Transcript: Episode 036 – Scott Stratton on the CARES Act for Music Teachers and Studio Owners
Last week the U.S. Congress passed the largest economic relief bill in U.S. history and it has a lot to offer individuals and small businesses.
Today, I’m joined by Scott Stratton, a financial advisor and a musician himself, who is going to break it down for us and tell us what steps to take next.
Here’s our conversation:[00:00:55]
Andrea: Hi Scott. Welcome back to the podcast. You were here very early on but thanks are coming back again today. Can you introduce yourself and tell us what you do?
Scott: Thanks for having me back. I’m Scott Stratton. I’m a certified financial planner and also a musician. I play trombone in the Dallas area and I kind of merged my two interests working a lot with musicians and I do a site called Financeformusicians.com where I write about financial planning topics for professional musicians and teachers.[00:01:23]
Andrea: Yeah and it’s full of relevant information for music teachers. They should definitely check it out for any answers to finance questions. But today you’re here to talk to us about the stimulus package that was announced last week now and what that means for music teachers. So can you give us a little background? What’s up with the stimulus package?
Scott: Absolutely, so the new Act is called the CARES Act, that’s the Coronavirus Aid Relief and Economic Stimulus Act and there’s actually a lot of moving parts to this that are going to impact people all around the country and it will apply to musicians who are employees and musicians who are self-employed and musicians who own a business. So it’s a lot of moving parts and a lot of different ways that this is going to be able to help.
So one of the first ways that’s going to be interesting is expanded unemployment benefits. In the past, you had to be a W-2 employee to qualify for any type of unemployment benefits. These are offered at the state level but the CARES Act has actually added federal funding to expand unemployment to include independent contractors and self-employed folks. And what that is going to mean is for the first time if you were a 1099 or if you had your own business that you’ll supposedly be able to apply for federal unemployment benefits. I say supposedly because even though the federal government pushed this out last week, not all the states are ready to move forward through this. They don’t have the processes and the states are overwhelmed already with just the regular unemployment benefits of which there have been 10 million new jobless claims in the last two weeks. It’s a record but supposedly, there is going to be a way for people to get unemployment benefits and, in fact, not even just the usual unemployment benefits. They’re going to increase it by $600 a week for now through the next four months through July.[00:03:05]
Andrea: Wow. Okay, so this is even if you haven’t paid into any unemployment fund, whether you’re self-employed, work as a music teacher through a music school as an independent contractor, anyone is supposedly eligible?
Scott: Yeah, it used to be that the only way you’d be covered by unemployment is if you work for an employer as a W-2 employee and that employer paid in paying those unemployment taxes, but now, this is going to be the first time that supposedly that’s going to cover and there are so many gig workers today. There are lot of people, whether you’re an Uber driver or there are just so many people are working on their own doing different types of consulting, that there are actually a lot fewer W-2 jobs, so it’s really great that they’re doing this. We don’t know the details yet of how they’re going to do it but the funding is there, so as soon as it’s available in your state, you should do that. I’m going to send a link to the federal government which you can go to this link and then find a direct link to your own state’s unemployment insurance department.[00:04:00]
Andrea: Okay, so you go through the state for that. All right, we’ll include that link in the show notes.
Scott: Terrific! Well the next thing I want to talk about was health insurance. So if your income has come down quite a bit and you are self-employed, you might have a health insurance policy through the health insurance exchange in Obamacare Affordable Care Act and you’re receiving a premium tax credit. And if your income changes during the year, you can actually re-file and re-estimate your income for this year and get immediately a larger income tax credit towards your health insurance and lower your health insurance premiums. Now if you don’t do that, don’t worry because they will figure it out at the end of the year that you made less than you estimated and they’ll give you a larger tax refund. But if you want the help now, you can also go through and refigure income towards your health insurance. So that’s the kind of a second thing that I want people to look at too.[00:04:50]
Andrea: That brings up a really good point. If you know your income is going to be impacted not just for this health insurance but just your quarterly tax payments that you’re making like you can make that adjustment too, just kind of separate from this but something else to be thinking about right now.
