We are far into the tax season. But if you are a busy sole proprietorship, partner or LLC member, you may not have submitted the 2020 Form 1040. If so, you will be forgiven. The good news: if you’ve stayed on the sidelines so far, it may be in your favor – because there are some new tax cuts you may be blissfully unaware of. Here the story about two is important. Use if you can.
Postpone self-tax
If you are a self-employed person, you know that the tax on self-employed people can take a big bite out of your wallet every year. Ouch. Fortunately, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows you to defer half of your 2020 liability for the tax component of 12.4% for the social security of the SE tax for the extension period. . The deferral period started on 3/27/20 and ended on 31/12/20. You must then pay the deferred SE tax amount in two installments:
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Half teen 31/12/21
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The remaining half by 31/12/22
If you have money, it can be a very useful transaction, and you need to make full use of it.
If you owe a maximum of $ 17,075 for the tax portion of the 2020 Social Security of the SE tax, it turns out that you can defer up to half the amount, or $ 8,537. You then pay $ 4,268.50 by 31/12/21 and the remaining $ 4,268.50 by 31/12/22.
Tax-saving tip: Complete Part III of Schedule SE to calculate the exact amount you can defer. Then transfer the deferred amount to Schedule 3 of Form 1040, where it is treated as a credit that reduces your 2020 federal income tax liability on page 2 of your return. Finished.
Claim tax credits for COVID-19-related sick leave and family leave taken last year
The Families First Coronavirus Response Act (FFCRA) granted two separate federal tax credits from 2020 to small employers to cover: (1) mandatory payments to employees who took time off between 4/1/20 and 31/12/20 under the FFCRA’s COVID-19 related sick leave emergency provisions and (2) compulsory payments to employees who took time off between those dates in accordance with the provisions of the FFCRA’s emergency family leave.
Somewhat surprisingly, as an independent person, you have equal tax credits available if you took days of qualified sick leave or qualified family leave between 4/1/20 and 31/12/20. In fact, you can claim credits for amounts you paid for yourself: (1) qualified sick leave days and (2) qualified family leave days. Nice. This is what you need to know to earn.
Credit details for sick leave
The sick leave credit is allowed for sick leave days that you took between 4/1/20 and 31/31/20. The daily sick leave credit is equal to: (1) 100% of the daily equivalent amount with sick leave plus (2) 67% of the daily sick leave equivalent amount if you took leave to care for a sick person or to provide an under- age-18 son or daughter after the closure of the child’s school or care place or because the child carer for the child was not available due to COVID-19 precautionary measures.
The daily equivalent amount with sick leave is equal to the lesser of: (1) your average daily income from self-employment or (2) $ 511 per day for up to ten sick days (up to $ 5,110 in total) to take care of yourself or $ 200 per day for up to ten days (up to $ 2,000 in total) to care for another sick person or for one of the aforementioned reasons to care for a boy or girl under the age of 18.
Average daily income from self-employment means your net earnings for 2020 divided by 260.
Family Vacation Credit Details
The separate credit for family leave is allowed for family leave days that you have taken to care for a boy or girl under the age of 18 between 1/1/20 and 31/12/20 after the closure of the child’s school or care home or because the childminder was not available for the child due to COVID-19 precautions.
You can claim the family leave credit for a maximum of 50 days. The allowable credit is equal to the number of qualified family vacation days multiplied by the lesser of (1) $ 200 or (2) your average daily income from self-employment.
The maximum total family leave credit is $ 10,000 (50 days × $ 200 per day).
Again, the average daily income from self-employment means your net self-earnings for 2020 divided by 260.
Save documentation
You must keep documentation to determine if you are eligible for these credits. According to the IRS website:
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If you have taken sick leave days for yourself based on a quarantine order or advice on self-quarantine, document the name of the government entity ordering quarantine, or the name of the health worker who advised self-quarantine. If you have taken sick leave to care for another person who was under quarantine, or recommended to be self-quarantined, you must document the name and relationship of the other person with you.
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If you have taken family leave days to care for a boy or girl under the age of 18 due to the closure of a school or the closure of a childcare facility or the availability of childminders, you must provide the name and age of the child document the name of the school, summer camp, summer enrichment program or other summer program that has been closed; or the childcare facility closed; or the childminder who was not available. Be prepared to state that no other person cared for the child during the days you took family leave.
Tax-saving tip: These two credits are so-called repayable credits. That means you can collect it, even if you have no federal income tax liability for 2020. However, you must submit your 2020 Form 1040 to pay in cash. First calculate the credits on the new IRS form 7202 (credits for sick leave and family leave for certain self-employed individuals). Then transfer the credits to Schedule 3 of Form 1040 where they will be treated as repayable credits on page 2 of your Form 1040.
Another tax-saving tip: You can choose to use your 2019 net income to calculate your average daily income for calculating these credits. Do this if it results in greater credits. To make the election, simply import the greater net income from 2019 from self-employment on Form 7202.
The conclusion
The COVID-19 pandemic, the economic consequences, and available federal income tax relief can make your 2020 Form 1040 a new ballgame. This column deals with two important considerations for independent individuals, but there is more. Your taxpayer can work with them to optimize your tax savings results for a year we all want to forget.