On Friday, the U.S. Treasury Department, Internal Revenue Service (IRS), and the U.S. Department of Labor announced two new refundable tax credits that offer relief to employees, small and midsize businesses, and the self-employed under the Families First Coronavirus Response Act, signed by President Trump on March 18, 2020.
How will these credits help freelancers who can’t work due to their own illness or because they have to care for a family member who is ill or a child whose school is closed because of the coronavirus?
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), and make that amount 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 to 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:
a) 100% of a self-employed person’s sick-leave equivalent amount, plus
b) 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:
a) Your average daily self-employment income, or
b) $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.
Freelancers can 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 documentation that is to be detailed soon by the IRS.
· Information regarding the process for 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. For more information about these credits and other coronavirus relief, visit the IRS website.
Jonathan Medows is a New York City-based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union* and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, http://www.cpaforfreelancers.com — which also features a blog, how-to articles, and a comprehensive freelance tax guide.
*Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. This offer covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.