Special Issues for Employees

 

Special Issues for Employees

57. Are qualified sick leave wages and qualified family leave wages taxable to employees?

Yes.  Under sections 7001(c) and 7003(c) of the FFCRA, qualified leave wages are wages as defined in section 3121(a) of the Internal Revenue Code (the “Code”) and compensation as defined in section 3231(e) of the Code, so the employee must pay social security and Medicare taxes (and for railroad employees, Tier II of the Railroad Retirement Tax Act tax).  In addition, wages are generally compensation for services subject to income tax under section 61 of the Code and federal income tax withholding under section 3402 of the Code unless an exception applies.  The FFCRA did not include an exception for qualified leave wages from income.

58. Are qualified sick leave wages and qualified family leave wages excluded from gross income as “qualified disaster relief payments”?

No.  Section 139 of the Internal Revenue Code (Code) excludes from a taxpayer’s gross income certain payments to individuals to reimburse or pay for expenses related to a qualified disaster (“qualified disaster relief payments”).  Although the COVID-19 outbreak is a “qualified disaster” for purposes of section 139 the Code (see below), qualified leave wages are not excludible qualified disaster relief payments, because qualified leave wages are intended to replace wages or compensation that an individual would otherwise earn, rather than to serve as payments to offset any particular expenses that an individual would incur due to COVID-19.

Section 139(c)(2) of the Code provides that for purposes of section 139 of the Code, the term “qualified disaster” includes a federally declared disaster, as defined by 165(i)(5)(A) of the Code.  The COVID-19 pandemic is a “federally declared disaster,” as defined by section 165(i)(5)(A) of the Code.  On March 13, 2020, the President of the United States issued a Proclamation declaring a national emergency concerning the Novel Coronavirus Disease (COVID-19) outbreak, stating that the ongoing COVID-19 pandemic warrants an emergency determination under section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121 – 5207.  A “qualified disaster relief payment” is defined by section 139(b) of the Code to include any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.  Qualified disaster relief payments do not include income replacements such as sick leave or other paid time off paid by an employer.

59. Can an employee receive both “qualified sick leave wages” and “qualified family leave wages”? (updated November 25, 2020)

Yes, but at different times.  Qualified sick leave wages are available for up to 80 hours during which an employee cannot work or telework for any of six reasons related to COVID-19, including because the employee must care for his or her child whose school or place of care is closed, or whose child care provider is unavailable, for reasons related to COVID-19.  By contrast, qualified family leave wages are available only because the employee must care for his or her child whose school or place of care is closed, or whose child care provider is unavailable, for reasons related to COVID-19, and only after an employee has been unable to work or telework for this reason for 80 hours.

Example: Your child-care provider is unavailable indefinitely due to the COVID-19 outbreak, leaving you unable to work or telework to care for your child.  For up to the first 80 hours of any period of leave to care for your child, you are entitled to qualified sick leave wages, up to $200 per day and $2,000 in the aggregate.  After that, you are entitled to qualified family leave wages for up to ten weeks of additional leave you need, up to $200 per day and $10,000 in the aggregate.

Specific Provisions Related to Self-Employed Individuals

60. Who is an eligible self-employed individual for purposes of the qualified sick leave credit and the qualified family leave credit? (updated November 25, 2020)

An eligible self-employed individual is defined as an individual who regularly carries on any trade or business within the meaning of section 1402 of the Internal Revenue Code, and would be entitled to receive qualified sick leave wages or qualified family leave wages under the FFCRA if the individual were an employee of an Eligible Employer (other than himself or herself) that is subject to the requirements of the FFCRA.

Eligible self-employed individuals are allowed an income tax credit to offset their federal self-employment tax for any taxable year equal to their “qualified sick leave equivalent amount” or “qualified family leave equivalent amount.”

61. How is the “qualified sick leave equivalent amount” for an eligible self-employed individual calculated? 

For an eligible self-employed individual who is unable to work or telework because the individual:

  1. Is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
  2. Has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
  3. Is experiencing symptoms of COVID-19 and seeking a medical diagnosis,

the qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in the applicable 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.

For an eligible self-employed individual who is unable to work or telework because the individual:

  1. 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;
  2. Is 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
  3. Is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor,

the qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in the applicable 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.

