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2020 was a chaotic year. While the Covid-19 pandemic forced us into our homes, it unleashed issues that many had not had to cope with previously. From working from home, to helping our children go through virtual learning, to caring for family members who contracted COVID, Americans were stretched thin.
This is never truer than for the self-employed. While all Americans struggled, the self-employed found themselves with fewer resources to tap for surviving the pandemic financially. Further, in taking time off to handle these challenges, they were not able to receive sick or family leave time as could employees of companies.
But Congress and the IRS were aware of the challenges these individuals faced. As a result, there is a key credit that all self-employed individuals should take on their 2020 tax return: the Credit for Sick Leave and Family Leave for Certain Self-Employed Individuals found on Form 7202. Although it is a powerful credit, many people may not take full advantage of it, or even be aware it exists.
“The 7202 credit is one that I have a hunch many sole proprietors are going to miss out on this year,” says Adam Markowitz, EA and Vice President, Howard L Markowitz PA, CPA in Florida. “If my Schedule C filers missed any time off work last year due to the fact that they had COVID, had symptoms of COVID, were otherwise forced to quarantine due to COVID or were taking care of a child who had COVID, had symptoms of COVID, were otherwise forced to quarantine due to COVID or had their school or daycare closed due to COVID, they’re eligible for this credit.”
It is important to understand how the credit works and who is eligible for it.
The Credit Explained
Back in March 2020, Congress was already anticipating how financially challenging the pandemic would be for self-employed individuals, thus they added sick and family leave credits to the Families First Coronavirus Relief Act.
There are two requirements to qualify. First, an individual must conduct a trade or business that generates self-employment income. Second, an individual would have been eligible to receive sick leave or qualified family leave wages if they had been an employee of an employer (other than yourself).
While this seems straightforward, the 7202 credit is more complicated in its administration. There are caps on how many days you can take.
“As far as how the 7202 credit works, you’re entitled to a tax credit based on the bottom line of your Schedule C of 2019 OR 2020, whichever is more favorable,” explains Markowitz. “You’re entitled to a credit of up to $511 per day for the sick leave portion of the credit for up to 10 days you were unable to work between 4/1 and 12/31 and $200 per day for the family leave portion of the credit for up to 12 weeks you were unable to work between 4/1-12/31.”
But this does not mean self-employed individuals who are high earners have an unlimited credit. There is another cap on what each day is worth.
“The credit is calculated by taking the bottom line of your Schedule C, from the higher of 2019 or 2020, dividing it by 365 to come up with a daily number, then multiplying that by the number of days missed. If the number exceeds $511 (sick) or $200 (family), you’re capped at those numbers,” says Markowitz.
Potential Pitfalls
While this credit can be extremely valuable, there are nuances, such as meeting the requirements or factoring in unemployment benefits, that must be considered. Many filers will likely need the help of a tax professional to fully benefit from the credits.
The self-employed individual has to meet the requirements of being unable to work, but here there is a need to tread carefully. “The real kicker is to explain to the client that they had to be UNABLE to work, not just be inconvenienced by COVID by having to work from home. Think about all part-time Uber
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Further, there are other programs that could have an impact on whether a self-employed individual can take the credit.
“We also have to be careful to make sure that we don’t take a 7202 credit for dates that also correspond with when these Schedule C taxpayers were on unemployment benefits,” notes Markowitz.
Available In 2021
This tax credit is not going to be limited to 2020. Taxpayers are eligible for 10 days from April 1, 2020 through March 31, 2021. If a taxpayer did not use their full days in 2020, they can roll them to 2021.
As a result, self-employed individuals should review their calendar and schedules for this period to see if they will be eligible for the credit on their 2021 1040.
Even though this credit may be difficult to deal with, there is tremendous value.
“Lots of headaches. But they’re very valuable headaches to ultimately go through. So far this year, I’ve captured $8,230 in 7202 credits for clients, and I suspect that number will continue to rise,” says Markowitz.
As a result, self-employed taxpayers should embrace the opportunity to take this credit and speak with their tax professional to see if they are eligible. There can be real savings to help reduce the sting of the 2020 challenges.
