Tax & AccountingFebruary 12, 2021

CARES Act Self-Employment Credits: Calculating the Amount

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CARES Act Self-Employment Credits: Calculating the Amount

Self-employed individuals may claim a refundable credit for a qualified sick leave or family leave equivalent amount if they cannot work due to COVID-19. The credits are available for the period from April 1, 2020, through March 31, 2021. The credits had been available through December 31, 2020, but were extended through March 31, 2021. The credits are “equivalent” to those available to an eligible employer who pays required paid sick leave or family leave to an employee who cannot work due to COVID-19.

The credits are reduced for certain sick or family leave wages received from the taxpayer’s employer.

Calculating the Qualified Sick Leave Credit

For the qualified sick leave equivalent, there are two possible calculations, depending on the taxpayer’s situation.

The first calculation applies to a taxpayer who is unable to work because the individual:

  • is subject to a federal, state, or local quarantine or isolation order related to COVID-19;
  • has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
  • is experiencing symptoms of COVID-19 and seeking a medical diagnosis.

In this case, the qualified sick leave equivalent amount is (1) the number of days that the individual cannot perform services in any trade or business for one of the three above reasons, multiplied by (2) the lesser of $511 or 100 percent of the individual’s “average daily self-employment income” (discussed below) for the tax year, or the prior tax year.

The second calculation applies to an eligible self-employed individual who is unable to work because the individual is:

  • caring for an individual who is subject to a federal, state, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
  • caring for a child if the child’s school or place of care has been closed, or child care provider is unavailable due to COVID-19 precautions; or
  • experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.

In this case, the qualified sick leave equivalent amount is equal to the number of days that the individual cannot perform services in any trade or business for one of the three above reasons, multiplied by the lesser of $200 or 67 percent of the individual’s average daily self-employment income for the tax year, or the prior tax year.

In either case, a taxpayer may take no more than 10 days into account in in determining the qualified sick leave equivalent.

Calculating the Qualified Family Leave Credit 

An eligible self-employed individual’s qualified family leave equivalent amount is calculated as follows:

(1) the number of days (up to 50) that the self-employed individual cannot perform services for which that individual would be entitled to paid family leave if the individual were employed by an eligible employer; multiplied by

(2) the lesser of the following amounts: (a) $200, or (b) 67 percent of the individual’s average daily self-employment income for the tax year, or the prior tax year.

Average Daily Self-employment Income

Average daily self-employment income is the net earnings from self-employment for the tax year, or prior tax year, divided by 260. The net earnings from self-employment amount is gross income from the taxpayer’s trade or business minus ordinary and necessary trade or business expenses.

Claiming the Credits

A self-employed taxpayer calculates the qualified sick leave credit on Part I of Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. The qualified family leave credit is calculated on Part II of Form 7202. The Form 7202 is attached to the taxpayer’s Form 10401040-SR, or 1040-NR, and the credit amount is reported on Schedule 3 (Form 1040), line 12b.

Robert Recchia, J.D., M.B.A., C.P.A.

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