Update on COVID-19 Employment Tax Credits, including the Release of Form 7202
Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals
On Tuesday, February 8, the IRS announced that a new form is available for eligible self-employed individuals to claim sick and family leave tax credits under the Families First Coronavirus Response Act (FFCRA).
Eligible self-employed individuals will determine their qualified sick and family leave equivalent tax credits with the new IRS Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. The tax credits will be claimed on 2020 Form 1040 for leave taken between April 1, 2020, and December 31, 2020, and on their 2021 Form 1040 for leave taken between January 1, 2021, and March 31, 2021. The Instructions for Form 7202 were also released and provide additional information. The FFCRA: Questions and Answers on the IRS website also provide further explanations of eligibility requirements and credit calculations.
The FFCRA, passed in March 2020, allows eligible self-employed individuals who, due to COVID-19, are unable to work or telework, for reasons relating to their own health or to care for a family member, to claim refundable tax credits to offset their federal income tax. The credits are equal to either their qualified sick leave or family leave equivalent amount, depending on circumstances. IRS.gov has instructions to help calculate the qualified sick leave equivalent amount and qualified family leave equivalent amount. Certain restrictions apply.
Who may file Form 7202 – Eligible self-employed individuals must:
- Conduct a trade or business that qualifies as self-employment income, and
- Be eligible to receive qualified sick or family leave wages under the Emergency Paid Sick Leave Act or Emergency Family and Medical Leave Expansion Act as if the taxpayer was an employee.
Taxpayers must maintain appropriate documentation establishing their eligibility for the credits as an eligible self-employed individual.
Form 7200, Advance Payment of Employer Credits Due to COVID-19
We have mentioned Form 7200, Advance Payment of Employer Credits Due to COVID-19, previously in our updates, but the focus in doing so was most recently on the employee retention credits (“ERC”). This focus was due to the expansion of the ERC, which under recent legislation, has gained greater significance for some employers now that participation in the PPP loan program does not preclude qualification for the ERC.
With the focus on PPP last year, some employers may not have considered their eligibility for the FFCRA tax credits for qualified sick and qualified family leave wages for 2020 and 2021. The Consolidated Appropriations Act, 2021, extended employer tax credits for paid sick leave and expanded family and medical leave voluntarily provided to employees until March 31, 2021. However, this Act did not extend an eligible employee’s entitlement to FFCRA leave beyond December 31, 2020.
Awaiting Guidance from the IRS on the ERC
As mentioned above and discussed in our update on February 2, the Consolidated Appropriations Act of 2021 (Act), signed into law on December 27, 2020, contains significant enhancements and improvements to the ERC. One of the main enhancements was the eligibility of a PPP loan recipient to now claim the ERC for payroll expenditures that are not utilized as the basis for PPP forgiveness. The IRS recently commented in a public forum (the American Bar Association Mid-year Tax Conference) that guidance will be issued concerning how businesses can retroactively claim the ERC, even if they took advantage of the PPP. We will continue to send updates as guidance is released.