We are entering the tax season. But if you are an individual owner, partner, or self-employed LLC member, you may not have attempted to file Form 1040 by 2020. If so, you will be forgiven. The good news: If you’ve been on the sidelines so far, it may be in your favor, because there are some new tax credits that you may be happily unaware of. Here is the story of two important things. Take advantage if you can.
Postpone any tax on your own
If you are self-employed, you already know that self-employment (SE) can take a big bite out of your wallet every year. Uch. Fortunately, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) allows you to defer half of your 2020 obligation for the 12.4% Social Security tax component of the SE tax for the period of postponement. The postponement period began on 03/27/20 and ended on 12/31/20. You will then have to pay the deferred SE tax amount in two installments:
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Half on 12/31/21
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The remaining half on 12/31/22
If you have cash problems, it can be a very useful deal and you should make the most of it.
If you owe a maximum of $ 17,075 for the 2020 Social Security tax portion of the SE tax, it is estimated that you can defer up to half of 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.
Tax Saving Tip: Fill in Part III of Annex SE to calculate the exact amount you can defer. Then bring the deferred amount to Schedule 3 to Form 1040, which is a credit that reduces your 2020 federal income tax liability on page 2 of your return. Fet.
Claim the tax credits for medical leave related to COVID-19 and family leave received last year
The Family Coronavirus Response Act (FFCRA) granted two separate federal tax credits from 2020 to small business owners to cover: (1) mandatory payments to employees who were on vacation between 1/4/20 and 31/12/20 under the 19 provisions relating to emergency sick leave and (2) mandatory payments to employees who were laid off between these dates in accordance with the provisions of the FFCRA Family Emergency License.
Somewhat surprisingly, you have at your disposal equivalent tax credits as a self-employed worker if you took days of sick leave or qualified family leave between 1/4/20 and 12/31/20. In effect, you may apply for credits for amounts you have paid for: (1) days of qualified medical leave and (2) days of qualified family leave. Nice. This is what you need to know to charge.
Details of the loan for sick leave
Sick leave credit is allowed for sick leave days you took between 1/4/20 and 12/31/20. The daily sick leave credit is equivalent to: (1) 100% of the equivalent amount of daily sick leave plus (2) 67% of the equivalent of the daily sick leave if taken to care for a person sick or to care for a minor -age-18 son or daughter after the closure of the school or place of care of the child or because the child’s daycare provider was unavailable due to COVID-19 precautions .
The daily amount equivalent to sick leave is the lesser of: (1) your average daily self-employment or (2) $ 511 daily up to 10 days of illness (up to $ 5,110 in total) to care for you or $ 200 daily for up to 10 days (up to $ 2,000 in total) to care for another sick person or care for a child under the age of 18 for any of the above reasons.
Average daily self-employment means your net self-employment earnings for 2020 divided by 260.
Details of the family leave credit
Separate family leave credit is allowed for family leave days you took to care for a child under the age of 18 between 1/4/20 and 12/31/20 after the end of the school or place of child care or because the childcare provider was not available due to COVID-19 precautions.
You can apply for family leave credit for up to 50 days. The credit allowed is equal to the number of qualified family leave days multiplied by the child of (1) $ 200 or (2) your average daily self-employment.
The maximum total family leave credit is $ 10,000 (50 days × $ 200 per day).
Again, average daily self-employment means your net self-employment earnings for 2020 divided by 260.
Keep the documentation
You must maintain documentation to establish your eligibility for these credits. According to the IRS website:
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If you took days off on medical leave based on a quarantine order or self-quarantine advice, document the name of the government entity requesting the quarantine or the name of the health care professional who advised the quarantine. If you took days off to care for another person who was quarantined or advised to quarantine, document the other person’s name and relationship.
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If you took family leave days to care for a child under the age of 18 due to a school closure or the closure of a child care center or the unavailability of the care provider to children, document the child’s name and age; the name of the school, summer camp, summer enrichment program, or any other closed summer program; or the closed nursery; or the daycare provider who was not available. Be prepared to claim that no one else cared for the child during the days you took family leave.
Tax Saving Tip: These two credits are called repayable credits. This means you can collect them even if you have no federal income tax obligation for 2020. But you must file Form 1040 of 2020 to collect. First, calculate the credits on the new IRS Form 7202 (Work and Family Leave Credits for Certain Self-Employed Workers). Then take the credits to List 3 on Form 1040, where they will be treated as repayable credits on page 2 of Form 1040.
Another tax-saving tip: You can choose to use your 2019 self-employed net income to calculate your average daily self-employed income to calculate these credits. Do this if it would result in larger credits. To make the election, simply enter the largest amount of net self-employment in 2019 on Form 7202.
The conclusion
The COVID-19 pandemic, its economic consequences, and the federal income tax relief available can turn Form 1040 into 2020 into a whole new game. This column addresses two important considerations for the self-employed, but there are more. Your tax professional can work with them to optimize tax savings results for a year we’d like to forget about.