Ever since the IRS Moratorium on ERC claims began last year, ERC Mills have switched gears in an attempt to stay in business. And so, they are now soliciting a little known pandemic-era tax credit called the Self-Employed Tax Credit which essentially says "eligible self-employed individuals are allowed a credit against their federal income taxes for any taxable year equal to their "qualified sick leave equivalent amount" or "qualified family leave equivalent amount."
While this is a legitimate credit, the tax code which expanded the Emergency Paid Sick Leave Act ("EPSLA") and Emergency Family and Medical Leave Expansion Act ("Expanded FMLA") under the American Rescue Plan of 2021 is literally written to discourage taking the credit given all of the eligibility criteria. Here is the guidance from the IRS on how the credit is calculated:
For an eligible self-employed individual 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,
seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19 and the individual has been exposed to COVID-19 or is unable to work pending the results of the test or diagnosis, or
obtaining immunization related to COVID-19 or recovering from any injury, disability, illness, or condition related to the immunization,
the qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in any trade or business for one of the three above reasons, multiplied by the lesser of $511 or 100 percent of the "average daily self-employment income" of the individual for the taxable year, or the prior taxable year.
For 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 HHS in consultation with the Secretary of the Treasury and the Secretary of Labor. The Secretary of HHS has specified, after consultation with the Secretaries of Treasury and Labor, that a substantially similar condition is one in which the employee takes leave:
to accompany an individual to obtain immunization related to COVID-19, or
to care for an individual who is recovering from any injury, disability, illness, or condition related to the immunization.
the qualified sick leave equivalent amount is equal to the number of days during the taxable year 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 "average daily self-employment income" of the individual for the taxable year, or the prior taxable year.
In either case, the maximum number of days a self-employed individual may take into account in determining the qualified sick leave equivalent amount is ten.
Note: The only days that may be taken into account in a taxable year in determining the qualified sick leave equivalent amount for the year are days occurring during the year and during the period beginning on April 1, 2021, through September 30, 2021.
Can a self-employed individual receive both qualified sick or family leave wages and qualified sick or family leave equivalent amounts?
Yes, but the qualified sick or family leave equivalent amounts are reduced by the qualified sick or family leave wages.
That is, if a self-employed individual is entitled to a refundable credit for a qualified sick leave equivalent amount and also receives qualified sick leave wages as an employee, it reduces the qualified sick leave equivalent amount for which the self-employed individual may claim a tax credit to the extent that the sum of the qualified sick leave equivalent amount and any qualified sick leave wages exceeds $2,000 (or $5,110 in the case of any day any portion of which is paid sick time.
Similarly, if a self-employed individual is entitled to a refundable credit for a qualified family leave equivalent amount and also receives qualified family leave wages as an employee, it reduces the qualified family leave equivalent amount for which the self-employed individual may claim a tax credit to the extent that the sum of the qualified family leave equivalent amount and the qualified family leave wages, exceeds $12,000.
Example: In her capacity as an employee, Taxpayer A receives $4,000 in qualified sick leave wages, comprised of:
$3,000 in qualified sick leave wages ; and
$1,000 in qualified sick leave wages
In addition, in her capacity as a self-employed individual, Taxpayer A is eligible for a $3,300 qualified sick leave equivalent credit comprised of:
$2,500 in qualified sick leave equivalent credits for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA, as amended for purposes of the ARP; and
$800 in qualified sick leave equivalent credits for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of the EPSLA, as amended for purposes of the ARP.
Taxpayer A must reduce the $3,300 qualified sick leave equivalent credit for which she is eligible by $2,190, which is comprised of:
the excess of the qualified sick leave wages and qualified sick leave equivalent amounts for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA over $5,110 (that is, $390); plus
the excess of the qualified sick leave wages and qualified sick leave equivalent amounts for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of the EPSLA over $2,000 (that is, $0); plus
the remaining excess of the total leave credits to which Taxpayer A is entitled in her capacity as either an employee or a self-employed individual over $5,110 (that is, $1,800).
Accordingly, Taxpayer A may claim a qualified sick leave equivalent credit of $1,110.
Example: In his capacity as an employee, Taxpayer B receives $8,000 in qualified family leave wages. In addition, in his capacity as a self-employed individual, Taxpayer B is eligible for a $4,500 qualified family leave equivalent credit. Taxpayer B may claim a qualified family leave equivalent credit of $4,000, because he must reduce the qualified family leave equivalent amount to which he is entitled to the extent that the sum of the qualified family leave equivalent amount and his qualified family leave wages (that is, $12,500) exceeds $12,000 (that is, $500).
ANY COMPANY that tells you taking the Self - Employed Tax Credit is "easy" is lying. There is a whole lot of "if-thens" and math that goes into the calculation and unless the individual was 100% self-employed during the time allowed for the credit, it will cost more by having a paid preparer accurately calculate then the individual will receive. Not to mention the high audit risk for this type of credit!
