Self-Employed During the Pandemic? Uncle Sam Didn’t Forget About You
In the past, Uncle Sam made no special effort to help you as a self-employed individual. For example, you had no “safety net” that existed for employees who lost their jobs during the COVID-19 Pandemic. You were just supposed to “Hang On” until things got better.
But this time, with COVID-19, it’s different…
If you report your business income as Self-Employed on Schedule C of your Form 1040 or any of the following:
- Receive 1099 income
- Operate your business as a single-member LLC and did not elect corporate status
- Operate a retail establishment or professional practice as a sole proprietor, or
- Report your W-2 income on a Schedule C because you are a statutory employee
In this article I’ll cover the following seven beneﬁts that are available to you as a self-employed individual:
- Up to $41,666 in Paycheck Protection Program (PPP) tax-free monies with the combination of first- and second-draw forgivable loans
- Up to $500,000 of Economic Injury Disaster Loans (EIDLs) at 3.75 interest
- Up to $10,000 in tax-free EIDL Advances
- Up to $10,000 in tax-free Targeted EIDL Advances
- Up to $33,022 in sick and family leave refundable tax credits ($15,511 with your 2020 tax return and $17,511 with your 2021 tax return)
- Possible large reductions in your cost of health insurance under the newly available Affordable Care Act (ACA) premium tax credits
- Qualification for unemployment benefits
Why this largesse? Perhaps because so many Americans are now self-employed—up to 44 million by some counts.
There may be as many as 44 Million American Workers (28.8%) who were Self-Employed at some point during a given week in 2019. 14% of workers said being an independent contractor was their primary job.
1. PPP Monies
PPP monies ﬁrst became available with the passage of the CARES Act on March 27, 2020.
But originally, millions mistakenly thought that the monies were not available to the self-employed. We were not among the mistaken, as you can see in COVID-19: New SBA Loans for Small Businesses—Maybe a Great Deal.
A second problem was that the PPP monies came with the word “loan” attached to them, and that was a turnoff for many. After all, who wants a loan, knowing you’ll have to pay it back?
But the PPP was not really a loan, because it was forgivable. You have to pay back a loan. You did not (and do not) have to pay back the PPP loan.
For the self-employed, PPP loan forgiveness is simple and virtually automatic.
Example: Alice receives a $20,833 PPP loan. She puts the $20,833 in her business checking account. It sits there for two weeks. She then writes a $20,833 business check to her personal savings account. Alice qualiﬁes for $20,833 of loan forgiveness, as explained in Five Answers to Spending the PPP Money on You and Your Employees.
PPP loans proved so popular, Congress expanded the program to allow two separate PPP loans: ﬁrst-draw PPP loans followed by second-draw PPP loans for those who had already received a PPP loan. For the latest rules on ﬁrst- and second-draw rules, see PPP Extended—Act Fast or Miss Out.
For the self-employed with no employees, both ﬁrst-draw and second-draw monies are capped at $20,833, for a maximum of $41,666.
Congress has added billions in additional funds to the Small Business Administration (SBA) EIDL program. Unlike PPP loans, EIDLs are not a temporary program; they have been available for decades.
EIDLs are 30-year loans for up to $500,000 (increased from $150,000) with a 3.75% interest rate. Payments can be deferred for up to four years. You need to provide no collateral if your loan is for $25,000 or less.
Unlike PPP loans, EIDLs are not forgiven by the SBA. You have to pay back the EIDL.
3. Prior EIDL Advances
Under the CARES Act, if you had both an EIDL Advance and a PPP loan, your forgiveness amount was reduced by the EIDL Advance.
For most self-employed individuals who applied for the EIDL, the EIDL Advance was a surprise. When you applied for an EIDL, you received a $1,000-per-employee EIDL Advance, up to $10,000. As a self-employed person, you were deemed an employee, too, and received $1,000.
And then there was a second surprise for those who also received a PPP loan. It worked like this: Let’s say in mid-June 2020, you received a $100,000 PPP loan. And let’s say about the same time you received a $5,000 EIDL Advance when you applied for an EIDL, but you did not take the EIDL.
When your $100,000 PPP loan was forgiven in November, the lender reduced your forgiveness by your $5,000 EIDL Advance, and you had to pay the $5,000 to the lender.
But here’s good news: the Economic Aid to Hard-Hit Small Businesses, Nonproﬁts, and Venues Act
- Eliminates the offset rule for all PPP loans, even those previously forgiven, and
- Requires the SBA to set in motion rules for the lenders to return the EIDL Advance money to PPP borrowers who had the money deducted from their forgiveness.
Example: Let’s go back to the $5,000 EIDL Advance that offset the $100,000 PPP forgiveness. Under the new law, the SBA will create rules for the lender to refund your $5,000. Thus, your total forgiveness will be $105,000 ($100,000 + $5,000).
Further, the entire $105,000 is not taxable, and all expenses paid with the monies forgiven are deductible.
4. New Targeted EIDL Advances
You might qualify for the new Targeted EIDL Advance of up to $10,000 if
- Your business is located in a low-income community (check the SBA map at SBA Targeted EIDL Advance Low Income Communities map), and
- You suffered a 30 percent reduction in revenue during an eight-week period beginning March 2, 2020, or later.