Scott: That’s absolutely right. Yeah, if your income is down, you ought to be looking at making those adjustments as well. And they’ve got the forms online through IRS.gov so you can calculate your estimated income tax payments that you need to do as well.
Scott: The third thing I want to talk about was the $1,200 per person stimulus check that should be coming out. This is going out to everybody and not just musicians, but not everyone is going to qualify. But first, the amount sets $1,200 if you’re single, $2,400 if you’re married, plus there’s a $500 check for each child that you have as well. But there are some income restrictions on this. So you’ll be getting a check if your adjusted gross income is less than $75,000 single or less than $150,000 married. Now that’s to get the full credit. It phases out above those amounts. So for a single person, the phase out will go up to $99,000. If you make above that, you’d get zero and for married couple, it will go all the way up to $198,000, and they’re going to base that on your most recent tax return, 2018 or 2019, and then it will adjust to what your 2020 income actually is.
Now your tax filing deadline has been extended from April 15 to July 15. I think the word has gotten out about that which is good news, but if you already have your taxes done, I would go ahead and file. The IRS is going to use the direct deposit that you used for your payments or refund as the way that they’re going to send this credit out–the $1,200 credit.[00:06:33]
Andrea: Okay. And that’s a credit as opposed to a tax refund, so it’s not like you get $1,200 off of your tax bill. It’s just a check, right?
Scott: Yeah, so they’re going to try to do it electronically through electronic funds transfer, but if they do not have your information at the IRS, they’re going to mail out a check. It should be coming out about two weeks from now although some people in Congress say it’s going to take longer because the IRS isn’t prepared to send that number of checks. We’re talking about sending checks to 250 million Americans that should be getting this check, so a lot of things that could go wrong with sending 250 million checks all at once, so that’s why they’re trying to do that electronically wherever possible.
Andrea: Yeah, alright.
Scott: Great! So then the fourth thing that I want to talk about that is specific for the CARES Act is the Paycheck Protection Program and this is the federal loan program to small businesses and especially if you’re the owner of a school and you have employees this is really something that you have to look into. Basically, the way it’s going to work is you’re going to get a loan from the Small Business Administration (SBA). They’re going to give you a loan for two and a half months of your payroll. You have to have less than 500 employees. The employees are going to be kept capped at $100,000 salary and they’re giving loans of up to $10 million and once you received that money, you then need to spend it over the next eight weeks on payroll or rent.
As long as you’re keeping people employed, you have the same number of employees at the beginning of that period at the end and you don’t cut their wages, then that loan is going to be forgiven, which means that for anybody who owns a business, the federal government is stepping up to pay your payroll for the next two months just don’t fire anyone. And that’s because they would rather have the employees working for you than filing for unemployment, and they know it’s going to be really difficult for people to keep people employed. So if you’re a music school and you’re shut down and you’re not able to teach lessons, then this is the way to keep doing that or if you’re running an orchestra or a chamber ensemble or doing a concert series and all your concerts have been shut down, this is a way you can still pay your staff and pay your musicians and keep your business open, and then when things do straighten out, you’ll still be around and your employees will have been taken care of. So you really want to look into this.
The loan application officially started April 3rd for most businesses. For people who are independent contractors, the filing can start April 10th. Now, small business loan is available through 1,700 banks and credit unions around the US. Probably your bank is part of this too whether you have a small local bank or whether you bank with one of the giants. I know, for example, that JP Morgan Chase actually did start online application for this yesterday.[00:09:18]
Andrea: Okay, so that is for music schools that employ teachers but someone who has independent contractors would not be eligible for that, is that correct?
Scott: Well here is the interesting thing is that it’s for any small business and so you could be set up as a corporation, you could be set up as an LLC, you could be a sole proprietor where you’re the only person, you could even just be an independent contractor. So it kind of runs the gamut for what a small business is. If you are impacted by the coronavirus and it had an impact on your earnings, you’d be eligible for this just as anybody with a schedule C.[00:09:55]
Andrea: Okay. I know there’s a lot of money but not a real lot of money available for this. How are they determining who gets it?
