Client wants to make me a temporary employee for their PPP forgiveness
May 16, 2020 1:18 PM   Subscribe

My client applied for an received a PPP loan. They claim their accountant advised them it’d be best to add me as an employee to their payroll during the 8 week period to help ensure they get total forgiveness for the loan. This sounds totally sketchy and I plan on saying no to this scheme, but I don’t know how to explain why.

I own my own small business and also received a (modest) PPP loan. I am not concerned about whether it will be forgiven because I did my due diligence in making sure the amount I received fits the guidelines for what you can claim. So, I don’t need any info on how these loans work — but I don’t understand the implications for me if a client who has been paying me as an independent contractor decides to make me an employee on their payroll for 8 weeks. At best I think it’d make my 2020 tax prep more confusing, at worst I worry it’d compromise my own PPP loan. If it matters, I bill them hourly twice a month for the work I do. They don’t have other employees, it’s just them. Pretty sure their business is set up like me, as an LLC filing as an S-Corp.

I am a little dubious of whether an accountant would really recommend this course of action but this isn’t someone who has lied to me before. I did ask them to get bob formation from their accountant on what this would mean for me but they haven’t heard back yet. We have a longstanding relationship so I don’t think they would actively try to fuck me over but I also know they are very focused on what’s best for them and not paying me a dime more than they have to.

In that vein, funnily enough I think there’s an argument to be made that this client should have made me an employee a long time ago and I almost wonder if this action will help me argue that I‘ve been wrongly classified as a contractor if I let them make me an employee for two months. The IRS doesn’t have cut or dried rules for these classifications, and I haven’t pursued it because two accountants who have prepared my taxes in the past have said it could probably go either way. Currently my business is set up in a way where I’m reasonably happy with the taxes I pay and compensation from this client. Not sure if this bit is relevant but wanted to mention it as something that I’m thinking about, and to bring up that while I assume this means they’d be paying the employee portion of the taxes for these 8 weeks I don’t think it’d save me a significant amount of money on taxes to have them do that, especially if it makes my tax prep bill higher than usual to deal with both 1099-income and this proposed W2 work.

You are not my accountant or lawyer, etc. No doubt it’d be best to consult with one but rather than paying money to deal with this request I know I can just say “no” and leave it at that. Having some reasons behind it is more for my own peace of mind and less needing to justify my actions to the client.
posted by the thorn bushes have roses to Work & Money (23 answers total)
Best answer: > I don’t know how to explain why

Because it appears to be entirely fraudulent. That impression may be right or wrong, but that's how the bell rings.
posted by yclipse at 1:29 PM on May 16, 2020 [9 favorites]

Best answer: Absolutely not, this will screw you on your own PPP loan and is 100% fraud.

Say no in writing so you have something to show the IRS when this idiot does it anyway. If you want to be nice about it say something like "thanks for the offer of temporary full time employment during this crisis, I appreciate your support but having received a PPP loan for my freelancing business I am doing just fine! Maybe we can discuss in the future though? It might make more sense given the work I am currently performing. Best wishes!"
posted by fshgrl at 1:39 PM on May 16, 2020 [43 favorites]

Best answer: Hopefully you can just say you can't do that because it will complicate your personal taxes and loan. That should be the end of it.
posted by Glinn at 1:42 PM on May 16, 2020 [8 favorites]

Best answer: Having done some HR-adjacent work previously, proper classification is definitely a "thing" to adhere to carefully as it has implications. My state (California) in particular takes it seriously. Hence lots of lobbying by Uber and so forth to make it less of a "thing" to have to adhere to.

Classification is not designed to be something an individual or company can just opt into or change on a whim or when they feel like it. Among other things, it helps make sure workers get the benefits they are entitled to.

I would also feel very incomfortable with the request you received and would similarly decline. You like the current relationship you have had with this client. If they are asking for a change, and you agreed to it, there should be a real, direct, and tangible benefit to you, of which there has been no mention of in your post.
posted by Goblin Barbarian at 1:58 PM on May 16, 2020 [2 favorites]

For your own peace of mind? It's almost certainly fraud and it harms people, and there's certainly nothing in these circumstances calling for a consideration of whether you ought to be breaking an unjust law or balancing harms.
posted by praemunire at 2:07 PM on May 16, 2020

Best answer: According to Mr. Otter_Handler: you can't because you have a PPP loan. Doing so would put your loan in jeopardy. End of conversation.

