If you're self-employed, the coronavirus (COVID-19) pandemic is likely impacting your business. Here's what tax relief is available under the major coronavirus relief legislation packages.
- Tax credits for paid sick and family leave
- How do I calculate and claim these tax credits?
- Employee Retention Credit
For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.
The COVID-19 pandemic has left self-employed workers, including freelancers and independent contractors, unable to work or facing a significant drop in revenue. Fortunately, the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief and Economic Security (CARES) Act offer some self-employed tax credits that can help.
While you'll find an overview of how these self-employed tax credits can benefit you below, for additional guidance on coronavirus relief, be sure to check out our Self-Employed Coronavirus Relief Center to get up-to-date information and tax advice.
Tax credits for paid sick and family leave
The FFCRA provides two self-employed tax credits to help cover the cost of taking time off due to COVID-19. While most of the text in these laws apply to businesses with employees, it also applies to self-employed individuals.
The tax credit for paid sick leave applies to eligible self-employed taxpayers who are unable to work (including telework or working remotely) due to:
- Being subject to a federal, state, or local quarantine or isolation order due to COVID-19,
- Being advised by a health care provider to self-quarantine due to COVID-19, or
- Experiencing COVID-19-related symptoms and seeking a medical diagnosis.
If you meet the above requirements, you would be eligible for qualified sick leave for each day during the year that you were unable to work for the above reasons (up to 10 days). The tax credit is worth the lesser of $511 per day or 100% of your average daily self-employment income for the year per day. The only days that may be taken into account 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.
Under the expanded Family and Medical Leave Act (FMLA) provision of the FFCRA, you would be eligible for qualified family leave for each day that you were unable to work because you were caring for someone else impacted by COVID-19 (up to 10 days), or for each day you were unable to work because your child's school or child care provider was closed or unavailable due to COVID-19 (up to 50 days). You can claim a tax credit for the lesser of $200 per day or 67% of your average daily self-employment income for the year per day.
How do I calculate and claim these tax credits?
"Average daily self-employment income" is calculated as your net earnings from self-employment during the tax year, divided by 260. You can estimate your available credit using our Tax Credit Estimator.
You can claim a credit for both qualified sick leave and qualified family leave, but not both for the same time periods.
You can claim both the tax credit for paid sick leave and the tax credit for paid family leave on your 2020 Form 1040 tax return. However, you don't have to wait until the next tax-filing season to benefit from these credits. You can estimate your credits using our Tax Credit Calculator, then simply reduce your quarterly estimated income taxes by that amount.
Employee Retention Credit
If you have employees, the Employee Retention Credit can help you cover the cost of keeping idle workers on your payroll during the pandemic. The tax credit is worth half of what you spent on wages and employee health plan costs after March 12, 2020, and before January 1, 2021, up to $10,000 per worker.
To qualify, your business must have one of the following:
- A full or partial suspension of its operations due to governmental orders limiting commerce, travel, or group meetings due to COVID-19.
- A sufficient decline in gross receipts compared to 2019. Decline begins when there is a 50% drop in a calendar quarter compared to the same quarter in the prior year. The decline doesn't end until a calendar quarter reaches 80% of the same prior year quarter. This means that if a quarter drops to less than 50% and the following quarter is at 70%, there is still a decline.
You can claim this credit by reducing your payroll tax deposits. If your employment tax deposits aren't enough to cover the full credit, you can get an advance from the IRS by filing Form 7200. If you received a Paycheck Protection Program loan, you can't also claim the Employee Retention Credit. You can claim both the paid leave credits and the Employee Retention Credit but not on the same wages.
Social Security tax deferral
If you have employees, you can defer the 6.2% employer portion of Social Security tax for March 27, 2020 through December 31, 2020. Self-employed taxpayers can also postpone the payment of 50% of the Social Security portion of their self-employment tax for the same period.
This is a deferral rather than forgiveness, so those amounts will eventually need to be repaid. Half of the deferred amount is due on December 31, 2021, and the other half is due on December 31, 2022.
If you're not sure whether these credits apply to you, our Tax Credit Calculator, available in our Self-Employed Coronavirus Relief Center, will walk you through determining which self-employed tax credits you can take and estimate your potential benefits.
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