The U.S. Treasury Department, Internal Revenue Service (IRS), and the U.S. Department of Labor (Labor) announced two new refundable tax credits which offer relief to employees, small and midsize businesses, and the self-employed under the Families First Coronavirus Response Act (Act), signed by President Trump on March 18, 2020.
How will these credits help self-employed individuals who can’t work due to their own coronavirus illness or because they have to care for a family member with the virus or a child who is not in school because of the corona virus?
In a nutshell, the IRS will take your taxable profit (based on your 2020 income), prorate it for 10 days (the equivalent of two 40-hour sick pay periods), then make it exempt from both income tax and self-employment tax. This ensures that self-employed individuals will get the same benefits as those who are employed.
Here are the specifics of these tax credits as they apply to the freelance community:
- Self-employed individuals who experience a coronavirus emergency are able to claim this tax credit against their 2020 federal income tax bill, including the self-employment tax portion of it. If the credits exceed your tax bill, you will receive a payment for the excess amount.
- The credit will be applied on your 2020 tax return (the return you will file in 2021). If you need the funds right away, you can apply the credit to this year’s first quarter estimated tax bill (now due on July 15, 2020) so you don’t have to wait to have the cash in your pocket.
- The income tax credit is calculated this way:
- 100% of a self-employed person’s sick-leave equivalent amount plus
- 67% of the sick-leave equivalent amount for taking care of a sick family member or taking care of your child following the closing of the child’s school.
- The sick-leave equivalent amount equals the lesser of:
- Your average daily self-employment income or
- $511 per day for up to 10 days (up to $5,110 in total) to care for yourself due to the coronavirus or $200 per day for up to 10 days (up to $2,000 in total) to care for a sick family member or your child following the closing of the child’s school due to the coronavirus.
- Self-employed individuals could also claim a coronavirus emergency family-leave credit for up to 50 days if necessary. This is calculated by the number of qualified family-leave days multiplied by the lesser of a) $200 or b) your average daily self-employment income. The maximum family-leave credit available is $10,000 (50 days x $200 per day).
A few other important points:
- These credits are only available from April 2, 2020 through Dec. 31, 2020.
- To claim the credits you must provide the documentation that is to be detailed soon by the IRS.
- Information regarding the process to receive an advance payment of the credit is expected to be available next week, as well as information about claiming the credit on your taxes.
There are likely to be additional details about these credits in the days to come so watch for updates. You can also find more information about these credits and other coronavirus relief, visit the IRS website.