(Mr Otter_Handler is a finance director at a small business and has been dealing with PPP for his organization.)
posted by Otter_Handler at 2:14 PM on May 16, 2020 [12 favorites]

Their average monthly payroll for the loan is based on the past. So either they are proposing back-classifying you (perhaps possible, but you would need to see a financial benefit from it just as if you made a wage complaint) or they are filling out the form wrong (fraudulently if intentionally.) And of course your own PPP loan makes this impossible as you’d double dip the PPP funds as a contractor for your own company and an employee for theirs. You must decline.
posted by michaelh at 2:16 PM on May 16, 2020 [2 favorites]

Best answer: I don’t think they would actively try to fuck me over

oh that's exactly what they're trying to do, by involving you in their fraud, and at your personal expense.
posted by poffin boffin at 2:34 PM on May 16, 2020 [16 favorites]

Response by poster: Thank you for totally confirming my assumptions on this. All these answers were great reminders to trust my gut. I’ve posted about this client before (the vast majority of my income is with them) and was actively job searching before COVID and continue to do so, but since I feel pretty precarious financially right now I think I worried more about the outcome of this conversation than I should. I will say no and take the reminder that this person isn’t truthworthy.

So poffin boffin (and everyone else!), you’re spot on. Thank you!
posted by the thorn bushes have roses at 2:52 PM on May 16, 2020

Best answer: They claim their accountant advised them it’d be best to add me as an employee to their payroll during the 8 week period to help ensure they get total forgiveness for the loan.

"Best" is a funny word here. It doesn't mean "bring moral balance to the universe" or "A decision that everyone will support when your client is the story on the news following Ruth's Chris Steakhouse". It means, "easiest way to get free money from taxpayers by appearing to follow the letter, but certainly not the spirit, of a law passed during a global emergency."

It's kinda like saying, "The best way for me to get a car is if you could co-sign this loan real quick". Best for me, maybe, but definitely not best for you.
posted by Nonsteroidal Anti-Inflammatory Drug at 3:02 PM on May 16, 2020 [7 favorites]

IANAL, etc., but perhaps: "As a small business proprietor myself during these tough times, I must kindly decline your offer. I'm concerned it might introduce some tax and financial intricacies to my business and personal accounting that right now I'm not fiscally equipped to handle." Rather than accusing them outright of fraud.
posted by WCityMike at 3:43 PM on May 16, 2020 [1 favorite]

Chiming in to second what others have said and add this lens: The intent of the PPP is to protect paychecks. It's already done that for you, as you received PPP funds. Receiving double funds would certainly be against the spirit of the program. And, as the reporting requirements have been coming out after loans were awarded, and could shift in the future, it's most prudent to stick to the spirit rather than the letter.

To the client: "Thank you so much for the offer of full-time employment. Since I've already received support from the PPP via a loan to my company, I won't be able to accept PPP support from any other source." The phrase "won't be able to" covers both legal implications and your own moral compass, and they may not ask for details.
posted by rockyraccoon at 7:08 PM on May 16, 2020 [5 favorites]

Best answer: Lots of people in this thread seem to have a really high degree of certainty about their opinions that aren't necessarily backed up by a program that is being written as it's implemented, and I don't see a single reference in this thread so far to any of the Treasury guidelines that have been released.

It's not against the rules to hire your contractors to make the payroll requirements. Maybe they had someone quit, and now they are worried about the FTE calculations (which are pretty complicated). Actually, the interim guidelines saying hiring new employees is a perfectly acceptable. Whether or not you were misclassified to begin with is a separate issue that doesn't have anything to do with PPP. And there is no rule against you taking a PPP loan based on your self employment income, and then accepting a new payroll position now whether it's being funded by PPP or not. That's not "double dipping" - Treasury says you can't take a PPP loan and PUA unemployment benefits for the same weeks, not that you can't accept a job offer. That wouldn't have anything to do with your own PPP loan or qualification for it.

I don't think this is fraud or some kind of Ruth Chris Steakhouse situation, but I still wouldn't accept the offer to sign up for a W2 as a favor to them if you're happy freelancing. But still, the consensus in this thread isn't actually based on the law or the Treasury guidelines in any way.
posted by bradbane at 8:50 PM on May 16, 2020 [7 favorites]

Fwiw, I think their accountant is incorrect. Their scheme is built on an incorrect assumption which makes it that much more of a bad decision. The loans are based on the previous 3 months. You were not an employee then. Making you one now, may help the accountant in some way, but it will not help you and it is not the correct way to do it.

