In the past year, the country-wide outbreak of the COVID-19 pandemic has led to the disruptions of people’s everyday lives and the normal functioning of numerous businesses. It has prompted the US government to come with many relief measures for the Americans.
Even a series of various federal legislation has come into effect, including the Coronavirus Aid, Relief, and Economic Security Act (CARES) and the Families First Coronavirus Response Act (FFCRA). These legislations also mean that the government must have access to relevant details about different citizens across the nations. It will enable it to identify and offer the required assistance to the people in actual need who have been most impacted as a consequence of the pandemic spread.
One such mitigation move announced by the Internal Revenue Services (IRS) is the availability of tax credits for self-employed individuals on sick leaves taken during a stipulated period in the preceding year.
On February 8, 2021, the IRS has come with a brand new form 7202 for the self-employed individuals eligible as per outlined criteria to file their claim for tax credits on the sick and family, which they availed of in 2020. The regulations for the tax credit claims are slated in the Families First Coronavirus Response Act. The professionals at Initor Global US are here to help you get a clearer picture of the newly introduced form 7202 and understand the eligibility conditions to file the claim for the tax credit with the same.
Introduction to Form 7202
Form 7202 is a form that the IRS has brought forth to enable adequate calculation of the tax credit on sick and family leaves of eligible self-employed individuals in the US. This form shall allow the qualified self-employed taxpayers to file claims for tax credits on their federal tax form 1040 for the financial years 2020 and 2021.
Relevant Provision in the FFCRA to enable Self-Employed Individuals to Claim Tax Credits
The US government enacted the Families First Coronavirus Response Act in March 2020. According to this law, self-employed individuals who comply with certain conditions can claim refundable tax credits for leave taken during the pre-determined tenure. The act offers relief in the form of tax credits to self-employed people who could not carry out their work or telework amidst the COVID-19 pandemic. The inability to operate could be due to the individual’s own health issues or to look after a family member’s health. Due to the tax credit, the self-employed can gain the benefit of offsetting their federal tax liability.
The main motto of FFCRA is to back the small and mid-sized employers with refundable tax credits as a way of reimbursing the expenditure they incurred for the paid sick and family leaves of their respective employees.
Eligibility Conditions for Self-Employed Individuals to file Claim with Form 7202
The individuals who can utilize the benefit of the refundable tax credit for qualified family and sick leave with Form 7202 must cater to the entitlement conditions. The requisites to be eligible for the federal tax credit are enlisted below:
- The self-employed individual should conduct a trade or business activity as per the scope of the definition in Section 1402 of the Internal Revenue Code
- The self-employed individual should be entitled to get paid family leave if he/she was an employee under another employer. This leave entitlement should be as per the provisions of the Emergency Family and Medical Leave Expansion Act.
- The self-employed individual should be entitled to obtain paid sick leave if he/she was an employee under another employer. This leave entitlement should be in accordance with the Emergency Paid Sick Leave Act.
It is crucial for taxpayers trying to avail of tax credits in Form 7202 to retain appropriate documentation to corroborate that he/she is an eligible self-employed individual.
Tenure covered for the purpose of claiming refundable tax credit with Form 7202
Qualified self-employed individuals can offset their income tax obligations using the tax credit on their respective IRS Form 1040. On the tax form 1040 for 2020, they shall be eligible for credits for leave taken from the month of April 1, 2020, to December 31, 2020. While on their tax form 1040 for 2021, they can consider leaves during the period from January 1, 2021, to March 31, 2021.
Amount of Tax Credit available to Eligible Self-Employed Individuals
The tax credit that the self-employed individual can claim shall be equivalent to the amount they would have received as employees entitled for paid leave under the Emergency Paid Sick Leave Act or the Emergency Family and Medical Leave Expansion Act. The amount shall vary depending on the circumstances of the individual taxpayer.
Important to Points to Note while Filing Claim for Tax Credits with Form 7202
It is crucial to realize that as per the IRS’s instructions for claiming the tax credit, each qualified self-employed individual should file a separate Form 7202. In cases where the spouses who are both entitled self-employed individuals file joint tax returns, each of the two taxpayers must provide a distinct Form 7202 with their joint federal tax return. The self-employed individuals must also consider the specific conditions mentioned for availing of the tax credit for sick leaves as well as the family leaves, respectively. As per the IRS regulations, the number of days taken into account for calculating the equivalent sum of qualified sick leaves should not be more than 10 days for all the relevant tax years. There are detailed instructions published by the Internal Revenue for calculating the amount of credit after due consideration of the total earnings and the number of days considered as leave. One can even find an option to use the net earnings from self-employment of the preceding year while filing the details online on Form 7202 with the main 1040 Form. Duly read through the detailed IRS guidelines to elaborately comprehend the various requirements of each specific line of Form 7202.
Keep tabs on the IRS website to check through the recent developments for claiming the tax credit with the new Form 7202.
Lower the intricacies involved to claim the refundable tax credit and to file Form 7202 by hiring professional support
The process of calculating and claiming the tax credit with Form 7202 can seem quite entangling for most self-employed individuals. Fret not! You can consult tax experts and CPAs to clarify your issues in this regard. Since filing Form 7202 is a newly introduced compliance requirement, you must be cautious before submitting the same with your federal tax return. It is highly recommended to find the right advice before you go further with your tax filings and relevant compliances.
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