The Families First Coronavirus Response Act (FFCRA) was enacted in March of 2020. It was one of the now many acts passed by Congress in an effort to ameliorate the effects of Coronavirus on the economy and individual people. The FFCRA created a tax credit for employers to incentivize businesses to continue to pay employees who were taking sick leave. Interestingly, this tax credit can also be used by self-employed individuals.
It is important to note that while the concept of the sick leave credit is intuitively tied to payroll, a self-employed individual does not need to be on a payroll to receive the credit. In other words, it is not necessary for a W-2 to have been filed or received. For a self-employed individual it is only necessary that they have income that is subject to self-employment tax. Common examples of such income streams are Sch C businesses, Sch F farms, and businesses structed as active partnerships.
There are two components of the credit: the sick leave component and the family leave component. The sick leave component is based upon the taxpayer being directly affected by Coronavirus, or the taxpayer caring for another person affected by Coronavirus. The family leave component is based on the taxpayer losing access to school or childcare for dependent children of the taxpayer because of Coronavirus.
The sick leave component of the credit is calculated as follows:
The amount of the credit is equal to the number of eligible days (maximum of ten) multiplied by the lesser of the following:
- $511 per day for self-employed individuals sick or quarantined / $200 per day for self-employed individuals caring for another person who is sick or quarantined.
- 100% of daily self-employment income for self-employed individuals sick or quarantined / 67% of that amount for self-employed individuals caring for another person who is sick or quarantined.
The IRS defines sick or quarantined in the following manner:
- 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.
The IRS further defines caring for another person to mean:
- 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.
And, finally, daily self-employment income is simply net earnings from self-employment for the year divided by 260.
The family leave component of the credit is calculated as follows:
The amount of the credit is equal to the number of eligible days (maximum of 50) multiplied by the lesser of the following:
- $200 per day for self-employed
- 67% of that amount for self-employed individuals
The IRS defines an eligible day as a day in which “the employee is caring for the child of such employee if the school or place of care of the child has been closed, or the childcare provider of such child is unavailable, due to COVID–19 precautions”.
The credit is reported on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. This form cannot be filed on its own, it must be attached to Form 1040, U.S. Individual Income Tax Return. In other words, this credit will be calculated at the same time your tax return is prepared.
As in all things, communication is critical. If you are a self-employed individual, it would be prudent to discuss with your tax advisor the effects Covid-19 had on you and your business. At ADKF we provide tax planning and compliance services to a wide array of clients, particularly business owners. We would be happy to provide an initial consultation to you at no charge.