New stimulus bill tax breaks that employees and self-employed people should know
The American Rescue Plan Act of 2021 offers new tax credits to employees as well as self-employed individuals and their families.
Stimulus checks for up to $1,400 per person (calculate your total), extra unemployment income and the extended child tax credit are just some of the ways that the government is providing financial relief to people hit hard by the pandemic. There are also a number of new tax provisions created to put some money back into people's wallets, including for people caring for older adults and children. But what about tax breaks and benefits for employees and those who are self-employed, especially those who lost work because of COVID-19?
Under the CARES Act, you can now take money out of your tax-deferred retirement accounts before age 59 ½, without paying the previously mandatory 10% tax penalty. You can also deduct up to $300 in charitable donations made in 2020 from your adjusted gross income, as long as you don't itemize your deductions. There's also the earned income tax credit for low-income families.
In March 2020, the government passed the Families First Coronavirus Response Act, which required some companies to provide paid sick leave and extended family leave for employees who were impacted by COVID-19. And as of March this year, self-employed individuals now have the opportunity to take paid sick leave and paid family leave as well. Here's everything you need to know.
What are sick and family leave tax credits?
In a nutshell, sick and family leave tax credits incentivize small- and medium-sized businesses to provide paid leave for employees who cannot work due to COVID-19. If an eligible business offers paid leave under FFCRA guidelines, they can receive a tax credit that fully reimburses them for the period that a particular employee is out of work.
Without the tax credit, businesses would lose money while their employees are out on paid sick or family leave. And because so many people have been unable to work due to COVID-19, these tax credits have helped businesses mitigate financial losses.
How do these tax credits apply to full-time employees?
Until recently, these tax credits applied only to full-time workers on the payroll of a company with less than 500 employees. Individuals could qualify for paid sick, family, and medical leave for reasons related to COVID-19 -- either because they got sick, had to care for a family member who was sick or were instructed to quarantine due to COVID-19 exposure.
Under the Emergency Paid Sick Leave Act, employees have been eligible to receive up to 80 hours of paid sick leave if they contracted COVID-19, had symptoms of COVID-19, provided care to someone who was sick or were quarantined. Employees could also get up to 10 additional weeks of paid family leave to care for children who could not attend school or child care due to COVID-19 closures.
Eligibility requirements for self-employed individuals
On March 11, President Joe Biden signed into law the American Rescue Plan Act of 2021, which extended paid sick leave and paid family leave to self-employed individuals. The benefits officially began on March 11 and are expected to end on Sept. 30, 2021.
According to the guidelines, a self-employed worker is defined as, "An individual who regularly carries on any trade or business within the meaning of section 1402 of the Internal Revenue Code." This applies to independent contractors, sole proprietors, LLC owners and partnerships, as well as people who rely on self-employment for full- and part-time income.
There are some qualifications self-employed people have to meet for benefits to apply.
If you are self-employed and think you qualify for paid sick leave, you must meet one of the following criteria:
1. You were instructed to quarantine per federal, state or local COVID-19 regulations;
2. A health care provider instructed you to self-quarantine due to a positive COVID-19 test or COVID-19 exposure;
3. You were experiencing symptoms of COVID-19 and were unable to work.
For example, if you own a small clothing store that you had to close for two weeks in 2020 because you contracted COVID-19, under the provisions of the American Rescue Plan Act you could recoup your lost income during that period.
That noted, in order to qualify for paid family leave, you must meet one of the following criteria:
1. You had to care for someone who was quarantining per federal, state or local regulations;
2. You were advised by a health care provider to self-isolate due to COVID-19 exposure;
3. You had to care for a child because their school or child care facility was closed due to COVID-19 precautions.
An example of eligible paid family leave: Your child's elementary school was closed for two weeks due to a COVID-19 outbreak and a doctor advised them to self-isolate due to potential exposure. If you had to take time away from your business to watch your child and help them with virtual school work, you could take advantage of paid family leave.
In order to claim one or both of these tax credits, you must be able to provide the right documentation. At a minimum, you will need to provide the dates of the requested leave, a statement that validates the reason for your leave and a statement from a qualifying individual stating.
For paid sick leave, you'll need documentation from the government agency or the health care professional who mandated your quarantine. For paid family leave, you will need to provide the name and age of the child who is being cared for, their school or child care program that has closed and a letter verifying the closure.
How is the qualified sick leave equivalent amount calculated?
Prepare yourself for some confusing math. If you're self employed, you can calculate your qualified sick leave equivalent by taking the number of days in 2020 that you couldn't provide your business services and multiplying that by $511 -- or 100% of your average daily self-employment income -- whichever is less.
To figure out your average daily self-employment income, take your net earnings from the taxable year and divide the number by 260. As a reminder, net earnings accounts for your self-employment gross income, minus any necessary business expenses, like advertising, equipment costs or office rent.
And to calculate your qualified paid family leave equivalent, take the number of days during the taxable year that you weren't able to provide services (with a maximum of 50 days) and multiply the number of days by $200 or 67% of the average daily self-employment income, whichever is less. Got that?
Are these types of benefits taxed?
Yes, if you qualify for paid sick leave and/or paid family leave and claim the tax credit, you are legally required to report it on your federal income taxes by filling out Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals.
Keep in mind that under the CARES Act, self-employed individuals are allowed to defer 50% of the social security tax on self-employment income between March 27, 2020 and Dec. 31, 2020. If you choose to defer the social security tax and you can claim the paid leave tax credits for the 2020 tax year, it could help reduce your tax burden.
If you become eligible for the paid sick leave or paid family leave tax credits during the 2021 tax year, you can factor the deductions into your quarterly estimated tax payments.