Scott: It’s first come, first serve. You don’t want to wait. There are $349 billion allocated to this and some people think it’s going to run out within the next couple of weeks. There’s mad grab for the cash and in fact, this is coming out so fast that the SBA hasn’t even written the policies yet for this. We don’t expect the policies to be around until the 13th to the 15th of this month when they actually have this in place even though you can apply now for the funds. So you don’t want to wait on this. You definitely want to apply for it first come, first serve. You do have to have those expenses in the file in eight weeks after you received the money. And the loan is not automatically forgiven. You have to apply for a forgiveness. You have to submit an application where you document how you spent the money you received.
Currently, whatever bank you go to, you’re still going to have the same application which is available online. I’ll include the link to that as well and that application is just a two-page application with two pages of instructions. They want to know what your average payroll is. You multiply that by 2.5 months and that’s the amount you can borrow.
Scott: So this is a huge benefit for business owners and then, lastly, there’s a fifth part of the CARES Act that I wanted to talk about which is called the Employee Retention Credit. This is not for people who are self-employed. This is only if you have employees. But the way the employee retention credit works is you get a tax credit for 50% of the income per employee up to $10,000 a year. So this would mean that you could get up to a $5,000 tax credit for each employee that you keep. Now you have to choose one or the other–the employee retention credit or the payroll protection program. You can’t do both. It has to be one or the other, but if you keep the employee retention credit, then you basically will be looking at a $5,000 tax credit.
Now where would you be better off doing this? If over two and a half months you have part-time employees who would make less than $5,000 but who will make more than $10,000 from March 12 to the end of the year, then you would get a larger tax credit by doing the employee retention credit than you would by doing the PPP.[00:12:21]
Andrea: Okay, and what is the reason for offering both of those? Is it just to make options for different categories of people, of businesses?
Scott: Sure! Some of it is going to be depending on how your business was or was not impacted. So for the employee retention credit, this is specifically for ones where you’ve had a larger impact. The small business loans, really, is going to be more for everyone. But there are definitely some overlapping programs. They’re just shoveling money out the door. The way I can explain it is they’re just shoveling money out the door to get it in the hands of people to make sure that we can pay our bills and that the economy can hopefully stay afloat and that when the coronavirus leaves, everyone can go back to work, that there’s going to be jobs waiting for people.[00:13:07]
Andrea: Yeah, and to give people perspective, so we’re talking about the US here, this CARES Act is 2.1 trillion dollars, is that right?
Andrea: In total? And the whole GDP or the whole value of the US economy in 2019 was 21 trillion or something, so close to 10% of our entire nation’s annual GDP pushed out in government stimulus to this. That’s a huge, huge thing.
Scott: That’s an enormous amount of money and I think that what the government is really looking at this time around was they wanted the money to go to people. And when we think back to 2008-2009, there was so much outrage that all the money went to big corporations, to these major banks that they were bailing out Wall Street. I think Congress really didn’t want to have that perception this time. They didn’t want to bail out the major companies. They wanted to bail out the small companies. They wanted to bail out the mom-and-pops. They wanted to bail out the people who are self-employed. So it’s going to be up to us to make sure that we take advantage of these things. The check should be coming automatically but some of the other things like the Payroll Protection Program you’ve got to apply for.
So it takes a little bit of time, not too complicated, but you definitely want to educate yourself on what your options are and make sure that you’re getting every benefit that you can. No one is going to come to you and ask you to apply for the unemployment benefits if you’re impacted but there should be a way, hopefully, that we’ll know about soon if you are self-employed or an independent contractor to apply for those benefits.[00:14:40]
Andrea: Okay, so when we get these checks in the mail, like everyone is going to get the initial credit, that $1,200 check if you’re single or more if you’re married and have dependents, but this is a stimulus package. So what should we be doing with that check?
Scott: Right. Well, some of this goes back to basic financial planning. Everyone needs to have three to six months of emergency funds. You need to have three to six months set aside in an emergency fund to cover your expenses. And most people think, “Well, I’m never gonna use that,” and you know what? You might still be healthy and this could happen to you and to the economy, so if you have three months you might already be looking at, “Wow, I’m gonna burn through that. I’m gonna burn through that pretty fast.” And we’re coming into summer and usually summer is less teaching and less gigs and less income, so I certainly think this will be a smart move to make sure that you’ve bolstered your emergency fund to help weather any reduction in income for the rest of the year.
