The Paid Sick and Family Leave Credit allows small business owners with no W2 employees/only 1099 contractors to claim COVID-19 tax credits. Unfortunately, to be classified as an eligible employer for the ERTC requires paying employees and tax withholding. The PSFL credit, on the other hand, can simply be filed under your own personal tax return.
ERC Tax Credit
Employee retention credits were introduced in the CARES Act and then further amended in the American Rescue Plan Act. This fully refundable tax credit was initiated to support small business owners whose payroll costs were impacted by government orders during the COVID-19 pandemic.
ERC refunds are based on employment taxes equal to 50% of qualified wages an eligible employer pays its employees. The payroll taxes paid would have to have been submitted via quarterly Form 941s. This credit is very different from Paycheck Protection Program (PPP) loans, which were a means to alleviate payroll costs, social security taxes, and employees’ health insurance expenses. An advance payment was also offered in the beginning via IRS Form 7200, where an employer’s share of social security tax owed could be withheld.
To qualify for the ERC, eligible employers are required to show a significant decline in gross receipts or a nominal impact on trade or business operations. These impacts must also have been caused by government shutdown orders from an appropriate governmental authority in the United States. Essential businesses can also qualify if they suffered a supply-chain-related shutdown.
Sick and Leave
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, however, the self-employed pandemic tax credit has very different qualifying factors than the ERC and PPP loan forgiveness. In the Internal Revenue Code (IRC), payroll tax deposits for business owners with no W2 employees can only be refunded through the Paid Sick and Family Leave Credit.
How To Qualify
Established by the U.S. federal government and Treasury Department, the employee retention tax credit was meant to help faltering businesses and tax-exempt organizations who refrained from laying off employees during the pandemic. This support helped manage employment tax deposits and other financial hurdles, but its main setback was claim inaccessibility for self-run businesses. Based on CARES Act provisions, self-employed business owners aiming to offset employment tax deposits can only do so, if they did not work during the pandemic due to sickness or being under quarantine.
Being self-employed means that your business is paying your wages and you likely have no full-time employees with W2 status. Typical examples include freelancers, sole proprietors, and 1099 contractors. To qualify for the Paid Leave Credit, you must have been self-employed during the pandemic between 2020 and 2021, as well as been sick/quarantined or cared for family members who were.
Unlike self-employment, employment typically means you earn wages and are subject to social security tax payments. Understanding all the rules regarding an employee’s social security taxes and how they interact with credits is crucial.
If you were employed between 2020 and 2021, you might be eligible if you were entitled to sick or family leave. Qualifications include testing positive or contracting the virus, undergoing quarantine, or caregiving due to COVID-19. Also, you can receive the tax credit if you cannot work because your child’s school was closed during the pandemic.
How To Claim
Whether it’s due to sickness, quarantine, or vaccine-related reasons, only the period between the 1st day of April 2020 and the last day of September 2021 is eligible for the Paid Sick and Family Leave tax credit. Unfortunately, there are no options like ERC advance payments or startup recovery businesses (RSBs) for self-employed individuals.
IRS Form 7202
This is the primary document for those looking to claim refundable credits for sick or family leave. Filling out Form 7202 requires just a single page and is much less complicated for small businesses than trying to figure out how to calculate the employee retention credit. Self-employed people can typically fill this form out themselves, but you can also consult a local tax specialist if you are having trouble.
Through this personal tax credit, the maximum amount you can claim during eligible calendar quarters for Paid Sick and Family Leave Credit is $5,110. If you cared for a child/ward during school shutdowns, the credits can total up to $10,000. To claim these tax benefits for 2022, you should amend your 2020 and 2021 tax returns within three years from their due date.
The maximum refundable credit if you were sick or under quarantine is up to $511 per day. A self-employed individual can only claim qualified wages paid for the days they were unable to work. To calculate the number of wages counted for the Paid Family and Sick Leave credit you will need to divide your yearly earnings by 260.
This formula provides a precise figure of daily earnings for a five-day-per-week job without holidays and is standard practice, even if you only work part-time. Based on this calculation, you would need to earn $132,860 annually (divided by 260) to claim $511 per day. If you or your business earns $52,000 annually, then you could only claim $200 per day ($52k / 260).
If you stopped or missed work to care for a relative who contracted COVID-19, you’re entitled to family leave. If you had to stay home to care for a child because their school year was partially suspended, you can claim for work days missed during your care period.
To calculate your family leave credit, multiply your daily earnings by 67%. For example, if your average earnings equal $100 per day, your claimable family leave credit would be $67 per day. However, if your calculated credit exceeds $200 per day ($300 per day in earnings), you cannot claim anything above this amount.
Number of Days
The number of days you claim Paid Leave credits is capped for most scenarios, except when caregiving for a child. Thankfully there are no same calendar quarter regulations here. If you stayed off work to handle personal matters relating to the virus or cared for a relative (not your child), you will be entitled to claim a maximum of ten days for your Paid Sick credit.
For example, if you were off work for three weeks (15 work days) because you contracted the virus, you can claim a paid sick credit of $511 per day for a maximum of 10 days ($5,110).
The only exception to this 10-day max claim rule is if you were off work to care for a child in your care who was unable to attend school due to the pandemic. To qualify for an extension of up to 50 days of Family Leave credit, the child in your ward must either be below the age of 18 or not able to look after themselves due to a documented disability.
This exception entitles you to 67% of your daily wages up to $200 per day, and a maximum of $10,000 for a full 10 weeks (50 work days).
To avoid redundancy, the Internal Revenue Service does not allow any overlap with the Paid Sick and Family Leave credits. If you’ve already paid sick leave by your employer or claimed certain days through the Employee Retention Tax Credit (ERTC), Work Opportunity Tax Credit, COBRA Act, etc., you cannot double-dip. You can however claim days you were not paid for.
For example, if you receive only 5 days paid leave days from your employer, but can qualify for 10 days, you are entitled to claim the remaining 5 days through through Form 7202. You can also only claim the maximum number of days one time, so f you claimed three days on your 2020 return, you will only have seven sick days left to claim on your 2021 return.
To be eligible, proof of claim records is vital between 2020 and 2021. Whether it’s about caring for a child during school closures or medical reports about a COVID-19 diagnosis, you must present documentation or risk being audited by the Internal Revenue Service. Maintaining these records, especially those related to employment tax deposits, is essential for a minimum of seven years.
If your reason for obtaining the retention credit is that you had to care for your children while their school was closed, you must provide notices that attest to their school closure. If you were diagnosed with Covid, you must provide doctor’s reports. A business revenue statement may also need to be submitted for other reasons.
Things to Avoid
Self-employed individuals should take great care in ensuring the IRS Form 7202 files do not contain any errors or omissions. When filing a 2020 claim you must file a 2020 Form 7202, while 2021 claims require a 2021 Form 7202.
Be sure you adhere to all instructions included on the form and calculate your daily rates with your previous annual revenue. You will also need to respect the amended tax return filing deadline dates listed above. Lastly, remember to keep a copy of your filing and all required tax refund documentation for up to 7 years in case you one day get audited by the IRS.
You can still file your pandemic tax credits in 2023, but the three-year window for filing tax refunds is starting to close. The 2020 filing due date is expected to be May 17, 2024, while April 18, 2025, is the expected last date to request a 2021 Paid Sick and Family Leave tax credit.
It is important to note that while self-employed COVID-19 tax credits are fully refundable, any tax liability owed will be deducted from your refund amount. For instance, if you are supposed to receive a $5,000 credit but your annual tax liability is $2,000, the IRS will only issue a refund check of $3,000