I know some of the forms ask for your payroll. Their (idiot?) accountant may just think, payroll? if that is what they want, that is what we will give them. The owners, whom I do not know, may just be following bad advice. Seems to me that the question you asked them that they have not answered is spot on. If they cannot answer this with a good explanation and reason, that tells you everything.

One thing that strikes me is that if they put you on the payroll and them lay you off from the payroll, you are entitled to unemployment compensation. I do not think they want that. Another thing is that this is double dipping. Two businesses, yours (rightfully) and theirs are getting a forgivable loan on the same person/worker, YOU. Are they going to put their accountant on the payroll too and all the professional services they pay on the payroll too? Come on. No friggin way.

Don't do it. I think fshgrl has a great script, but a simple. "No" or "no thank you, this is not appropriate for me at this time." would work too.
posted by AugustWest at 10:18 PM on May 16, 2020 [1 favorite]

At best, you run the risk of jeopardizing your own loan forgiveness if you agree to this arrangement. At worst, it opens you up to all kinds of hassle and questions. Given the lack of any real benefit to you, I'm having a hard time imagining reasons to agree.

I doubt it could be considered fraud since you had no fraudulent intent when taking the loan and can prove the offer wasn't on the table until after the loan was made, but that doesn't mean that it couldn't seriously complicate your life anyway!
posted by wierdo at 10:19 PM on May 16, 2020 [1 favorite]

You can read the Treasury guidelines link Here; sorry I didn’t link to them before. Some of the plain language interpretations are hard to link to as they’ve been disseminated through SBA lenders.

bradbane, I think you’re confusing two things. Independent contractors are supposed to get their own PPP loans, and the history of payroll, not future payroll, is used in the application. (There is an alternative payroll measurement method for new businesses, but it still wouldn’t work here.)

But the percentage of the PPP loan spent on payroll (future payroll) is used for forgiveness.

In other words, even if the asker were to legitimately become an employee for purposes of their client’s application and not endanger their own funds, which doesn’t seem feasible, they would still mess up the forgiveness of their loan.

Attempts to deliberately stagger the client’s PPP and the asker’s PPP so the double funds weren’t being spent at the same time would most likely fall under section S of the guidelines. I’m guessing the asker would be okay but still wouldn’t want to be involved in that.
posted by michaelh at 10:22 PM on May 16, 2020 [2 favorites]

It's not against the rules to hire your contractors to make the payroll requirements.

It is against the rules to misclassify a employee as a contractor. OP doesn't mention any change in work circumstances.
posted by praemunire at 10:38 PM on May 16, 2020 [3 favorites]

Best answer: This seems like such a self-serving move on their part to me. I find it telling that they tell you about their own business needs without even trying to paint it as beneficial for both sides. Then you ask a question about where that would put you and you get no response.

It can be hard for nice people to say "no" because they are defaulting to meeting others' requests and a "no" needs a reason in their mind. But really, why exactly WOULD you do what they ask? What is the benefit to you?

Also, since you mentioned past questions I looked them up. I'd think really hard about coming on board with this client as an employee. The way they allowed you to forbear all compensation for a single typo was not indicative of good faith. And then, the way they approached you now, not even trying to hide their motives? yikes.

It appears that not only are they your (almost) only source of business right now but that they only have you to rely on... so you probably have as much power in this situation as them. They might not want to lose you - a reliable, conscientious contractor with a long tenure is not easy to replace.

All this to say, quite apart from the legal aspects which would give me serious pause, apart from it making your life more complicated for no reason, this move would make you more entangled with a client who even before this pandemic was stressing you out.
posted by M. at 12:40 AM on May 17, 2020 [2 favorites]

Best answer: Also, I'd document your refusal in writing so they cannot claim misunderstanding and list you as an employee anyways.
posted by M. at 1:16 AM on May 17, 2020 [4 favorites]

Best answer: I'd document your refusal in writing so they cannot claim misunderstanding and list you as an employee anyways.

I regret that I have only one favorite to give this comment.

