We are well into the fiscal season. But if you are a sole proprietor, partner, or LLC member working on your own, you may not be listed on Form 1040 2020. If so, you are forgiven. The good news is that if you’ve been on the sidelines so far, it may be in your favor – because there are some new tax cuts you may not be aware of. Here is the story of the two important ones. Take advantage if you can.
Postpone a tax on your own
If you are self-employed, you know that self-employment tax (SE) can take a big bite out of your wallet every year. Uch. Fortunately, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows you to defer half of your 2020 debt for the 12.4% tax security component of the SE tax for the deferral period. The postponement period started on 27.03.2020 and ended on 31.12.2020. Next, you have to pay the deferred amount of SE tax in two installments:
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Half until 31.12.21
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The remaining half until 31.12.2022
If you are without money, this can be a very useful business and you should take full advantage of it.
If you owe a maximum of $ 17,075 for the 2020 Social Security tax portion of the SE tax, it turns out that you can defer up to half of that amount or $ 8,537. You will then pay USD 4,268.50 until 31.12.21 and the remaining USD 4,268.50 until 31.12.22.
Tax Saving Tip: Complete Part III of Annex SE to calculate the exact amount you can defer. Then take the deferred amount to Schedule 3 of Form 1040, where it is treated as a 2020 federal income tax credit on page 2 of the return. Done.
Apply for tax credits for sick leave related to COVID-19 and family leave taken last year
The Family Correspondence Act for the First Coronavirus (FFCRA) granted two federal 2020 tax credits for small employers to cover: (1) mandatory payments to employees who took leave between 01.04.20 and 31.12.2020 under COVID of FFCRA- 19 provisions regarding emergency medical leave and (2) mandatory payments to employees who have taken leave between those dates under the provisions of FFCRA regarding emergency leave for family.
Somewhat surprisingly, equivalent tax credits are available to you as a self-employed person if you have taken days of qualified medical leave or qualified family leave between 01/04/20 and 31/12/20. In fact, you can claim credits for the amounts you paid for: (1) qualifying days of sick leave and (2) qualifying days of family leave. That’s great. Here’s what you need to know to cash in.
Medical leave credit details
The sick leave credit is allowed for the sick leave days you took between 01/04/20 and 31/12/20. The daily sick leave credit is equal to: (1) 100% of the daily equivalent amount of sick leave plus (2) 67% of the daily equivalent amount of sick leave if you have taken leave to care for a sick person or to care for a minor -18 son or daughter after the closure of the school or place of child care or because the child care provider was not available due to COVID-19 precautions.
The equivalent daily amount of sick leave is equal to the lesser of: (1) the average daily income from self-employment or (2) $ 511 per day for up to 10 days of sickness (up to $ 5,110 in total) for take care of yourself or $ 200 a day for up to 10 days (up to $ 2,000 in total) to care for another sick person or to care for a son or daughter under the age of 18 for any of the above reasons previous.
Average daily self-employment income means your net self-employment earnings for 2020 divided by 260.
Family vacation credit details
The separate family leave credit is allowed for the days of family leave you have taken to take care of a son or daughter under the age of 18 between 01/04/20 and 31/12/2020 after school or school. place of childcare or because the childcare provider was not available due to COVID-19 precautions.
You can apply for the family leave credit for up to 50 days. Eligible credit is equal to the number of days of qualified family leave multiplied by the lesser of (1) $ 200 or (2) average daily self-employment income.
The maximum total credit for family leave is $ 10,000 (50 days × $ 200 per day).
Once again, the average daily income from self-employment means your net self-employment earnings for 2020 divided by 260.
Keep the documentation
You should keep the documentation to determine your eligibility for these credits. According to the IRS website:
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If you took days off based on a quarantine order or self-quarantine advice, document the name of the government entity that ordered the quarantine or the name of the medical staff that recommended the self-quarantine. If you have taken days off to care for another person who has been quarantined or advised to self-quarantine, document the other person’s name and relationship.
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If you have taken family days off to care for a son or daughter under the age of 18 due to school closure or child care or the availability of a child care provider, document the child’s name and age. ; the name of the school, summer camp, summer enrichment program or other summer program that has been closed; or the child care unit that has been closed; or the child care provider who was not available. Be prepared to state that no other person has cared for the child on the days when you took family leave.
Tax Saving Tip: These two loans are the so-called repayable loans. This means you can collect them even if you have no federal income tax liability for 2020. But you must file Form 1040 from 2020 to collect. First, calculate the credits for the new IRS Form 7202 (Sick Leave and Family Leave Credits for Self-Employed Individuals). Then take the credits to Annex 3 of Form 1040, where they are treated as repayable credits on page 2 of Form 1040.
Another tax saving tip: You can choose to use 2019 net earnings from self-employment to calculate the average daily income from self-employment to calculate these credits. Do this if higher credits result. To make your choices, simply enter the 2019 largest amount of net earnings from self-employment on Form 7202.
Bottom line
The COVID-19 pandemic, its economic consequences and the exemption from available federal income taxes can make Form 1040 2020 a whole new game. This column addresses two important considerations for self-employed people, but there are several. Your tax professional can work with them to optimize your tax-saving results for a year we all want to forget about.