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Self-Employed: “Tax Credits” for Qualified Emergency Family Leave and Sick Leave

The Service has recently issued tax guidance for self-employed individuals wishing to claim the equivalent credit allowed for leave claims under the Emergency Family Leave Act (“EFMLA”) and Emergency Paid Sick Leave Act (“EPSLA”).

Part of a larger Q&A release on the EFMLA and EPSLA, the Service’s Questions 24 and 60-65 address self-employed persons.[1]

While we have restated below the Service’s guidance, covering the seven (7) applicable Q&A’s, it is important to understand that there are two separate benefits for which the Service is granting an equivalent credit:  One is for paid sick leave and the other is for paid family leave.  As the Q&A format toggles between the two and sometimes covers both benefits concurrently, we have sometimes added italicized terms to help follow this distinction.  We have also added some comments, also italicized.

Q&A’s for the Self-Employed

  1. Is a similar tax credit available to self-employed individuals?

Yes.  The FFCRA also provides a comparable credit for self-employed individuals carrying on any trade or business within the meaning of section 1402 of the Internal Revenue Code if the self-employed individual would be entitled to receive paid sick leave under the EPSLA if the individual were an employee of an employer (other than him or herself).

  1. Who is an eligible self-employed individual for purposes of the qualified sick leave credit and the qualified family leave credit?

An eligible self-employed individual is an individual who regularly carries on any trade or business within the meaning of section 1402 of the Code, and would be entitled to receive qualified sick leave wages or qualified family leave wages if the individual were an employee of an Eligible Employer (other than himself or herself) that is subject to the requirements of the FFCRA.

Eligible self-employed individuals are allowed an income tax credit to offset their federal self-employment tax for any taxable year equal to their “qualified sick leave equivalent amount” or “qualified family leave equivalent amount.”

  1. How is the “qualified sick leave equivalent amount” for an eligible self-employed individual calculated?

For an eligible self-employed individual who is unable to work or telework because the individual:

  1. Is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
  2. Has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
  3. Is experiencing symptoms of COVID-19 and seeking a medical diagnosis,

the qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in the applicable trade or business for one of the three above reasons, multiplied by the lesser of $511 or 100 percent of the “average daily self-employment income” of the individual for the taxable year.

(Authors’ Note and Warning: Stay-at-Home Order.  As to item “1.” Individuals in states with a stay-at-home order, under recent updated regulatory guidance from the DOL, are apparently only considered under a “quarantine or isolation order” if they are not providing an essential service and unable to telecommute.  The existence of the stay-at-home order, alone is insufficient.  Self-employed individuals who stop work due to lack of client work or isolate due to an elevated risk of death due to Covid-19 (age or medical condition) do not qualify.  Pre-regulatory guidance under a Q&A (not binding), had stated that a stay-at-home order would not qualify.)

For an eligible self-employed individual who is unable to work or telework because the individual:

  1. 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;
  2. 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
  3. 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, the qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in the applicable trade or business for one of the three above reasons, multiplied by the lesser of $200 or 67 percent of the “average daily self-employment income” of the individual for the taxable year.

In either case, the maximum number of days a self-employed individual may take into account in determining the qualified sick leave equivalent amount is ten.

Note:  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.

(Author’s Note:  As to all categories it was contemplated that all days would be taken consecutively, this set being an extension of the previous set.  However, care for others may be factually different.  Taxpayers who choose to telecommute certain days and provide care on other days.  Taxpayers should demonstrate if they do not take days consecutively because other telecommuters are available.)

  1. How is the “average daily self-employment income” for an eligible self-employed individual calculated?

Average daily self-employment income is an amount equal to the net earnings from self-employment for the taxable year divided by 260.  A taxpayer’s net earnings from self-employment are based on the gross income that he or she derives from the taxpayer’s trade or business minus ordinary and necessary trade or business expenses.

  1. How is the “qualified family leave equivalent amount” for an eligible self-employed individual calculated?

The qualified family leave equivalent amount with respect to an eligible self-employed individual is an amount equal to the number of days (up to 50) during the taxable year that the self-employed individual cannot perform services for which that individual would be entitled to paid family leave (if the individual were employed by an Eligible Employer (other than himself or herself), multiplied by the lesser of two amounts:  (i) $200; or (ii) 67 percent of the average daily self-employment income of the individual for the taxable year.

  1. Can a self-employed individual receive both qualified sick or family leave wages and qualified sick or family leave equivalent amounts?

Yes, but the qualified sick or family leave equivalent amounts are offset by the qualified sick or family leave wages. (Authors Note:  if they are also an employee elsewhere.)

