New FAQs on COVID-19 Relief Issues for Employees and Self-Employeds
The IRS has updated and added several answers to frequently asked questions about COVID-19 relief issues for employees and self-employeds.
Q. Can an employee receive both “qualified sick leave wages” and “qualified family leave wages?”
A. Yes, but at different times. Qualified sick leave wages are available for up to 80 hours during which an employee cannot work or telework for any of six reasons related to COVID-19, including because the employee must care their child whose school or place of care is closed, or whose child care provider is unavailable, for reasons related to COVID-19. By contrast, qualified family leave wages are available only because the employee must care for his or her child whose school or place of care is closed, or whose child care provider is unavailable, for reasons related to COVID-19, and only after an employee has been unable to work or telework for this reason for 80 hours.
Q. Who is an eligible self-employed individual for purposes of the qualified sick leave credit and the qualified family leave credit?
A. An eligible self-employed individual is an individual who regularly carries on any trade or business and would be entitled to receive qualified sick leave wages or qualified family leave wages under the FFCRA if the individual were an employee of an Eligible Employer. Eligible self-employed individuals are allowed an income tax credit to offset their federal self-employment tax for any tax year equal to their “qualified sick leave equivalent amount” or “qualified family leave equivalent amount.”
Q. Can a self-employed individual receive both qualified sick or family leave wages and qualified sick or family leave equivalent amounts?
A. Yes, but the qualified sick or family leave equivalent amounts are offset by the qualified sick or family leave wages. So, if a self-employed individual is entitled to a refundable credit for a qualified sick leave equivalent amount the FFCRA, and also receives qualified sick leave wages as an employee, the FFCRA reduces the qualified sick leave equivalent amount for which the self-employed individual may claim a tax credit to the extent that the sum of the qualified sick leave equivalent amount described in the FFCRA and any qualified sick leave wages, exceeds $2,000 (or $5,110 in the case of any day any portion of which is paid sick time as described in paragraph (1), (2), or (3) the EPSLA).
Similarly, if a self-employed individual is entitled to a refundable credit for a qualified family leave equivalent amount, and also receives qualified family leave wages as an employee under the Emergency Family and Medical Leave Expansion Act (EFMLEA), the FFCRA reduces the qualified family leave equivalent amount for which the self-employed individual may claim a tax credit to the extent that the sum of the qualified family leave equivalent amount and the qualified family leave wages, exceeds $10,000.
Q. How does a self-employed individual determine the sick and family leave equivalent tax credit that they may claim?
A. A self-employed individual will determine the sick and family leave equivalent tax credit to which he or she is entitled by completing Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. To complete the Form 7202, self-employed individuals who are also employees will need any amount of qualified sick and family leave wages that their employers reported on their Forms W-2, Wage and Tax Statement. For more information on the requirement for Eligible Employers to report the amount of qualified sick and family leave wages paid to employees on Form W-2, see Notice 2020-54, 2020-31 IRB 226.
Q. How can a self-employed individual cover their qualified sick leave equivalent and qualified paid family leave equivalent amounts before filing their Form 1040?
A. The self-employed individual may cover 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.
The Coronavirus Aid, Relief, and Economic Security Act (PL 116-136; “CARES Act”) provides that self-employed individuals may defer the payment of 50% of the social security tax imposed on net earnings from self-employment income for the period beginning on March 27, 2020 and ending December 31, 2020. Self-employed individuals may defer these taxes in addition to the credits for qualified sick leave equivalent amounts or qualified family leave equivalent amounts. Accordingly, if the self-employed individual is eligible for these credits, the individual should take into account these credits in addition to any amount of self-employment tax the individual plans to defer under the CARES Act in determining required estimated tax payments.
Q. Can an independent contractor who generally performs services for multiple clients as a nonemployee claim the tax credit with regard to the lost services due to COVID-19?
A. Yes. If an individual is an independent contractor who generally performs services for multiple clients as a nonemployee, he or she is self-employed and is eligible for the tax credits for days he or she is not able to work or telework for reasons related to COVID-19.
Q. Does an eligible self-employed individual who is allowed a credit under the FFCRA for the qualified sick leave equivalent amount or a credit for the qualified family leave equivalent amount include any amount of these credits in gross income?
A. No, the amount of the credits allowed under FFCRA Sec. 7002 and FFCRA Sec. 7004 are not included in the gross income of the eligible self-employed individual.
Q. How should a self-employed employer substantiate eligibility for tax credits for qualified leave wage equivalents?
A. Self-employed individuals should maintain documentation establishing their eligibility for the credits as a self-employed individual. That documentation should be similar to the documentation maintained by employers claiming the credits for qualified leave wages under FFCRA. For more information, see “How Should an Employer Substantiate Eligibility for Tax Credits for Qualified Leave Wages?”
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