COVID-19 Update #3 - Families First Coronavirus Response Act - Sick Leave Tax Credits for the Self-Employed

On March 18, President Trump signed into law the Families First Coronavirus Response Act (the Act, PL 116-127), which eased the compliance burden on businesses. While the Act requires mandated paid sick leave in certain instances (covered in a separate blog post), the Act also provides limited relief for taxpayers who are self-employed.  

Tax Credit for Sick Leave 

The Act provides a refundable income tax credit (including against the taxes on self-employment income and net investment income) for sick leave to a self-employed person by treating the self-employed person both as an employer and an employee for credit purposes. Thus, with some limits, the self-employed person is eligible for a sick leave credit to the extent that an employer would earn the payroll sick leave credit if the self-employed person were an employee.

Applicable Taxpayers: The taxpayers eligible for this credit are those who regularly carry on a trade or business as defined by IRC Section 1402 and would qualify for the paid leave and the related credits, if they were employees for an applicable employer.  

Warning:  An unusual nuance is the law's application to ministers and employees who work for churches making the election under IRC Section 3121(w).  Income earned by ministers is taxed under IRC Section 1402 as self-employment income as is income paid to all employees that work for a church electing out of the FICA/Medicare system.  Therefore, these employees, even if provided with required sick leave by an employer, must claim the credit on their personal tax returns.  The employers will not be eligible to claim the credit.  At this time, guidance has not been issued by the IRS to confirm this interpretation.

Qualifying Time:  The taxpayer must have incurred days that he/she could not have performed their regular work duties for one of the following stated reasons: 

1. the taxpayer is subject to a Federal, State or local quarantine or isolation order related to COVID-19;
2. the taxpayer has been advised to self-quarantine due to COVID-19;
3. the taxpayer is experience symptom of COVID-19;
4. the taxpayer must care for an individual who is subject to a quarantine order; 
5. the taxpayer is caring for a son or daughter, if the child's school has been closed; or 
6. the taxpayer qualifies due to a subsequent factor defined by the Secretary of Health & Human Services.

Amount of the Credit:  The amount of the credit is either $511 per day, not to exceed 10 days, for the days qualifying under #1, #2 or #3 or $200 per day, not to exceed 10 days, for the days qualifying under #4, #5 or #6 above.  Accordingly, the self-employed person may receive an income tax credit with a maximum value of $5,110 or $2,000 per the payroll sick leave credit. 

Limit on the Credit:  The allowable credit is limited to either 100% for days qualifying under #1, #2 or #3 or 67% for days qualifying under #4, #5 or #6, of the average daily self-employment income.  Average daily self-employment income is determined by taking the self-employment income for the year and dividing by 260 days.  Additionally, the credit is decreased to the extent that the self-employed person has received days of  paid sick leave from an employer under the Act. The credit applies to a period (1) beginning on a date determined by the IRS that is no later than April 2, 2020 and (2) ending on December 31, 2020. Applicable taxpayers should be able to estimate the amount of the credit and decrease required estimated tax payments.  

Please note that guidance on the legislation is being issued and may provide further clarification on the application and operation of the new law. 

Further analysis of COVID-19 relief legislation is discussed in separate blog posts.