a temporary offsite role. Subcontractors can also be people like virtual administrators, IT or an answering service that perform the same functions for many businesses. These types of subcontractors are often self-employed, sole-proprietors or small businesses that offer one specific service.

1099 workers do not have payroll taxes withheld from payments for services. Payroll taxes are not withheld because 1099 workers are required to remit their own payroll taxes. Employers do not have to pay employer matching taxes on 1099 earnings.

W-2 Workers

A W-2 worker is the typical worker a business hires to help in the day to day operations of a business. If a worker is on-site meaning that they work every day at the physical business location, the worker is W-2. Other ways to know if a worker is a W-2 employee:

  1. Employee works in a physical location used for business operations.
  2. Employee is solely employed by one business.
  3. Employe works from home and fulfills the same role, daily or weekly that is vital to the day to day operations of the business.
  4. Employee is not self-employed.
  5. Employee is the owner of an S-Corp or single member LLC.

Employers are required to pay employer matching taxes on employee wages when an employee is a W-2 worker. W-2 employees are also eligible to receive benefits like paid time off (depending on the state) and disability, worker’s compensation and unemployment.


Maintaining employees can be costly. When employing an on-site worker, employers are required to carry coverage like worker’s compensation that cover an employee if they are injured on the job. Employer matching taxes can also add up. Employers are required to match the funds withheld from employee paychecks for social security and medicare taxes. Employers are also required to pay additional state payroll taxes which are a direct expense to the business. Paid time off can sometimes be required by the state. For these and other reasons, some employers will try to classify employees as 1099 workers. There are many different ramifications for employers that misclassify workers. Employers send reporting quarterly to state and federal entities. Business also have to file payroll and income tax returns. Any independent contractor or subcontractor with earnings of more than $600 in a calendar year is required to receive a 1099 at year end. W-2 workers will receive a W-2 at year end showing earnings and taxes withheld.

Common issues that employers that misclassify employees will encounter:

  1. Employee does not realize they have been classified 1099. Sometimes employees are unaware of the consequences of filing 1099, even if an employee asks you to classify them as a 1099 employee. Some employees only hear that they will not have taxes deducted from each paycheck. Unfortunately, the old adage nothing is certain but….is completely true. It is a terrible surprise to find that taxes are still due on an entire year’s worth of earnings at tax time.
  2. Employee reports employer to state authority. Not all employee relationships end well. If an employee feels mistreated or angry they may lash out. All states have an employment agency that helps maintain employee/employer relations. If reported to a state agency, the agency may decide to audit your payroll records. If it is determined that a business failed to report W-2 employee wages, the business may be subject to payment of payroll taxes, penalties and interest. It should also be noted that the interest and penalties can go back years even if an employer is reported years later.
  3. Employee is not eligible for disability or unemployment when needed. In light of recent world pandemic events, benefits like unemployment are critical. Additionally, a worker can be injured on the job any time any place. Misclassifying an employee can cost the employee necessary benefits during difficult times and the result…see #2. An employee reporting an employer is not the worst thing that can happen. An employee can sue at a later date for any number of reasons. The end consequences of a lawsuit can be devastating to a business and the owners of a business.
  4. Loopholes close and laws change just ask Uber. Because Uber’s drivers are considered independent contractors, Uber saves millions per year in insurance and payroll tax costs. Uber drivers are also responsible for things like insurance, fuel and maintenance of their vehicles. Whereas a taxi company would be responsible for all of the above, Uber avoided this by deeming their drivers to be independent contractors. Recently the state of California sued Uber and Lyft. The result of this landmark lawsuit may cause sweeping legislation across many states to ensure that employers don’t abuse 1099 loopholes.
  5. Overpaying taxes to the state and Fed. While it does not happen often, an employer may misclassify an employee in the other direction. Paying a subcontractor or independent contractor as a W-2 employee benefits only the subcontractor.


Scroll to top