And I’d love to tell you to put it into a Roth IRA and invest for your future. But at this point, cash is kind of king. You can always do that Roth investment in December if the economy is straightened out and everything is back to normal, but for now, I think you definitely want to hold on to that, pay all of your bills, and just make sure that you’re going to remain solvent. If you are having trouble meeting some of your bills, keep in mind that a lot of banks, credit card companies, auto lenders and other places are now aware of the problem and are offering some kind of forbearance so you might be able to delay or skip a month or two of payments, same with student loans.[00:16:15]
Andrea: Okay, yeah, so there are options to ask about things like that and change your cash flow if you need to postpone some of those payments.
Scott: Yeah. I don’t think people are going to have any trouble figuring out what to do with that $1,200. I think a lot of it is going to be spoken for before it gets here. I mean, I know from just the few gigs I have that I lost way more than $1,200 in income in just April.
Andrea: Sure, yeah. And at what point would you say like if someone’s got their three to six months of savings for emergency fund and maybe their income didn’t get impacted. I know a lot of teachers moved online pretty seamlessly. Some lost a few students but a lot have really been okay. And are there ways to use that money, maybe we need to be spending it and to bolster some of our other small businesses in the area. Are there ways that you recommend spending it?
Andrea: Is that a bad question?[Laughter]
Scott: Usually people have no trouble spending the money. Assuming you’re going back to your normal life would be the best way to help the economy. So whatever you were doing before this in terms of eating out at your local restaurants and going shopping and spending your money with other local businesses, I know that they would also very much appreciate it. Certainly, if you’re doing well through this, this is a good time to also revisit your financial plan. Make sure you’re taking care of things like your credit card debt and you got your state plan in place. Look at if you need life insurance for your children. Think about what retirement planning you should be doing. There are plenty of opportunities for you to invest that money prudently too if you’ve decided you don’t want to spend it.[00:17:54]
Andrea: All right Scott. Is there anything else we haven’t covered that you’d like to talk about before you go?
Scott: I just want to encourage everybody to stay positive and remember that we’re going to get through this. It’s certainly a very unprecedented time in our country’s history and it’s surprisingly stressful. I never thought I’d feel anxiety about going to the grocery store before and think if I’m going to die because I went to the grocery store, but this too shall pass and musicians are resilient and tech-savvy and can figure things out and adapt and learn. So I just encourage you to be patient and this is also a great time to revisit your financial plan. I find that the time I’ve had here kind of in isolation has been really good for reflection and thinking about what my goal should be for the rest of the year and maybe thinking about what the values are that you want to have and what’s most important to you going forward. Hopefully, this will be a good experience maybe when we’re all done with it.
Andrea: I think we’ll get a lot of reflection out of it.
Scott: And I’ll bet everybody is going to be so happy to come back to their music lessons after having done it on Zoom for three months and not being able to hear very well. Figure out how happy you’ll be when that’s over, too.
Andrea: Definitely. All right, well thanks so much Scott!
Scott: Thanks for having me. If you have any questions you can reach me at FinanceForMusicians.com and I try to reply to every email that I can.
Andrea: All right, we’ll post that in the show notes. Thank you.
Scott: Thanks for having me. I appreciate it.[00:19:17] [End of interview]
Andrea: The economic impact of pressing pause on business operations for coronavirus is huge.
The point of this stimulus package is to try to lessen that impact by stimulating the economy, by putting cash back in people’s pockets so they can return to their normal spending patterns as quickly as possible.
Scott mentioned that the CARES Act was passed very quickly and a lot of the processes are not in place yet to handle the applications, BUT I want to reiterate the importance of getting your applications in ASAP. Like, today.
You can find the links Scott mentioned in the show notes at musicstudiostartup.com/episode036.
These certainly are unprecedented times. Scott talked about this being a time of reflection and I’ve really enjoyed sharing that process with many of you, as you’ve gone through the Vision & Values course.
If you find yourself trying to bring meaning to your teaching or business, I encourage you to go through this free course. You can find it in the show notes, too, at musicstudiostartup.com/episode036.
That’s all for today, I’ll be back next week.