We are well into tax season. But if you’re a busy self-employed sole proprietor, partner, or LLC member, you may not have gotten around to submitting your 2020 Form 1040. If so, you will be forgiven. The good news: If you’ve stayed on the sidelines until now, it could turn out to be in your favor – because there are some new tax breaks that you may not be aware of. Here’s the story about two major ones. Take advantage if you can.
Postpone some self-employment tax
If you are self-employed, you know that the self-employed tax (SE) can take a big bite out of your wallet every year. Au. Fortunately, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) allows you to defer half of your 2020 liability for the 12.4% Social Security tax component of the SE tax for the grace period. The grace period started on 3/27/20 and ended on 12/31/20. You must then pay the deferred SE tax amount in two installments:
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Half on 31/12/21
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The remaining half on 31/12/22
If you’re short on cash, this can be a very useful deal, and you should take full advantage of it.
If you owe the maximum of $ 17,075 for the 2020 Social Security tax portion of the SE tax, the bottom line is that you may be able to defer up to half that amount, or $ 8,537. You will then pay $ 4,268.50 on 12/31/21 and the remaining $ 4,268.50 on 12/31/22.
Tip to save tax: Complete Part III of Schedule SE to calculate the exact amount you can defer. Then transfer the deferred amount to Schedule 3 of Form 1040 where it will be treated as a credit that will lower your federal income tax liability for 2020 on page 2 of your return. Done.
Apply for tax credits for COVID-19-related sick leave and family leave taken last year
The Families First Coronavirus Response Act (FFCRA) granted two separate federal tax credits for 2020 to small employers to cover: (1) mandatory payments to employees who took time off from 4/1/20 to 12/31/20 under the COVID 19-related provisions on emergency sick leave and (2) compulsory payments to employees who have taken leave between those dates under the provisions of the FFCRA on emergency family leave.
Somewhat surprisingly, there are equivalent tax credits for you as a self-employed person if you took between 1-4-20 and 12-31-20 days of qualified sick or family leave. In fact, you can claim credits for amounts paid to yourself for: (1) qualified sick leave days and (2) qualified vacation days for family reasons. Fun. Here’s what you need to know to start raising money.
Sick leave data
The sickness absence discount is allowed for sick days that you have taken between 1-4-20 and 31-12-20. The daily sick leave credit is equal to: (1) 100% of the equivalent per day of sickness absence plus (2) 67% of the equivalent per day of sickness absence if you took leave to care for a sick person or to care for a minor -18 years old son or daughter after closure of the child’s school or daycare center or because the childcare provider was not available for the child due to precautions of COVID-19.
The equivalent daily sickness absence amount is equal to the lesser of: (1) your average daily self-employed income or (2) $ 511 per day for up to 10 sick days (up to $ 5,110 in total) to take care of yourself or $ 200 per day for up to 10 days (up to $ 2,000 in total) to care for another sick person or for a son or daughter under 18 for any of the above reasons.
The average daily income as a self-employed person means your net income as a self-employed person for 2020 divided by 260.
Credit information for family leave
The separate leave credit is allowed for leave days that you have taken to care for a son or daughter of less than 18 years between 1-4-20 and 31-12-20 after the closure of the school or the child’s care place or because the childcare provider was not available for the child due to COVID-19 precautions.
You can claim the family leave credit for a maximum of 50 days. The credit allowed is equal to the number of qualified vacation days for family reasons multiplied by the lesser of (1) $ 200 or (2) your average daily self-employed income.
The maximum total time off credit is $ 10,000 (50 days × $ 200 per day).
Again, the average daily self-employed income means your 2020 self-employed net income divided by 260.
Keep documentation
You must keep documentation to determine your eligibility for these credits. According to the IRS website:
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If you have taken sick days for yourself on the basis of a quarantine order or self-quarantine advice, make a note of the name of the government agency that ordered quarantine or the name of the health care provider who advised to quarantine themselves. If you took sick leave to care for another person who was quarantined or advised to self-quarantine, write down the other person’s name and relationship with you.
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If you have taken family leave to care for a son or daughter under the age of 18 because of school closure or the closure of a daycare or the unavailability of childcare, write down the name and age of the child; the name of the school, summer camp, summer enrichment program, or other summer program that was concluded; or closed childcare; or the childcare provider who was not available. Be prepared to say that no one else took care of the child during the days you took family leave.
Tip to save tax: These two credits are so-called refundable credits. That means you can collect them even if you don’t owe any federal income tax before 2020. But you must file your 2020 Form 1040 to redeem. First, calculate the credits on the new IRS Form 7202 (credits for sick leave and family leave for certain self-employed persons). Then transfer the credits to Schedule 3 of Form 1040 where they will be treated as refundable credits on page 2 of your Form 1040.
Another tax-saving tip: You can choose to use your net self-employment income in 2019 to calculate your average daily self-employment income to calculate these credits. Do that if it would result in larger credits. To make the choice, simply enter the greater amount of 2019 net self-employment income on Form 7202.
it comes down to
The COVID-19 pandemic, economic fallout, and available federal income tax relief can turn your 2020 Form 1040 into a ball game from scratch. This column discusses two important considerations for the self-employed, but there are more. Your tax professional can work with them to optimize your tax-saving results for a year we’re all eager to forget.