Editor: Alexander Semerano, CPA
Two valuable refundable income tax credits available to self-employed taxpayers may have been missed in 2020 and 2021. The IRS, continuing professional education courses, and tax preparation software systems gave little attention to an interesting fact: Besides being available to employers with fewer than 500 employees, tax credits for paid sick leave (Sec. 3131) and paid family leave (Sec. 3132) are also applicable to selfemployed taxpayers. These tax credits are for wages (or, for self-employed taxpayers, prorated net annual earnings) with respect to days of work missed due to COVID-19 illness, quarantine, or family care absences.
The credits might make it worthwhile to ask self-employed clients if they were off work due to sick or family leave in 2020 or 2021 (or both) and, if indicated, then amending their income tax returns for those years. These are valuable credits because they are refundable for up to $5,110 for qualified sick leave wages and up to $10,000 or $12,000 for qualified family leave wages (or, in either case, net self-employment earnings). Expiration of the general statute of limitation for amending timely filed and paid 2020 returns, April 15, 2024, is fast approaching, so CPAs should have these conversations with self-employed clients soon.
The credits were available for qualified wages paid and self-employed earnings from April 1, 2020, to March 31, 2021, under the Families First Coronavirus Response Act, P.L. 116-127 (as amended by the COVID-Related Tax Relief Act of 2020, P.L. 116-260); credits in modified form were available from April 1, 2021, to Sept. 30, 2021, under the American Rescue Plan Act of 2021, P.L. 117-2. See frequently asked questions in IRSFact Sheet 2022-15for the later period and, for the earlier periodFact Sheet 2022-16, particularly the portions of both fact sheets headed “Specific Provisions Related to Self-Employed Individuals.”
The sick and family leave credits are generally available in the case of employees or self-employed individuals under any of the following conditions (with some variation between the earlier and later period):
The individual was under a federal, state, or local quarantine order related to COVID-19.
The individual was advised by a health care provider to self-quarantine due to concerns about COVID-19.
The individual (a) was experiencing COVID-19 symptoms and sought a medical diagnosis; (b) had been exposed to COVID-19 and was seeking or awaiting results of a test for, or medical diagnosis of, COVID-19; or (c) was obtaining immunization related to COVID-19 or recovering from any injury, disability, illness, or condition related to it.
The individual was caring for an individual who was subject to a federal, state, or local quarantine or isolation order relating to COVID-19 or was advised by a health care provider to self-quarantine due to concerns related to COVID-19.
The individual was caring for their child if, due to COVID-19 precautions, the child’s school or place of care was closed or child care provider unavailable.
The individual experienced any other substantially similar conditions specified by the U.S. Department of Health and Human Services.
For situations 1, 2, or 3 (caring for self), thesick leavecredit is equal to qualified sick leave wages (or earnings) paid (or apportioned) at the individual’s regular rate of pay, up to $511 per day for a maximum of 10 days over a period of two weeks (80 hours), for an aggregate maximum of $5,110. For situations 4 through 6 (caring for others), the credit is equal to up to 10 days over a period of two weeks (80 hours) at two-thirds the individual’s regular pay rate (or, if higher, any applicable federal, state, or local minimum wage), up to $200 per day and $2,000 in the aggregate.
Thefamily leaveprovision provides a credit for up to 50 days over 10 weeks of qualified family leave wages (or earnings) of up to $200 per day for qualified family leave wages, with an aggregate limit of $10,000 in the first credit period. The maximum wage or earnings period was increased to up to 12 weeks and the aggregate maximum qualified family leave wages (or earnings) to $12,000 for the second credit period. Qualified family leave wages (or earnings) are paid (or apportioned) at a rate two-thirds of the individual’s regular wages or earnings.
The credit is reported on Form 7202,Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals,with the 2020 and 2021 individual tax returns. Self-employed individuals must apply the daily credit amounts by calculating their average daily selfemployment income, which is their net earnings for the tax year divided by 260. Taxpayers may elect in some cases to use their prior-year net self-employment earnings to figure their credits.
Example:J, a self-employed barber, was home sick for at least 10 days in July 2020 due to COVID-19 (either required or self-quarantine). Previously, in April and May 2020, he was home taking care of his dependents due to a required school closure (61 days, but limited to 50). Taking into account both qualifying events, ifJhad net earnings for 2020 of $25,000, his combined credit would be $4,160 (see sample Form 7202here, reporting a sick leave credit of $960 and a family leave credit of $3,200). IfJearned $50,000, the credit would be $8,370; $100,000 earnings would produce a credit of $13,850 (reaching the maximum credit for care for dependents out of school). If he earned $132,730,Jwould reach the maximum credit of $15,110.
IfJcontracted COVID-19 again in 2021 and/or his dependents were out of school due to required closing and he took days off to care for them, he is eligible for similar credits again in 2021.
As noted earlier, many self-employed individuals who were eligible to claim these credits may have failed to do so. Out of four continuing education tax update courses reviewed, none touched on these credits for self-employed taxpayers. Out of three tax software systems examined, none prompted or had an explicit place for preparers to ask whether, or enter amounts if, self-employed taxpayers had missed work due to coronavirus illness for either themselves or their family. Nor did the systems direct preparers to Form 7202. Unless the tax preparer was aware of the credit and knew to go to Form 7202, the refundable tax credit could have been missed.
The table “Overview of Sick and Family Leave Credit for Self-Employed Taxpayers,” below, summarizes the credits’ availability to self-employed taxpayers.
Additional sick or family leave wages received from an employer
If the self-employed taxpayer also held a job with an employer and received any employer-paid sick and family leave wages, those are reported on the Form W-2,Wage and Tax Statement, in Box 14, or on a separate statement received with the Form W-2 and will reduce the sick and family leave credits for self-employment.
Statute of limitation
Based on the statute of limitation, the opportunity to amend for the purpose of seeking the refundable credit on the 2020 tax return for sick or family leave that occurred between April 1, 2020, and Dec. 31, 2020, expires April 15, 2024, for returns filed by the due date. Returns with an extended due date may have a later deadline, as may those filed within the postponement period granted by Notice 2021-21 to May 17, 2021 (with “lookback” period relief granted by Notice 2023-21).
For sick and family leave that occurred between Jan. 1, 2021, and Sept. 30, 2021, an amendment to claim the credit is eligible to be filed up to April 18, 2025.
Example scenarios — Form 7202
Sample Forms 7202 provide examples of the credit with self-employment earnings of$25,000and$200,000in 2020.
Editor Notes
Alexander Semerano, CPA, is a partner with Pease Bell CPAs in Cleveland.
For additional information about these items, contact Alexander Semerano at taxclinic@cpamerica.org.
Unless otherwise noted, contributors are members of or associated with CPA America.
