Key Takeaways
- Self-employed people can claim tax credits if they were unable to work due to COVID
- You can claim up to $5,110 if you missed work due to being ill or quarantined
- There is up to a $10,000 credit for caring for your child if their school or daycare was closed due to COVID
- You can claim the credit in 2022 by amending your 2021 or 2020 returns
- There is a limited amount of time to claim these credits
The government offered an employee retention credit (ERC) to employers who retained their employees when their revenues dropped or their doors shut due to COVID. This valuable credit was unfortunately not available for the self-employed, but the government created a very similar tax credit for people who work for themselves.
COVID tax credits for the self-employed are refundable tax credits to cover income you lost when you were unable to work due to COVID in 2020 and 2021. These credits are not available for 2022 unless the government changes the tax code for this year, but you can claim them retroactively.
This guide explains who qualifies for these credits and how to claim them. Self-employed people who lost income due to illness, caring for a loved one, or taking care of their child due to COVID-related school or daycare closures will want to keep reading for more information.
Qualifying for the Employee Retention Credit Self-Employed
The employee retention credit was designed to reward employers who kept their employees on, even as their revenue dipped due to COVID. The credit helped to cover costs related to payroll taxes, but unfortunately, this wasn’t an option for the self-employed. Self-employed people are not out of luck, though.
You may be able to claim the COVID credit for the self-employed if you were unable to work due to COVID and you meet the IRS’s requirement criteria.
1. You Were Self-Employed
A self-employed taxpayer is anyone who works for themselves. This includes sole proprietors who own a business and have employees, as well as independent contractors and freelancers. Anyone who earns money on their own without having an employer is considered to be self-employed by the IRS. You must have been self-employed in 2020 or 2021 to qualify for these credits.
2. You Would Be Eligible for Sick or Family Leave Pay if You Were Employed
You can qualify to claim self-employed COVID tax credits in situations where you would be eligible to take sick leave or family leave if you were an employee. You qualify for sick leave if you were sick with COVID, had symptoms of COVID and tried to get tested, or were quarantined. You may also qualify if you had to take care of someone who had COVID-related needs.
You can qualify for family leave if you had to take care of a child for COVID-related reasons. This can include sickness or quarantines, but you can also claim the credit if you were unable to work because your son or daughter’s school or daycare was closed due to COVID.
3. You Have Records to Support Your Claims
You must have records to support your eligibility for the self-employed COVID tax credits. This includes notices of school closures, revenue statements from your business, doctor’s records, and anything else that can substantiate your claim.
You don’t need to include copies of the records when you file your tax return. You only need the records if the IRS audits you. You are supposed to keep tax-related records for seven years – this is true for everything that you report on your tax return, not just COVID credits for the self-employed.
Meeting these three criteria is the first thing you need to assess if you’re interested in claiming the employee retention credit for the self-employed. The timing, however, must be right. These COVID tax credits are only available if you were unable to work in 2020 or 2021. These credits are not available for the self-employed for tax year 2022.
How to Claim the Self-Employed COVID Tax Credits
You must claim the self-employed COVID-tax credits on your 2020 or 2021 tax returns. You can claim sick leave or family leave credits for any time periods you couldn’t work for COVID-related reasons in 2020 and for the first nine months of 2021. You can also claim these credits if you couldn’t work due to COVID vaccine-related reasons between April 1, 2020, and September 30, 2021.
Here is an overview of how to claim these credits. You can work through these steps on your own, but for best results, you should hire a tax credit professional to help you.
Calculate the Daily Value of the COVID Tax Credit for Sick Leave
The daily value of the credit corresponds to how much you earn as a self-employed person. You get to claim 100% of your average daily pay (up to $511) for the days you couldn’t work due to having COVID or being quarantined.
The IRS advises taxpayers to calculate their daily rate by dividing their annual profit by 260. This shows you how much you earn per day if you work five days a week with no vacations. The IRS doesn’t care how much you actually worked – you will use this same formula whether you work seven days a week or just two or three.
Imagine that your business earned $52,000 in net income. This equates to $200 a day when you divide the annual earnings by 260. Someone who earns $104,000, in contrast, has a daily wage of $400 based on this formula. You get to claim your daily rate up to $511 per day. People who earn more than $511 per day don’t get to claim a credit for their full daily rate – the most they can claim is $511.
