Deadline nears for forgotten self-employed tax credit that could mean ‘serious money’ (Courtesy of the Jacksonville Business Journal) — Self-employed professionals might be missing out on a lucrative tax credit, and the deadline to claim the potential benefit is fast approaching.
The credits for sick leave and family leave for certain self-employed individuals originated in March 2020 as part of the Families First Coronavirus Response Act during the initial response to the Covid-19 pandemic. The tax credits — open to any professional who paid self-employment taxes in 2019 and 2020 — apply to anyone who had to take time off of work to quarantine, to care for another person who quarantined, or to care for children while schools were closed, among other items.
“It seems to me that in 2020 pretty much anybody with very few exceptions is going to qualify for it,” said Bruce Hicks, an enrolled agent and president of tax and insurance firm The Freedom Group Inc. “We are talking serious money.”
The tax credit has two parts.
The first piece extends to a self-employed person who was unable to work for up to 10 days from April 1, 2020, to Dec. 31, 2020, because of Covid-19. That includes:
- Being subject to a federal, state, or local quarantine or isolation order related to Covid-19.
- Being advised by a health-care provider to self-quarantine due to concerns related to Covid-19.
- Experiencing symptoms of Covid-19 and seeking a medical diagnosis.
- Missing work due to a Covid-19 vaccination appointment.
- Experiencing side effects due to vaccination.
The second part of the tax credit is for self-employed workers unable to work for up to 50 days from April 1, 2020, to Dec. 31, 2020, due to one of the following reasons:
- Caring for an individual who was subject to a federal, state, or local quarantine or isolation order related to Covid-19.
- Caring for an individual who was advised by a health-care provider to self-quarantine due to concerns related to Covid-19.
- Caring for a child because the school or place of care for that child was closed or the child care provider for that child was unavailable due to Covid-19 precautions.
How much money is at stake, and what’s the deadline?
The total potential value of part one of the credit is $5,110 per self-employed person, on a scale that diminishes as income drops. Part two maxes out at about $10,000 for the care of a child, according to Hicks.
Hicks said while the credit’s purpose was to replace lost income, workers do not have to prove any lost income — only that they lost time by having to deal in various ways with the pandemic.
The tax credit extends beyond the noted 2020 period into the first quarter of 2021. Taxpayers can claim that credit in 2020, or separately claim the middle two quarters of 2021, albeit with a few changes, instead of claiming one in 2020.
The deadline to apply for the credit for the 2020 time period is May 17 of this year — and that includes filing an amended return, which is what workers will need to do in order to claim the credit. Individuals interested in the tax credit need to gather up proof in the form of doctors notes, school messages, appointment confirmations or positive Covid test results — documentation that proves they were either quarantining or taking care of a child instead of working. That includes local government orders that apply to their specific profession.
Other programs overshadow the credit
The tax credit for self-employed individuals largely faded into the background as the Covid-19 pandemic took hold, a victim of the fact that there were larger, more-public programs for workers and because the rules around how to get the tax credit were so vague it was hard to confidently apply.
Over the course of 2022 and 2023, the IRS released more official and detailed guidance on how to prove eligibility for the credit, and that was when Hicks and The Freedom Group — and others — began to process requests for the credit.
Hicks said the credit is only going to grow more popular as the deadline nears. That’s already occurring to some degree, he said, because some of the third-party operators that have worked on the Employee Retention Credit — and have been the target of vigorous IRS enforcement and fraud efforts — have turned their attention to this credit.
“I get at least a call or an email every day, which is one of the ways we found out about this,” Hicks said. “A lot of our clients started getting these emails and texts and phone calls, and that’s what drew my attention to it.”
Hicks urged taxpayers to work with a trusted tax professional — such as an enrolled agent, CPA or tax attorney — who can not only guide them through the credit process, but who can also ensure that amending the older returns does not create additional problems or result in a tax liability that cancels out the credit. He encouraged applicants to avoid using one of the third parties that take a much higher portion of the credit as a fee than typical and likely will not be there to help a taxpayer should the IRS come knocking.
The involvement of third-party groups — which the IRS has called “mills” — in the Employee Retention Credit program is what led the agency to declare a moratorium on Sept. 14 on processing ERC claims. That moratorium is not likely to be lifted any time soon, and Congress is mulling legislation that could retroactively end the ERC on Jan. 31 instead of in April, as originally designed.
In addition to the potential tax credit for self-employed professionals, many business owners are not aware of a series of tax credits of up to $5,000 passed by Congress to help defray the cost of launching or boosting a retirement plan.
Information about other tax credits available to business owners this year is available here.
We’ve also compiled a list of small-business grants that business owners can apply for in 2024.