Running your own business is like putting work on "hard" mode - everything falls on you to ensure things get done, and the responsibilities rarely end at 5 pm. With so much focus being put on earning an income and keeping your business afloat, it's probably safe for us to assume you're not keeping an eye on the latest IRS updates that add new tax credits for 1099 workers and sole proprietors.
That's why we're here to help! Congress has updated existing COVID-19 tax relief laws to include workers like you who faced financial setbacks because of the pandemic. Let's break down everything we know about this update and what you'll need to do to get your tax refund.
Tax credits and deductions often get grouped together, which can get confusing because they each have different rules and outcomes for how much you'll end up owing the IRS.
A tax deduction is a tax incentive that allows you to reduce the amount of taxes you owe. There are thousands of tax deductions available from the IRS and your state governments that range from the property you own, the loans you have outstanding, and the way you earn a living. Tax deductions are subtracted when you file your yearly returns and will often only be applicable to that tax year.
A tax credit is a refund of taxes you've already paid. These refunds can be retroactive based on new laws passed by the US or state governments and must be applied for directly (i.e., the government won't automatically refund you, you need to ask for the refund). Tax credits also run the gamut and are available for parents, college students, small business owners, and 1099 workers. If you have any outstanding tax liability, then the credits will act like a deduction, subtracting the refund from your taxes owed. If you're all caught up on your taxes, though, the IRS will send you an actual check or direct deposit of the amount you're due. Since it's a refund of previously-paid taxes, your tax credit will not count as income and will have no restrictions on how you can use it.
Tax credits for freelancers can be a game-changer when it comes to managing your taxes. They can provide a significant boost to your bottom line, allowing you to keep more of your hard-earned money. As a freelancer or gig worker, it's crucial to take advantage of any tax breaks available to you, and tax credits are no exception.
The Families First Coronavirus Response Act (FFCRA) was passed in 2020 as a way to help businesses recoup sick leave paid to employees during the COVID-19 pandemic. In 2021, the Coronavirus Aid, Relief, and Economic Security (CARES) Act expanded the scope of the FFCRA, making its tax credits available to freelancers, 1099 workers, and sole proprietors. The FFCRA was enacted in response to the COVID-19 pandemic, aiming to provide financial assistance to individuals and businesses affected by the crisis.
Under the FFCRA, eligible self-employed individuals can claim tax credits for paid sick leave and expanded family and medical leave. If you are a freelancer or sole proprietor who couldn't work due to COVID-19-related reasons, such as being quarantined or caring for a child whose school or daycare closed, you may qualify for these tax credits.
The FFCRA maximum refund is $32,220! And unlike PPP loans, there are no requirements for how you can use your tax credits. Plus, you'll never need to pay it back.
As a self-employed individual, you're eligible to claim up to 110 days total for family and childcare-related reasons, plus 20 days of paid sick leave. You can claim as many days as you need but can't double-dip and use the same date twice (i.e., you can claim a day due for childcare reasons or for your sick leave but not both).
The amount you can get back depends on your self-employment income that was filed on your 2020 or 2021 Schedule SE (form 1040). Paid sick leave is eligible for a maximum of $511 per day, while family and childcare-related reasons are eligible for $200 a day or 67% of your average daily income, whichever is lower.
It sounds confusing, we know! Luckily, we can help you calculate what you're owed with our 3-minute pre-qualification quiz.
Figuring out whether you're considered self-employed is tricky, especially if you've got multiple jobs. Luckily, the IRS has simplified this definition down to one qualification:
Did you file a Form 1040 (also known as a Schedule SE) in 2020 or 2021? If so, you're considered self-employed by the IRS!
Don't remember? Here are a few examples of people who would've filed a Form 1040:
(Please note - You may qualify for FFCRA relief if you received both a W-2 and 1099, but it gets tricky because your employer may have claimed the FFCRA on your behalf. If this is your situation, it's best to consult a CPA to determine your eligibility.)
In order to qualify, you'll need to have had your self-employment income impacted by COVID-19. This could be due to restrictions or illness relating to yourself or someone under your care. A few reasons include, but are not limited to:
The dates eligible for FFCRA relief are as follows:
We know it might sound overwhelming, but we'll walk you through the entire application process in the Madison Tax Group portal to ensure you get the maximum refund possible.
As a freelancer or sole proprietor, it's crucial to stay informed about new tax opportunities that can benefit your business. The FFCRA provides valuable tax credits that can help alleviate some of the financial burdens caused by the pandemic. That’s why Madison Tax Group has built Madison Tax Group, a robust platform that will guide you every step of the way, ensuring you get the tax credits you deserve. By taking advantage of these tax breaks, you can keep more money in your pocket and ensure the sustainability of your freelance career or small business.
