By Denise M. Holmes, CPA, Tax Partner | Healthcare and Medical Services Industry Team
Self-Employed? You may eligible for a COVID-19 related tax credit
With over 27 million COVID-19 cases in the U.S., it’s likely that when you ask someone, “How has your year been?,” they will respond by sharing (1) their own COVID-19 illness, (2) their exposure and quarantine, and/or (3) their new and sometimes arduous role in their child’s virtual education.
It’s also likely if you work for yourself rather than an employer, that you have faced unique business and financial challenges due to the pandemic. Help is now available. Eligible self-employed individuals may be entitled to sick leave and/or family leave tax credit on their 2020 IRS Form 1040.
Who is eligible for the self-employed Individual sick leave and/or family leave Tax credit?
An eligible self-employed individual is an individual who regularly carries on a trade or business and would be entitled to receive qualified sick leave wages or qualified family leave wages if the individual were an employee of an eligible employer that is subject to the requirements of the Families First Coronavirus Relief Act (FFCRA).
For eligible self-employed individuals who are unable to work or telework because the individual:
- Is subject to a Federal, state, or local quarantine or isolation order related to COVID-19;
- Has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
- Is experiencing symptoms of COVID-19 and seeking a medical diagnosis,
the qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in the applicable trade or business for one of the three above reasons, multiplied by the lesser of $511 or 100% of the “average daily self-employment income” of the individual for the taxable year.
The maximum number of days a self-employed individual may consider in determining the qualified sick leave equivalent amount is 10.
For an eligible self-employed individual who is unable to work or telework because the individual:
- Is caring for an individual who is subject to a Federal, state, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
- Is caring for a child if the child’s school or place of care has been closed, or childcare provider is unavailable due to COVID-19 precautions; or
- Is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor,
The qualified family leave equivalent amount is equal to the number of days (up to 50) during the taxable year that the individual cannot perform services in the applicable trade or business for one of the three above reasons, multiplied by the lesser of $200 or 67% of the “average daily self-employment income” of the individual for the taxable year.
The average daily self-employment income is an amount equal to the net earnings from self-employment for the taxable year divided by 260. A taxpayer’s net earnings from self-employment are based on the gross income that he or she derives from their trade or business minus ordinary and necessary trade or business expenses.
The only days that may be considered in determining the qualified sick leave equivalent amount are days occurring during the period beginning on April 1, 2020, and ending on December 31, 2020.
What IRS Form is required to claim the self-employed Individual sick leave and/or family leave Tax credit?
A self-employed individual will determine the sick and family leave equivalent tax credit to which he or she is entitled by completing Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals.
Self-employed individuals should maintain documentation establishing their eligibility for the credits as a self-employed individual to substantiate their eligibility.
The rules are strict, but the resulting credit can be significant.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.