That is, if an eligible self-employed individual receives qualified sick leave wages as an employee of an Eligible Employer (other than himself or herself), that individual’s qualified sick leave equivalent amount must be reduced (but not below zero) to the extent that the sum of the qualified sick leave equivalent amount and the qualified sick leave wages received exceeds:

  • $5,110 in the case of any day, any portion of which is paid sick time for when the individual:
    1. is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
    2. has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
    3. is experiencing symptoms of COVID-19 and seeking a medical diagnosis.
  • $2,000 in the case of any day, any portion of which is paid sick time for when the individual:
    1. 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;
    2. 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
    3. 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.

Example:  Assume that an eligible self-employed individual’s qualified sick leave equivalent amount is $1,500, but the individual also works for an Eligible Employer and received qualified sick leave wages of $1,000 to care for the individual’s child while school was closed due to COVID-19.  The individual’s qualified sick leave equivalent amount would be reduced by $500 [i.e., ($1,500 + $1,000) – $2,000], resulting in a credit for the qualified sick leave equivalent of $1,000 [i.e., $1,500 – $500].

If an eligible self-employed individual receives qualified family leave wages, the individual’s qualified family leave equivalent amount must be reduced (but not below zero) to the extent that the sum of the qualified family leave equivalent amount and the qualified family leave wages received exceeds $10,000.

Example:  Assume that an eligible self-employed individual’s qualified family leave equivalent amount is $5,000, but the individual also works for an Eligible Employer and received qualified family leave wages of $9,000 to care for the individual’s child while school was closed due to COVID-19.  The individual’s qualified family leave equivalent amount would be reduced by $4,000 [i.e., ($5,000 + $9,000) – $10,000], resulting in a credit for the qualified family leave equivalent of $1,000 [i.e., $5,000 – $4,000].

  1. How does a self-employed individual claim the credits for qualified sick leave equivalent amounts or qualified family leave equivalent amounts?

The refundable credits are claimed on the self-employed individual’s Form 1040, U.S. Individual Income Tax Return, tax return for the 2020 tax year.

  1. How can a self-employed individual fund his or her qualified sick leave equivalent and qualified paid family leave equivalent amounts before filing his or her Form 1040?

The self-employed individual may fund sick leave and family leave equivalents by taking into account the credit to which the individual is entitled and will claim on Form 1040, U.S. Individual Income Tax Return, in determining required estimated tax payments. This means that a self-employed individual can effectively reduce payments of estimated income taxes that the individual would otherwise be required to make if the individual was not entitled to the credit on the Form 1040.

(Authors Note: we suggest any reduction be based on the annualized income method, noting that the credits are not available before April 1, 2020.  First and Second Quarter estimated tax payments are not due for the 2020 year before July 15, 2020.  Many states, California included, do not presently conform and the credit cannot be used to reduce state tax liability within non-conforming states.)

Recommendations

For self-employed persons, granting a credit of emergency family leave and emergency paid sick leave are helpful, but further guidance from the Service may be necessary.  Furthermore, the Service’s guidance is not legally binding, and we are seeing all agencies making changes from-time-to-time in their guidance.

Paying Estimates.  Because the Service did not expressly address underpayment penalties for estimated taxes, taxpayers may wish to consider using the annualized income method in computing estimates for all quarters, to both account for the credit, if claimed, and avoid underpayment penalties on estimated taxes – while the extension granted by the Service for estimates allows payment by July 15, 2020, the annualized income method follows the same conventions for reliance on prior periods to determine annualized income.

Recordkeeping.  Another concern in claiming the equivalent credit is recordkeeping to support the basis for claiming a credit.

We recommend that self-employed persons obtain and keep with their returns, documents to support the claim for a credit.  For example, to claim the equivalent child care family leave or sick leave credit (or both), it requires evidence, whether by e-mail or notice that the school or child care facility has been closed.  It may be an e-mail, a letter or other record.

Likewise, if the credit claimed is for a reason other than for child care due to school or child care closure, records should include a copy of the direct order (connected with personal travel and proof of travel) or written evidence from doctor or an authority, i.e., an e-mail may suffice stating that medical care was sought for COVID-19 or one was instructed to self-isolate.

Furthermore, if a self-employed person relies on a stay-at-home order, the Service may require some demonstration that it was not possible to telecommute (i.e. work from home).  While not stated, this may be determined to be implicit in the equivalent credit granted.  For example, a person suffering from COVID-19 may receive a medical note to self-isolate, but a Service audit examiner may determine by way of call logs, billing sheets or otherwise that the person claiming the credit was able to work during the period and may disallow the sick-leave credit.  With audit examinations, there may be no rest for the self-employed as to the level of proof to keep this tax credit.


[1] Source: https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-required-paid-leave-provided-by-small-and-midsize-businesses-faqs#basic

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