Unlike EIDLs themselves, Targeted EIDL Advances need not be paid back. They really are tax-free government grants.
Unfortunately, these advances will ﬁrst be made available only to those businesses that
- Received a previous EIDL Advance for less than $10,000, or
- Applied for an advance before December 27, 2020, but didn’t receive one because the funding was exhausted at that time.
The SBA will send you an email invite if you’re in either category. And if monies are left after the invites, the SBA may accept new applications.
You apply for the Targeted EIDL Advances online at the SBA website.
5. Sick Leave and Family Leave Tax Credits
PPP loans have gotten the most publicity, but don’t overlook the sick leave and family leave credits for the Self-Employed.
For you, the refundable tax credits can be worth up to $15,111 on your 2020 tax return and up to $17,111 on your 2021 tax return. If you are married and your spouse is also self-employed, double the maximum amounts to
$30,222 for 2020 and $34,222 for 2021.
Thanks to the American Rescue Plan Act of 2021, there are two separate sets of credits:
- One for April 1, 2020, through March 31, 2021, and
- One for April 1, 2021, through September 30, 2021.
Let’s take a peek at the rules you will follow for your 2020 tax return to ﬁnd up to $15,111 in refundable tax credits.
- For the big picture, see the self-employed sections of COVID-19: Significant Payroll and Self- Employment Tax Relief.
- Here’s IRS Form 7202, which you file with your 2020 tax return.
- Here are the 2020 Instructions for IRS Form 7202.
To help you visualize what’s involved for this tax year, here are the rules for April 1 through September 30, 2021:
Sick Leave Credit
You have two ways to qualify for a credit for up to 10 total days of sick leave during the period of April 1 through September 30, 2021. The amount of the credit depends on whether you’re sick or someone else is.10
1. You’re sick: You qualify for a credit of up to $511 per day if you can’t work or telework because you:
- Have to self-isolate or quarantine, are experiencing COVID-19 symptoms, and need to obtain a diagnosis;
- Have been exposed to COVID-19 and are unable to work pending test results;
- Need to get vaccinated against COVID-19; or
- Are recovering from a vaccination.
This credit is equal to 100 percent of the average net earnings from self-employment you earn per day, capped at $511 per day. Thus, the maximum credit is $5,110.
2. You care for others: You also qualify for a sick leave credit of up to $200 per day if you can’t work or telework because you:
- Were or are caring for an individual who was subject to a federal, state, or local quarantine or isolation order related to COVID-19;
- Were or are caring for an individual who was advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
- Were caring for a son or daughter because the school or place of care for that child was closed or because the childcare provider was unavailable due to COVID-19 precautions.
This credit is equal to 67 percent of your daily average net earnings from self-employment, capped at $200 per day. Thus, the maximum credit is $2,000.
Family Leave Credit
You can also receive a second credit, for up to 60 days of family leave, for days you can’t work or telework for any of the same reasons listed above that qualify you for the sick leave credit.
The family leave credit is equal to 67 percent of your average daily self-employment income, capped at $200 per day. Thus, the maximum credit is $12,000.
If you qualify, you can take both the sick leave and family leave credits, up to a maximum of 70 combined days. But you cannot use both credits for the same day of leave.
Average Daily Net Earnings from Self-Employment
You determine your average daily net earnings from self-employment by dividing your total net self-employment income for the year or the prior year by 260. Your net self-employment income is on Schedule SE, line 6.
Example: Jane is a self-employed consultant whose net earnings from self-employment income for 2021 are $200,000. Her average daily net earnings from self-employment income are $769 ($200,000 ÷ 260), but her sick leave credit is capped at $511. She takes four days off during May 2021 to recover from the side effects of her second COVID-19 vaccination. She may claim a sick leave credit of 4 x $511 = $2,044.
On your 2020 tax return, you claim your sick leave and family leave credits for leave taken during the period of April 1, 2020, through December 31, 2020. The rules are largely the same as for the new law’s credit that’s available from April 1 to September 30, 2021, except for the following differences:
- COVID-19 vaccinations do not qualify for either credit.
- The family leave credit is limited to 50 days, for a maximum of $10,000.
On your 2021 tax return, for sick leave and family leave days from January 1 to March 31, 2021, you have the leftover days from the 2020 tax return available, plus the full batch of the new 10-day and 60-day limits for the credit during April 1, 2021, through September 30, 2021.
Planning point: For each of 2020 and 2021, you have two separate credit opportunities depending on whether you are sick or taking care of others. They are both refundable tax credits—you get the full amount even if it exceeds your tax liability for the year.
Taking the Credits in Advance
To take the credit in advance of ﬁling your tax return, you can reduce your quarterly estimated tax payments by the anticipated amount of the credit. From April 1, 2020, through March 30, 2021, you could have deducted the credit from both the income tax and self-employment tax portions of your estimated taxes. For April 1, 2021, and later, you can deduct the credit only from the income tax portion of your estimated tax payments.
