Self-employed individuals who could not work due to certain COVID-19 related circumstances between January 1, 2021, and September 30, 2021, may qualify for refundable qualified sick and family leave tax credits. These credits are available under the Families First Coronavirus Response Act (FFCRA) and the American Rescue Plan Act (ARPA). The credits are designed to relieve self-employed individuals who could not work due to personal sickness or caring for a family member due to COVID-19.
Claiming the Credits
The Internal Revenue Service (IRS) has provided instructions for Form 7202, which self-employed individuals must use to claim the refundable tax credits. Each eligible self-employed individual must file a separate Form 7202. The maximum tax credit is $5,110 for qualified sick leave wages and $10,000 for qualified family leave wages. The credits are refundable, meaning that if the credit exceeds the self-employed individual’s tax liability, the IRS will issue a refund for the difference.
It is worth noting that the credits might make it worthwhile for self-employed individuals to amend their income tax returns for 2020 or 2021. The credits are valuable because they are refundable and can provide up to $15,110 in tax relief. However, self-employed individuals should consult with a tax professional to determine if amending their returns is best for their circumstances.
Determining Eligibility
Eligibility for Self-Employed Individuals
Self-employed individuals may be eligible for tax credits for qualified sick and family leave under the Families First Coronavirus Response Act (FFCRA) and the American Rescue Plan Act of 2021. To be eligible, the individual must have been unable to work or provide services due to a quarantine order, experience COVID-19 symptoms and seek a diagnosis, care for someone else who is subject to a quarantine order or experiencing COVID-19 symptoms and seek a diagnosis, or care for a child whose school or place of care is closed due to COVID-19.
Calculating Qualified Sick and Family Leave Credits
To calculate the equivalent amount of qualified sick leave, the self-employed individual must use their net earnings from self-employment for the taxable year, up to a maximum of $511 per day for up to 10 days, for a total of $5,110. If the individual cares for someone else, the maximum is $200 per day for up to 10 days, for a total of $2,000.
To calculate the equivalent amount of qualified family leave, the self-employed individual must use their average daily self-employment income for the taxable year, up to a maximum of $200 per day for up to 50 days, for a total of $10,000.
Filing for the Credits
Form 7202: Credits for Sick Leave and Family Leave
Eligible self-employed individuals must file Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, to claim the refundable tax credits for qualified sick and family leave. Each individual must file a separate form.
It is important to note that the tax credits are refundable, meaning that if the amount of the credit exceeds the individual’s income tax liability, the excess will be refunded to the individual.
Self-employed individuals should also be aware of the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act, which provide additional paid leave for COVID-19-related reasons. These acts are separate from the FFCRA and have eligibility requirements and credit calculations.
Overall, self-employed individuals should carefully review the eligibility requirements and credit calculations for the FFCRA and other COVID-19-related paid leave acts and consult with a tax professional if necessary to ensure they claim the correct tax return credits.
Utilizing Tax Credits
Reporting Credits on Tax Returns
Self-employed taxpayers who claim sick and family leave tax credits should report them on their Form 1040, U.S. Individual Income Tax Return. The credits should be entered on Schedule 3, Line 10, and the amount of the credits should be identified on the appropriate line. Taxpayers should also attach Form 7202, which calculates the refundable credits.
Documentation and Compliance Requirements
To claim the sick and family leave tax credits, self-employed individuals must maintain appropriate documentation supporting their eligibility. This documentation should include records of the qualified sick leave wages and family leave wages paid during the applicable period. Self-employed taxpayers should also maintain records that demonstrate their compliance with the requirements of the Internal Revenue Code.
Maximizing Tax Benefits and Refunds
Self-employed taxpayers can maximize their tax benefits and refunds by taking advantage of the sick and family leave tax credits. These credits can significantly relieve self-employed individuals facing financial challenges due to the COVID-19 pandemic. Taxpayers can use IRS Form 7202 to calculate their refundable credits and the tax credit estimator to determine the amount of credits they are eligible to receive.
By claiming sick and family leave tax credits, self-employed taxpayers can reduce their tax bills and increase tax refunds. These credits can also help small and midsize employers provide paid sick and family leave to their employees. In addition, the Tax Relief Act of 2020 allows self-employed individuals to defer their social security tax payments, providing additional financial relief.
Freelancers and contractors eligible for the sick leave credit should take advantage of this tax credit to reduce their tax liability and increase their refunds. Self-employed taxpayers who receive a Form W-2c, Corrected Wage and Tax Statement, reporting corrected amounts of sick and/or family leave wages in Box 14 should use the diagnostic test to determine their eligibility for the ERC.
The American Rescue Plan Act of 2021 extended the sick and family leave tax credits for wages paid between April 1, 2021, and September 30, 2021. The Act also provides tax credits for childcare expenses and expands the eligibility criteria for the sick and family leave tax credits. Taxpayers can use the tax credit calculator to determine the amount of credits they are eligible to receive.
FAQs
How can self-employed individuals calculate the sick and family leave tax credit?
Self-employed individuals can calculate the sick and family leave tax credit by determining the amount of qualified sick and family leave wages they paid themselves. The credit amount is equal to the lesser of the qualified leave wages paid, or the maximum credit amount, which is $5,110 for qualified sick leave wages and $12,000 for qualified family leave wages. The credit can be claimed on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals.
What are the eligibility requirements for self-employed individuals to claim the sick and family leave tax credit?
To be eligible for the sick and family leave tax credit, self-employed individuals must have carried on a trade or business in 2020 or 2021. They must have been unable to work or telework due to COVID-19 related reasons. Additionally, they must have been subject to a COVID-19 quarantine order or advised by a healthcare provider to self-quarantine, experienced COVID-19 symptoms and were seeking a medical diagnosis, or were caring for an individual who was subject to a COVID-19 quarantine order or advised by a healthcare provider to self-quarantine.
Which IRS form must self-employed individuals use to claim the sick and family leave tax credit?
To claim the sick and family leave tax credit, self-employed individuals must use Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. They must attach the completed form to their income tax return.
Are there any changes to the sick and family leave tax credit for self-employed individuals in 2023?
Currently, there are no changes to the sick and family leave tax credit for self-employed individuals in 2023. However, it is important to keep an eye on any updates or changes made by the IRS.
How does the sick and family leave tax credit for self-employed individuals differ from previous years?
The sick and family leave tax credit for self-employed individuals was introduced in 2020 as part of the Families First Coronavirus Response Act (FFCRA), and was extended through 2021 by the American Rescue Plan Act (ARPA). The credit was not available in previous years.
Can self-employed individuals claim the sick and family leave tax credit for COVID-19 related absences?
Yes, self-employed individuals can claim the sick and family leave tax credit for COVID-19 related absences, provided they meet the eligibility requirements and have paid themselves qualified sick and/or family leave wages.
