Published on 03/05/2021

The last year has been particularly stressful. Americans have been pushed to the breaking point by the global spread of coronavirus. Families have had to struggle to put food on the table and pay bills amid a crumbling economy. The employed have even had to work with pay cuts, not to mention the mental and emotional effect of the pandemic on the workforce.

Things have been especially bad for self-employed individuals. While several SOPs were announced for the employed and the unemployed, self-employed individuals suffered immensely. The resources for those self-employed have been scarce to rely on. While employed individuals could afford to take time off to deal with the infection or care for sick family members, or even break for mental welfare, this was a luxury that the self-employed individuals could not afford. The financial and emotional cost of the pandemic has perhaps hurt self-employed individuals the worst.

On the bright side, both Congress and the Internal Revenue Service (IRS) have taken cognizance of the pleas of those running small enterprises. Self-employed individuals are being rewarded with a special Tax Credit that they can claim on their 2020 income tax returns.

The ‘Credit for Sick Leave and Family Leave for Certain Self-Employed Individuals’ is a Credit that is mentioned on Form 7202. Although it can help self-employed individuals by leaps and bounds, not many are aware about the credit and may not use it to its full potential.

Special Tax Credit for the Self-employed

Sick leave and family leave credits have been added to the Families First Coronavirus Relief Act. This credit is only applicable to individuals who were engaged in business or trade that generated self-employed income.

You can claim tax credit if you missed time from work in 2020. The same is also applicable if the individual was isolation having tested positive or in quarantine due to a family member showing COVID symptoms and/or testing positive for COVID. A self-employed person will also be eligible for the tax credit if they have children who had to stay at home with schools and daycare centers being shut.

However, there is a threshold on how many days you can take as leave.

The 7202 Credit

To claim the 7202 tax credit, an individual can stake a claim based on the lower threshold of their Schedule C of 2019 or 2020, whichever is favorable in the circumstances. A credit of up to $511/day can be claimed as sick leave wages for employees who were affected. Credit upto $200/day can be claimed for those caring for family who were afflicted. Remember the threshold for sick leaves is capped at 10 days. You can claim the sick leave wage payment credit if you or your employees were not able to work anytime between April 1, 2020, and December 31, 2020.

Similarly, the credit for paid family leave is limited to $200/day for each day of leave required, to an aggregate of $10,000 for the calendar year. You can claim this credit if you were not able to work anytime between April 1, 2020, to December 31, 2020.

The amount of total credit you are entitled to, is calculated by identifying the bottom line of Schedule C from the upper threshold of your 2019 or 2020 income. Divide this number by 365 to get a daily number. Multiply the daily number with the number of days missed for sick leave or family leave. Remember, the resultant number shouldn’t be greater than $511 (for sick leaves) or $200 (for family leaves). This is the per-day tax credit you can claim in your 2020 income tax returns.

Drawbacks of 7202 tax credit

Claiming the benefits of a 7202 tax credit can be tricky, there is a set of requirements that you need to fulfill to prove that you were not able to work. The process is a little wobbly and you need to tread carefully. There is a difference between being unable to work and being inconvenienced and not working.

Self-employed individuals will also need to make sure that the dates for which you claim a 7202 benefit do not clash with dates where you claimed unemployment benefits (if you did).

7202 Tax credit in 2021

The norms of the 7202 tax credit are not limited to just 2020. If you were not able to work due to the aforementioned reasons in 2021, you can claim a benefit for it too. The Taxpayers can rollover the benefit till March 31, 2021.

Of course, claiming this tax credit can be quite cumbersome but it is worth it. And if you are a self-employed individual who struggled with low business and personal COVID horrors, this is your best shot to get a tax rebate and reduce the amount of taxes you owe to the Govt.

However, claiming a 7202 tax credit is difficult for an individual. It is always recommended you hire a tax consultant to do the scut work for you. Speak to a professional at MyTaxFiler today!