We are right in the tax season. But if you are a busy self-employed entrepreneur, partner or member of the LLC, you may not have made an effort to complete Form 1040 2020. If so, you are forgiven. The good news: if you’ve been on the sidelines so far, it may actually end up in your favor – because there are some new tax breaks that you may be happily unaware of. Here is the story of two important ones. Enjoy it if you can.
Postpone some self-employment tax
If you are self-employed, you know that the self-employment tax (SE) can take a big bite out of your wallet every year. There. Fortunately, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows you to defer half of your 2020 liability for the Social Security tax component of 12.4% of the SE tax to the deferral period. The deferral period started on 03/27/20 and ended on 12/31/20. You must then pay the amount of the deferred SE tax in two installments:
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Half on 12/31/21
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The other half until 12/31/22
If you are broke, this can be a very useful business and you should get the most out of it.
If you owe a maximum of $ 17,075 for the Social Security SE 2020 tax installment, it follows that you can potentially defer to half that amount, or $ 8,537. You would then pay $ 4,268.50 until 12/31/21 and the remaining $ 4,268.50 until 12/31/22.
Tax Savings Tip: Fill out Part III of the SE Schedule to calculate the exact amount you can postpone. Then, take the deferred amount to Attachment 3 to Form 1040, where it is treated as a credit that reduces your 2020 federal income tax liability on page 2 of your return. Done.
Claim COVID-19-related sick leave and family tax credits taken last year
The Family Coronavirus Response Act (FFCRA) granted two 2020 federal tax credits to small employers to cover: (1) mandatory payments to employees who took leave between 4/1/20 and 12/31/20 under COVID- 19 provisions regarding emergency medical leave and (2) mandatory payments to employees who took leave between those dates, in accordance with the FFCRA emergency family leave provisions.
Surprisingly, equivalent tax credits are available to you as a self-employed individual if you took days of qualified medical leave or qualified family leave between 4/1/20 and 12/31/20. In fact, you can claim credits for amounts you have paid yourself for: (1) qualified sick leave days and (2) qualified family leave days. Nice. Here’s what you need to know to make money.
Credit details for sick leave
The sick leave credit is allowed for sick leave days that you took between 4/1/20 and 12/31/20. The daily sick leave credit is equal to: (1) 100% of the equivalent amount of the daily sick leave plus (2) 67% of the equivalent amount of the daily sick leave if you took leave to care for a sick person or to care for a sick person. minor – 18 year old son or daughter after the child’s school or care location is closed or because the child care provider for the child was not available due to the precautions of COVID-19.
The equivalent amount of daily sick leave is equal to less than: (1) your average daily income from self-employment or (2) $ 511 per day for up to 10 days of sick leave (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 18 for any of the reasons mentioned above.
Average daily income from self-employment means your net earnings from self-employment for 2020 divided by 260.
Family leave credit details
Separate family leave credit is allowed for family leave days that you took to care for a son or daughter under 18 between 4/1/20 and 12/31/20 after the child’s school or place of assistance closes or because the child care provider for the child was not available due to the precautions of COVID-19.
You can claim a family leave credit for a maximum of 50 days. The allowable credit is equal to the number of qualified family leave days multiplied by less than (1) $ 200 or (2) your average daily income from self-employment.
The maximum total credit for family vacations is $ 10,000 (50 days × $ 200 per day).
Again, the average daily income from self-employment means your net income from self-employment for 2020 divided by 260.
Maintain documentation
You must maintain 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 agency requesting quarantine or the name of the health professional who advised self-quarantine. If you have taken sick days to care for another person who has been quarantined or advised to do so, document the other person’s name and relationship with you.
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If you have taken days of family leave to care for a son or daughter under the age of 18 due to the closure of a school or daycare center or daycare facility unavailability, document the child’s name and age; the name of the school, summer camp, summer enrichment program, or other summer program that has been closed; or the nursery that was closed; or the child care provider that was not available. Be prepared to declare that no one else took care of the child during the days that you took family leave.
Tax Savings Tip: These two credits are called repayable credits. This means that you can collect them even if you have no federal income tax obligations for 2020. But you must complete your 2020 Form 1040 to make money. First, calculate the claims on the new IRS Form 7202 (claims for sick leave and family leave for certain self-employed individuals). Then, take the credits to Attachment 3 to Form 1040, where they will be treated as repayable credits on page 2 of Form 1040.
Another tip for saving taxes: You can choose to use your 2019 net self-employment earnings to calculate your average daily self-employment income for the purpose of calculating these credits. Do this if it results in larger credits. To make the choice, just enter the greater 2019 amount of net earnings from self-employment on Form 7202.
The final result
The COVID-19 pandemic, its economic consequences and the reduction of the available federal income tax can make your Form 1040 2020 a totally new game. This column addresses two important considerations for self-employed individuals, but there are more. Your tax advisor can work with them to optimize your tax savings results for a year that we would all like to forget.