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 determining the qualified sick leave equivalent amount are days occurring during the period beginning on April 1, 2020, and ending on December 31, 2020.

62. How is the “average daily self-employment income” for an eligible self-employed individual calculated?

Average daily self-employment income is an amount equal to the net earnings from self-employment for the taxable year divided by 260.  A taxpayer’s net earnings from self-employment are based on the gross income that he or she derives from the taxpayer’s trade or business minus ordinary and necessary trade or business expenses.

63. How is the “qualified family leave equivalent amount” for an eligible self-employed individual calculated?

The qualified family leave equivalent amount with respect to an eligible self-employed individual is an amount equal to the number of days (up to 50) during the taxable year that the self-employed individual cannot perform services for which that individual would be entitled to paid family leave (if the individual were employed by an Eligible Employer (other than himself or herself)), multiplied by the lesser of two amounts: (1) $200, or (2) 67 percent of the average daily self-employment income of the individual for the taxable year.

64. Can a self-employed individual receive both qualified sick or family leave wages and qualified sick or family leave equivalent amounts? (updated November 25, 2020)

Yes, but the qualified sick or family leave equivalent amounts are offset 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 under section 7002(a) of the FFCRA, and also receives qualified sick leave wages as an employee, section 7002(d)(3) of the FFCRA 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 described in section 7002(c) of the FFCRA and any qualified sick leave wages under section 7001(b)(1) of the FFCRA, exceeds $2,000 (or $5,110 in the case of any day any portion of which is paid sick time described in paragraph (1), (2), or (3) of section 5102(a) of the Emergency Paid Sick Leave Act (EPSLA)).  
Similarly, if a self-employed individual is entitled to a refundable credit for a qualified family leave equivalent amount under section 7004(a) of the FFCRA, and also receives qualified family leave wages as an employee under the Emergency Family and Medical Leave Expansion Act (EFMLEA), section 7004(d)(3) of the FFCRA 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 described in section 7004(c) of the FFCRA and the qualified family leave wages under section 7003(b)(1) of the FFCRA, exceeds $10,000.

Example:  In her capacity as an employee, Taxpayer A receives $4000 in qualified sick leave wages, comprised of:

  • $3000 in qualified sick leave wages for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA; and
  • $1000 in qualified sick leave wages for reasons described in paragraphs (4), (5), or (6) of the EPSLA. 

In addition, in her capacity as a self-employed individual, Taxpayer A is eligible for $3300 in qualified sick leave equivalent credits, comprised of:

  • $2500 in qualified sick leave equivalent credits for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA; and 
  • $800 in qualified sick leave equivalent credits for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of the EPSLA. 

Taxpayer A must reduce the $3300 of total qualified sick leave equivalent credit for which she is eligible by $2190, which is comprised of:

  • The excess of the qualified sick leave wages and qualified sick leave equivalent credits for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA over $5110 (that is, $390); plus
  • The excess of the qualified sick leave wages and qualified sick leave equivalent credits for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of the EPSLA over $2000 (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 $5110 (that is, $1800).

Accordingly, Taxpayer A may claim a qualified sick leave equivalent credit of $1110.

Example: In his capacity as an employee, Taxpayer B receives $6000 in qualified family leave wages.  In addition, in his capacity as a self-employed individual, Taxpayer B is eligible for $4500 in qualified family leave equivalent credits.  Taxpayer B may claim a qualified family leave equivalent credit of $4000, because he must offset the total qualified family leave wages and qualified family leave equivalent credits to which he is entitled under the EFMLEA (that is, $10,500) by the excess of this amount over $10,000 (that is, $500). 

65. How does a self-employed individual claim the credits for qualified sick leave equivalent amounts or qualified family leave equivalent amounts?

The refundable credits are claimed on the self-employed individual’s Form 1040, U.S. Individual Income Tax Return PDF, tax return for the 2020 tax year.