This client has shown you who they are. Believe them. Create a paper trail that makes it abundantly clear that you are not one of their employees.
posted by virago at 12:04 PM on May 17, 2020 [1 favorite]

1. There is absolutely nothing wrong with a PPP recipient hiring -- or laying off -- during the eight-week period in which payroll, rent, and utilities expenses can be forgiven from the total PPP loan amount. That goes for you, your client, and every other PPP loan recipient in the country. The purpose of the loan program is to stabilize payrolls, not freeze them. If you can find me one member of Congress who voted for PPP but only because they were satisfied that it would prevent or discourage hiring, I will eat my hat.

2. Generally speaking, PPP loan amounts are determined by the average monthly sum of payroll, rent, and utilities in 2019 multiplied by 2.5, which is about eleven weeks' expenses. PPP recipients can apply for forgiveness of actual payroll, rent, and utilities over the eight-week loan forgiveness period following the loan award. By design, the average PPP recipient is not expected to reach 100% loan forgiveness. So let's say you got a $10,000 PPP loan and your payroll, rent, and utilities payments are $8,000 during the forgiveness period. When the smoke clears, you will be left with a $2,000 loan to repay . . . over two years, at 1% interest, which is as close to free debt as you can get. (If you hate debt, you can use the loan to pay off the loan in the first month.)

3. If you agree to be hired by your client, they get PPP loan forgiveness for your payroll cost. You will not get PPP loan forgiveness for those hours because you will no longer be paying yourself for them. In PPP forgiveness terms, they win and you lose. Do the math: How much do they need to pay you as an employee to make this worthwhile to you?
posted by mississippi at 3:08 PM on May 17, 2020 [1 favorite]

Best answer: It is against the rules to misclassify a employee as a contractor

Sure but that has nothing to do with PPP.

If you agree to be hired by your client, they get PPP loan forgiveness for your payroll cost. You will not get PPP loan forgiveness for those hours because you will no longer be paying yourself for them.

I am not defending OP's client because I would tell them to get lost with this request, but... this is not true at all. The client would get forgiveness for their own qualifying payroll cost. So would OP. These two things are not mutually exclusive - "hours" have nothing to do with it. You can take a PPP loan based on self employment, then turn around and decide that's not working out right now and go get a payroll job somewhere. Lots of people here seem to be assuming that PPP works the same as unemployment but that's not the case at all.

Anyways, lots of people say lots of things about PPP including professional accountants who all have their own contradictory takes on this ever evolving bureaucratic nightmare. But the best thing to do is go read the actual Treasury guidelines that have been released so far yourself...
posted by bradbane at 1:49 AM on May 18, 2020

Response by poster: Final update: Bradbane, I agree with your comments here. I have done so much research into the PPP for myself, along with advice from my accountant, and it aligns with what you’ve written. (It’s not personalized advice, but my accountant has sent all his clients updates with the latest SBA guidance and his interpretations of them since the program was announced...I didn’t want to pay his hourly rate to talk to him about my issue since I planned on declining.)

I do agree with everyone else that it’s fishy because this client doesn’t have my best interests in mind, and ethically I disagree, but I don’t think the SBA would see it as fraud. Lots of people with small businesses who receive the PPP might also have W2 jobs with small businesses that were funded by the PPP — you can receive the funds and still get paid in other ways. I have to run my payroll regardless of what I get paid from clients, and that is what the program assists with and will be looking at when it comes to repayment, not profits outside the payroll. I get the sense that a lot of folks who answered aren’t small business owners who have these loans (or maybe you all are, the SBA guidance hasn’t been great!) but many comments didn’t seem to understand what this program covers so I hope this clarifies somewhat. I think Bradbane wrote it better.

Anyway, if it’s interesting to anyone following, the closest info I could find online about this was an article saying that now was a good time to reclassify contractors as employees if the business had any doubt they previously had been misclassified by declaring that to the IRS and keeping them as employees to ensure 75% of loan repayment goes towards payroll expenses. My client only wanted to do it for 8 weeks, which needlessly complicates my tax situation, and wouldn’t rectify the possible misclassification issue I brought up for past years.

The client hasn’t brought it up and can’t do it without my input since I would need to fill out the W2, but I will decline in writing if it comes up. Hoping their accountant was advising what I mentioned in my previous paragraph and has set them straight but if not, I am happy to do so.
posted by the thorn bushes have roses at 1:09 PM on May 18, 2020 [1 favorite]

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