Determine the Daily Value of the COVID Credit for Family Leave
Self-employed people who missed work due to caring for someone with COVID or someone whose school was shut down due to COVID can claim 67% of their daily rate. You start with the math above to calculate your daily rate, then multiply the result by .67.
Someone with a daily rate of $200, for example, can claim a credit of $134 for the days they missed while caring for someone with a COVID-related need. Someone with a daily rate of $250, on the other hand, gets to claim a credit of $167.50. This credit is capped out at $200 per day.
Figure Out How Many Days of Credits You Can Claim
You can claim up to 10 days’ worth of credits for dealing with your own COVID-related issues or helping someone else who is not your child with COVID-related issues. You cannot claim more than 10 days of credits even if you couldn’t work for more than 10 days.
Here’s an example. Say you couldn’t work due to having COVID for one week (five days) and you took care of a loved one for two weeks (10 days). You can claim five days at 100% pay (up to $511 per day) and an additional five days at 67% of pay (up to $210 per day). You cannot, as a rule, claim the other five days.
There is an exception, however. You can claim more than the 10 days if you were unable to work because you had to care for your child who was out of school or daycare due to COVID. Your child must be under age 18 or unable to care for themselves due to a disability.
This COVID tax credit for the self-employed can cover up to 50 days and it’s worth 67% of your average daily rate, up to $200 per day. The total credit is worth up to $10,000 if you missed 10 weeks of work.
Subtract Days Already Claimed
The IRS has rules in place to prevent people from double dipping into these credits. You need to reduce your number of eligible days by any COVID sick leave or family leave that has already been paid to you by an employer.
Say you have a full-time job for an employer and you’re also self-employed on the side. Your employer already paid you for three days of sick leave, which means you’re only entitled to seven additional days of sick leave with this credit.
You can also only claim the maximum number of days one time, so for example, if you claimed three days on your 2020 return you only seven sick days left to claim on your 2021 return.
File the Form to Claim the Credits
Self-employed people can claim these value COVID credits using IRS Form 7202 (Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals). This is a one-page form that walks you through the math so you can calculate your self-employed COVID tax.
Enjoy Your Reduced Tax Bill or Refund
The self-employed COVID tax credits are fully refundable. That means that the tax credit goes toward your tax liability for the year, but after that, any additional amount is refunded to you.
A self-employed worker who missed 50 days of work due to caring for their child when their school was shut down, for instance, is entitled to the full $10,000 credit, but the tax liability is only $4,000. The IRS will send a refund check for the remaining $6,000 in this situation.
Most people have already filed their tax returns for 2020 and 2021, but that doesn’t mean it’s too late to claim the credits. You can still claim COVID credits in 2022. You have the right to amend tax returns and claim refunds when you learn new information about your tax situation, but you must do so within three years of the return’s due date.
The due date for 2020 tax returns was May 17, 2021, so you have until May 17, 2024, to file an amendment. The due date for the 2021 return was April 18, 2022, giving you until that date in 2025 to amend and request a refund.
Mistakes to Avoid with the Self-Employed COVID Credit
The COVID credits for those who are self-employed have the potential to be very valuable for people who were unable to work for COVID-related reasons. You need to ensure that you apply for the credits correctly. Follow these tips to avoid common errors:
- Use the IRS Form 7202 for the correct year.
- Follow the instructions carefully to ensure that you complete the form carefully.
- Don’t forget that you can use the current or previous year’s income when calculating your average daily rate.
- Make sure you don’t miss the deadline if you need to amend a return you had already filed.
- Have documents to support your claims in case the IRS audits your return.
Self-employed people often don’t have safety nets like this tax credit. They aren’t entitled to unemployment or sick pay under normal circumstances. This is why it’s so important to take advantage of this tax credit. The government rarely offers perks like this to the self-employed.
Get Help Applying for the COVID Self-Employed Tax Credit
Self-employed people have unique tax reporting requirements. Staying compliant with your filing requirements can be tricky enough at the best of times, but it can be very complicated when you’re trying to claim a credit like this.
Since the team at ERC Today specializes in the Employee Retention Credit for employers, we recommend you contact your individual tax return preparer to ask their help applying for the COVID Self-Employed Tax Credit.
