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We are well into tax season. But if you are an independent sole proprietor, partner, or member of the LLC, you may have failed to file your Form 1040 2020. If so, you are forgiven. The good news: If you’ve stayed on the sidelines so far, it might actually work in your favor – because there are new tax breaks out there that you may not be fully aware of. Here is the story of two important ones. Take advantage if you can.
Self-employment tax deferral
If you are self-employed, you know that the self-employment tax (SE) can take a big chunk of your wallet every year. Ouch. Fortunately, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows you to defer half of your 2020 liability for the 12.4% social security tax component of the SE tax for the deferral period. The deferral period started on 03/27/20 and ended on 12/31/20. You must then pay the amount of deferred SE tax in two installments:
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Half as of 12/31/21
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The remaining half as of 12/31/22
If you are strapped for cash, this can be a very useful offer and you should take full advantage of it.
If you owe the maximum of $ 17,075 for the 2020 Social Security tax portion of the SE tax, that means you can potentially carry forward up to half that amount, or $ 8,537. You would then pay $ 4,268.50 on 12/31/21 and the remaining $ 4,268.50 on 12/31/22.
Tax saving advice: Complete Part III of Schedule SE to calculate the exact amount you can carry forward. Then carry forward the amount carried forward to Schedule 3 of Form 1040 where it is treated as a credit that reduces your federal income tax for 2020 on page 2 of your return. Made.
Claim Tax Credits for COVID-19 Sick Leave and Family Leave Taken Last Year
The Families First Coronavirus Response Act (FFCRA) granted two separate federal tax credits for 2020 to small employers to cover: (1) mandatory payments to employees who took leave between 4/1/20 and 31 / 12/20 under the COVID of the FFCRA- 19 emergency sick leave provisions and (2) mandatory payments to employees who took leave between these dates under the emergency family leave provisions of the FFCRA.
Surprisingly enough, equivalent tax credits are available to you as a self-employed worker if you took days of sick leave or qualified family leave between 4/1/20 and 12/31/20. In fact, you can claim credits for the amounts you paid yourself for: (1) eligible sick leave days and (2) eligible family leave days. Pretty. Here’s what you need to know to cash out.
Sick Leave Credit Details
Sick leave credit is allowed for sick leave days you took between 4/1/20 and 12/31/20. The daily sick leave credit is equal to: (1) 100% of the equivalent daily sick leave amount plus (2) 67% of the equivalent daily sick leave amount if you have taken leave to care for a sick person or to treat a -the 18-year-old son or daughter following the closure of the school or place of care of the child or because the babysitter was not available due to COVID-19 precautions.
The daily sick leave equivalent amount is the lesser of: (1) your average daily self-employment income or (2) $ 511 per day for up to 10 sick days (up to $ 5,110 in total ) to take care of yourself or $ 200 per day for up to 10 days (up to $ 2,000 in total) to care for another sick person or to care for a son or daughter under the age of 18 for any of the above reasons.
Average daily self-employment income is your net self-employment earnings for 2020 divided by 260.
Family leave credit details
Separate family leave credit is granted for days of family leave you took to care for a son or daughter under 18 between 04/01/20 and 12/31/20 after the closure of the school or place of child care or because the child care provider was not available due to COVID-19 precautions.
You can claim the family leave credit for up to 50 days. The eligible credit is equal to the number of eligible family leave days multiplied by the lesser of (1) $ 200 or (2) your average daily self-employment income.
The maximum family leave credit is $ 10,000 (50 days × $ 200 per day).
Again, the average daily self-employment income is your net self-employment earnings for 2020 divided by 260.
Keep documentation
You must keep documentation to establish your eligibility for these credits. According to the IRS website:
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If you have taken sick days for yourself based on a quarantine order or self-quarantine advice, document the name of the government entity ordering the quarantine or the name from the healthcare professional who advised the self-quarantine. If you’ve taken sick days to care for someone else who has been quarantined or advised to quarantine, document the other person’s name and relationship to you.
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If you have taken family leave days to care for a son or daughter under the age of 18 due to a school closure, daycare closure, or unavailability of a child care provider, provide the name and age of the child; the name of the school, summer camp, summer enrichment program or any other summer program that has been closed; or the daycare that was closed; or the child care provider who was not available. Be prepared to say that no one else took care of the child during the days you took family leave.
Tax saving advice: These two credits are called refundable credits. This means that you can collect them even if you have no federal income tax for 2020. But you must file your 2020 1040 form to cash out. First, calculate the credits on the new IRS Form 7202 (Credits for Sick Leave and Family Leave for Certain Self-Employed). Then report the credits to Schedule 3 of Form 1040 where they are treated as refundable credits on page 2 of your Form 1040.
Another tip for saving taxes: You can choose to use your net self-employment income for 2019 to calculate your average daily self-employment income for the purposes of calculating these credits. Do this if it would result in larger credits. To make the election, simply enter the higher amount of net self-employment earnings for 2019 on Form 7202.
The bottom line
The COVID-19 pandemic, its economic fallout, and the available federal tax breaks can make your 2020 Form 1040 a whole new ball game. This column covers two important considerations for the self-employed, but there are others. Your tax professional can work with them to optimize your tax saving results for a year we would all love to forget.
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