Self Employed Sick and Family Leave Credits (Explained)
Updated: Oct 23, 2021
2020 was the year of all people being tax people. There was and continues to be a lot of misinformation about taxes going around on the internet, making it more difficult for taxpayers to know what deductions they can and cannot take. It’s even harder for self employed taxpayers trying to determine what credits, let alone refundable credits they can take advantage of on their 1040 despite all people being tax people. Tik Tok is all a buzz with posts making statements such as “the IRS wants you to take your sick days and will even pay you for them.” I’ve been sent different posts repeatedly that have information missing, so I wanted to fill in the gaps of missing information.
Self-Employed Taxpayers that couldn’t work or telework due to the Covid-19 may be able to find relief of up to $511 a day. The Families First Coronavirus Response Act (FFCRA) extended this relief beyond employers to self-employed taxpayers on Form 7202 This tax credit is refundable, which is HUGE. Tax credits zero out a taxpayer’s liability dollar for dollar and a refundable credit turns into a tax refund once the liability has been cancelled out. So, let’s look at who is eligible, the credit for sick leave, the credit for family leave, and the credit limitations.
Eligible Self-Employed Taxpayers
The IRS isn’t just giving money out without good reason. Documentation is going to be key in showing that you are eligible for the sick leave credit and family leave credit. So let’s see who is eligible:
Taxpayer must be conducting a trade or business
Eligible to receive paid sick leave under the FFCRA if the taxpayer was an employee of an employer (other than themselves)
Eligible to receive paid family leave under FFCRA if the taxpayer was an employee of an employer (other than themselves)
The taxpayer conducts a trade or business as a self-employed individual if they are a sole proprietor and with their primary purpose for engaging in the activity is to generate income and a profit. The taxpayer must also be involved in the activity with continuity and regularly.
Again, documentation is going to be key in determining if claiming these credits and showing the taxpayer is qualified as a self-employed taxpayer.
Credit for Sick Leave
Self-Employed taxpayers qualify for the credit for sick leave if they were unable to perform services from April 1st – December 31st, 2020 as a self-employed individual for any of the following reasons:
Subject to a federal, state, or local quarantine/isolation order related to Covid-19
Was advised to by a health care provider to self-quarantine due to concerns related to Covid-19
Was experiencing symptoms of Covid-19 and seeking a medical diagnosis
Was caring for an individual who was subject to federal, state, or local quarantine/isolation order related to Covid-19
Was caring for an individual who was advised by a health care provider to self quarantine due to concerns related to Covid-19
Was caring for a son or daughter because their school or childcare was closed OR the childcare provider for that child was unavailable due to COVID-19 precautions.
If the taxpayer qualifies for any of reasons 1-3 they may receive up to $511 per day, limited to 10 days in any year. This means a refundable credit of $5,110. If the taxpayer qualifies for any of the reason 4-6 they may receive a credit of up to $200 per day, limited to 10 days. This means a refundable tax credit of up to $2,000. Only 5 states did not have some partial or full stay at home order as a result of Covid-19 during some part of 2020.
Credit for Family Leave
Self-Employed taxpayers qualify for the credit for family leave if they are unable to perform services from April 1st – December 31st, 2020 as a self-employed individual because the taxpayer had to provide care to a son or daughter. Taxpayers qualify if:
The son or daughter was under 18 years old
School or place of care was closed
Child care provider was unavailable due to reasons related to Covid-19
This credit is limited to 50 days and has a $10,000 annual limit. This is going to provide a major relief for self-employed taxpayers that could not work because they could not find childcare for their minor children.
$15,110 refunds for all self-employed taxpayers would be nice! But that just simply won’t be the case this tax season as self-employed individuals affected by Covid-19 begin to file their taxes. There are limits to how much of the credit may be claimed and these will be figured on Form 7202. The limitations are:
Self-employment income divided by 260 for purposes of the $511 per day limit
67% of that limit for purposes of both the $200 per day limits
Taxpayer also received wages as an employee and receiving sick or family leave wages
Self-employed taxpayers can claim up to $15,110 in these credits however, to max out the credits the taxpayer must net (Gross income – Deductions) $132,860 in self-employment income to qualify for this amount, and $77,740 to max out one of the $200 per day tax credits.
If a self-employed taxpayer received sick or family leave wages during this time then their credit is reduced by the amount of wages received as an employee for sick or family leave. This computation is made on Form 7202 as well.
All people are taxpayers, not tax people so make sure that you have all of your i’s dotted and t’s crossed when it comes to filing your taxes this year. There are so many changes due to the FFRCA and you don’t want to get left behind, paying more in taxes or get in trouble with the IRS. If you were unable to work in your business during 2020 for reasons related to Covid-19 make sure your preparer is aware of Form 7202 and the benefits you are entitled to this year. If you’re not sure where to start with choosing a preparer here is an article to help you: Three Things to Consider When Choosing a Tax Preparer So You Don't End Up With Tax Trouble.
Was your business affected by Covid-19 in 2020? These credits may be an answer to prayers for you. Let me know down below in the comments!
Timalyn S. Bowens EA is America's Favorite EA and Louisville's Tax Expert that will work hard to find a legal solution that is customized for you! As an Enrolled Agent licensed through the Internal Revenue Service Timalyn is able to fight the IRS for taxpayers in all 50 states.
When you are facing questions regarding your personal or business taxes, working with a professional makes all the difference. At Bowens Tax Solutions, we serve our Louisville-area neighbors by providing the tax services and knowledge needed to succeed. We are here to assist you with your tax issues and preventative care. Visit our website at www.bowenstaxsolutions.com for more information.