65a. How does a self-employed individual determine the sick and family leave equivalent tax credit that he or she may claim? (udded November 25, 2020)

A self-employed individual will determine the sick and family leave equivalent tax credit to which he or she is entitled by completing Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals.  This form will be available during the fourth quarter of 2020 at irs.gov.  To complete the Form 7202, self-employed individuals who are also employees will need any amount of qualified sick and family leave wages that their employers reported on the Form W-2, Wage and Tax Statement PDF.  For more information on the requirement for Eligible Employers to report the amount of qualified sick and family leave wages paid to employees on Form W-2, see Notice 2020-54 PDF.

66. How can a self-employed individual cover his or her qualified sick leave equivalent and qualified paid family leave equivalent amounts before filing his or her Form 1040? (updated November 25, 2020)

The self-employed individual may cover sick leave and family leave equivalents by taking into account the credit to which the individual is entitled and will claim on Form 1040, U.S. Individual Income Tax Return PDF, in determining required estimated tax payments. This means that a self-employed individual can effectively reduce payments of estimated income taxes that the individual would otherwise be required to make if the individual was not entitled to the credit on the Form 1040 PDF

Section 2302 of the CARES Act provides that self-employed individuals may defer the payment of 50 percent of the social security tax imposed under section 1401(a) of the Internal Revenue Code on net earnings from self-employment income for the period beginning on March 27, 2020 and ending December 31, 2020.  Self-employed individuals may defer these taxes in addition to the credits for qualified sick leave equivalent amounts or qualified family leave equivalent amounts.  Accordingly, if the self-employed individual is eligible for these credits, the individual should take into account these credits in addition to any amount of self-employment tax the individual plans to defer under section 2302 of the CARES Act in determining required estimated tax payments.

66a. Can an independent contractor who generally performs services for multiple clients as a nonemployee claim the tax credit with regard to the lost services due to COVID-19? (added November 25, 2020)

Yes.  If an individual is an independent contractor who generally performs services for multiple clients as a nonemployee, he or she is self-employed and is eligible for the tax credits for days he or she is not able to work or telework for reasons related to COVID-19.

For more information on whether an individual is an independent contractor or an employee, and the tax consequences of either status, see Self-Employed Individuals Tax Center.

66b. Can a partner in a partnership claim the tax credits? (added November 25, 2020)

Maybe. A partner in a partnership is a self-employed individual if the partner’s distributive share constitutes net earnings from self-employment or if the partner receives guaranteed payments for his or her services.  If the partner is a self-employed individual and is not able to work or telework for reasons related to COVID-19, the partner is eligible for the tax credits.  

Generally, partners in a partnership (including members of a limited liability company (LLC) that is treated as a partnership for federal tax purposes) are considered to be self-employed, not employees, when performing services for the partnership.

66c. Can a self-employed individual use the Form 7200 to apply for an advance of the tax credits? (added November 25, 2020)

No. Form 7200, Advance Payment of Employer Credits Due to COVID-19 PDF, is only available for employers that file Form 941, Employer's Quarterly Federal Tax Return PDF, or certain other employment tax returns. However, a self-employed individual may reduce payments of estimated income taxes equal to the credit to which the individual is entitled.

For more information about how a self-employed individual can reduce his or her estimated income taxes to cover a credit for qualified sick leave equivalent amounts and qualified family leave equivalent amounts, see “How can a self-employed individual cover his or her qualified sick leave equivalent and qualified paid family leave equivalent amounts before filing his or her Form 1040?

67.    Does an eligible self-employed individual who is allowed a credit under section 7002 of the FFCRA for the qualified sick leave equivalent amount or a credit under section 7004 of the FFCRA for the qualified family leave equivalent amount include any amount of these credits in gross income?  (added November 25, 2020)

No, the amount of the credits allowed under sections 7002 and 7004 of the FFCRA are not included in the gross income of the eligible self-employed individual.

68.    How Should a Self-Employed Employer Substantiate Eligibility for Tax Credits for Qualified Leave Wage Equivalents? (added November 25, 2020)

Self-employed individuals should maintain documentation establishing their eligibility for the credits as a self-employed individual.  That documentation should be similar to the documentation that employers claiming the credits for qualified leave wages under FFCRA sections 7001 and 7003 should maintain under “How Should an Employer Substantiate Eligibility for Tax Credits for Qualified Leave Wages?”.

Where can I get more information?

 

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