6. ACA Tax Credits Expanded
Many self-employed individuals obtain health insurance coverage through their state health insurance exchange established under the ACA. But the ACA coverage can be expensive.
Depending on your income, you can qualify for a premium tax credit to help pay for your coverage.
Under the pre-pandemic ACA rules, premium tax credits were available only to enrollees whose family income was less than 400 percent of the federal poverty level ($51,040 for a single person and $104,800 for a family of four). If your income exceeded the threshold by even one dollar, you got no ﬁnancial help to purchase ACA coverage.
The American Rescue Plan Act has temporarily abolished the ACA subsidy cliff for 2020 and 2021.
Under this new law, if you earn over 400 percent of the federal poverty level, you pay no more than 8.5 percent of your household income for individual ACA insurance. Regardless of how high your income, you are entitled to a premium tax credit to the extent the cost of the silver benchmark plan in your area exceeds 8.5 percent of household income.16
Many independent contractors will qualify for premium tax credits for the ﬁrst time; others will get larger credits. For example, if your income is $200,000, you are required to pay no more than $17,000 for Obamacare coverage. If a silver plan for you and your family costs $25,000, you are entitled to an $8,000 premium tax credit.
If you have no health coverage, you can enroll right now, during a special enrollment period scheduled to last through August 15, 2021.
If you obtain individual health coverage outside your health exchange, you should consider whether it’s worthwhile to switch to exchange coverage. You can receive premium tax credits only if you get your coverage through the exchange.
If you currently do have ACA coverage, you may wish to upgrade to a higher-cost policy with lower co-pays and deductibles.
You can ﬁnd a link to your state health insurance exchange at https://www.healthcare.gov.
7. Unemployment Beneﬁts for the Self-Employed
Finally, if things get really tough, you likely can obtain unemployment beneﬁts. This is truly unprecedented.
Ordinarily, Schedule C taxpayers such as 1099 folks and proprietors cannot collect unemployment from their state unemployment insurance agency when they are out of work. This makes perfect sense because the self-employed do not pay unemployment taxes; nor do their clients pay such taxes for them.
But the Pandemic Unemployment Assistance program, passed by Congress in March 2020 as part of the CARES Act, made the self-employed temporarily eligible for unemployment for the ﬁrst time.
Pandemic Unemployment Assistance beneﬁts were scheduled to expire March 14, 2021, but have now been extended through September 6, 2021, by the American Rescue Plan Act. Independent contractors can collect up to 79 weeks of beneﬁts.
You need to apply for unemployment beneﬁts through your state unemployment ofﬁce.19 Beneﬁt amounts vary from state to state; the federal government adds $300 per week to the applicable state beneﬁt. You must be earning no income, or almost no income, to qualify for unemployment.
Here are seven main things the federal government has done and is doing to help you during the COVID-19 pandemic, if you’re self-employed:
- PPP monies: Self-employed individuals with no employees can obtain forgivable ﬁrst- and second-draw PPP monies of up to $20,833 for each draw, or $41,666 in total.
These monies are available through May 31. Apply now if you haven’t already done so. If you already received a PPP loan, you may qualify for a second-draw loan if your 2020 income for any quarter declined by 25 percent compared with the same 2019 quarter.
- EIDLs: These 3.75 percent interest loans of up to $500,000 are available to the self-employed and are not forgivable. You can borrow up to $25,000 without any collateral.
- Prior EIDL Advances: The Economic Aid to Hard-Hit Small Businesses, Nonproﬁts, and Venues Act, enacted on December 27, 2020, eliminates the rules that required reducing your PPP forgiveness by the amount of your EIDL Advance and requires the SBA to refund your advance if your loan forgiveness has been previously reduced.
- New Targeted EIDL Advances: You might qualify for a Targeted EIDL Advance of up to $10,000 if (a) your business is located in a low-income community, and (b) you suffered a 30 percent reduction in revenue during an eight-week period beginning March 2, 2020, or later. Unlike EIDLs, Targeted EIDL Advances need not be paid back. They are tax-free government grants.
- Sick and family leave tax credits: If you’re unable to work due to COVID-19, or if you need to care for a family member, you can qualify for refundable sick leave and family leave tax credits of up to $15,511 in 2020 and $17,511 in 2021. You can get up to $511 per day for 10 days if you’re sick. You can get up to $200 per day for 70 days if you need to care for others. These credits last through September 30, 2021.
- ACA premium tax credits: Congress removed the subsidy cliff (400 percent of the federal poverty level) for 2020 and 2021. During these years, you need to pay no more than 8.5 percent of your household income for ACA coverage. You are entitled to premium tax credits to the extent midlevel silver ACA coverage exceeds this amount.
- Unemployment for the Self-Employed: For the ﬁrst time ever, self-employed individuals may receive unemployment beneﬁts. The Pandemic Unemployment Assistance program has been extended to September 6, 2021. You’ll qualify for unemployment only if you’re earning little or no income.
If you want to retain more of what you make and multiply your net worth while remaining tax compliant, contact us at Morris + D’Angelo. This is our Expertise!
Parts of this article are published with permission from Bradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo
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