Is a self-employed taxpayer eligible for a tax credit for the lost workdays due to Covid?
Question of the Week 2/17/21: How do the self-employed calculate tax credits for COVID-19 sick and family leave?
Q: Is there a self-employed COVID-19 sick and family leave tax credit?
Li is a self-employed plumber. In July of 2020, just as his business was recovering from the shutdown, he had to stay home for eight days to care for his wife because she had COVID-19. Thankfully she recovered quickly, and he was able to return to work after getting other care for her.
As a self-employed taxpayer, is Li eligible for a tax credit for the eight lost workdays? His 2020 net profits are about $40,000.
A: Yes, self-employed taxpayers are eligible for credits equivalent to the credits employers receive when their employees can’t work because of COVID-19 related reasons.
Yes, it appears that Li is eligible for an equivalent credit for sick leave.
Under the FFCRA, a self-employed taxpayer, including a partner in a partnership, may be eligible for credits for sick leave and family leave. These are equivalent to the credits employers may receive when their employees can’t work for coronavirus-related reasons.
An eligible self-employed individual is one who:
- Regularly carries on a trade or business within the meaning of §1402 (generally, the section that defines net earnings from self-employment for SE tax and other purposes), and
- Would be eligible to receive qualified sick leave wages or family leave wages if the individual were an employee of an eligible employer (other than the business owner).
COVID-19 related circumstances
An equivalent credit for sick leave is available for an eligible individual who was unable to perform services because of coronavirus-related circumstances:
Category 1. 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,
Category 2. 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 child care 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.
Maximum self-employed equivalent tax credit for COVID-19 sick leave
For a taxpayer in Category 1, the credit is equal to the lesser of $511 per day or 100% of average daily self-employment income per day. For a taxpayer in Category 2, the credit is equal to the lesser of $200 per day or 67% of average daily self-employment income per day.
Average daily self-employment income means net earnings from self-employment for the current or prior tax year divided by 260. In most instances, net earnings from self-employment will be the amount on Schedule SE, line 6.
A maximum of 10 days can be used for the COVID-19 paid sick leave credit for the period April 1, 2020 through March 31, 2021. For instance, Li used eight days to care for his wife. If he needs to stay home for another coronavirus-related reason before March 31, 2021, he could receive a credit for two more days of qualified leave when he files his 2021 tax return.
Applying the credit formula to Li’s situation, assume that Li had $40,000 net earnings from self-employment in 2020 and is using eight days for the credit. Because he stayed home to care for his wife, the Category 2 calculations apply.
Figure the credit as follows:
- Average daily self-employment income: $154 ($40,000 net earnings from self-employment ÷ 260).
- Credit based on average income: $825 [($154 × 67%) × 8 days]
- Credit based on daily maximum: $1,600 ($200 Category 2 × 8 days)
Since the credit based on average daily self-employment income is smaller than $1,600, Li will receive a sick leave equivalent credit equal to $825. If Li’s 2019 net earnings from self-employment were higher than in 2020, he could use the 2019 amount to calculate the credit instead, subject to the daily limit of $200 for Category 2 leave.
Claiming the self-employed tax credit for COVID-19 sick leave
The credit is calculated on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. It carries to line 12b of Schedule 3 of Form 1040, Additional Payments and Credits, and to line 31 of Form 1040. The credit will serve to increase the tax refund or decrease the balance due.
Calculating and claiming the self-employed tax credit for COVID-19 family leave
As mentioned earlier, self-employed taxpayers are also eligible for an equivalent family leave credit if the taxpayer is unable to work in order to provide care to a son or daughter when the child’s school or day care is closed for coronavirus-related reasons.
The credit is figured by multiplying the number of days (to a maximum of 50 days for the period April 1, 2020 through March 31, 2021) by the lesser of $200 per day or 67% of average daily self-employment income per day. This credit is also calculated on Form 7202.
See the Form 7202 instructions and Specific Provisions Related to Self-Employed Individuals (starts with FAQ 60) for more information on equivalent credits.