Claim Your Overlooked 2020 COVID Sick and Family Leave Credits

If you are self-employed or operate as a corporation, there’s a good chance that you failed with your 2020 tax returns to claim the family leave credit.

And that could be a big deal with you losing out on up to $15,110 in tax credits.

But it’s not too late. You can amend your 2020 personal or corporate payroll tax returns and claim that money now.

If you qualify, don’t wait. The clock ticks on amended returns, and time is running out.

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Getting to the $15,110

To get to the full $15,110, you need the following:

• Sufficient 2020 income. If you’re self-employed, that means $143,866 of net income on Schedule C—which translates to self-employment income of $132,860. If you are a W-2 employee of your corporation, you need equivalent W-2 income for the corporate benefit.
• A 2020 COVID-19 reason for your inability to work (explained below).
• A son or daughter who is under age 18 or who is incapable of self-care because of a mental or physical disability.

The rules that can give you up to $15,110 in tax credits fall into two categories:

• Rules for up to $5,110 in 2020 tax credits. (No child needed here.)
• Rules for up to $10,000 in 2020 tax credits. (Here, you need the child.)

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Rules for Up to $5,110

$511 a day. To qualify for the full $5,110 for the period from April 1, 2020, through December 31, 2020, you need (1) $143,866 or more in Schedule C income, and (2) 10 days when you were unable to perform services as a self employed individual because of one or more of the following reasons:

• You were subject to a federal, state, or local quarantine or isolation order related to COVID-19.
• You were advised by a health care provider to self-quarantine due to concerns related to COVID-19.
• You were experiencing symptoms of COVID-19 and seeking a medical diagnosis.

$200 a day. If you don’t meet the $511-a-day rules, you get a second chance for up to $200 a day for up to 10 days when you were unable to work because of one or more of the following reasons:

• You were caring for an individual who was subject to a federal, state, or local quarantine or isolation order related to COVID-19.
• You were caring for an individual who was advised by a health care provider to self-quarantine due to concerns related to COVID-19.
• You were caring for a son or daughter because the school or place of care for that child was closed or the childcare provider for that child was unavailable due to COVID-19 precautions.

Example 1. Bill had $160,000 of Schedule C net income in 2020, and during the months of April through December he was subject to COVID-19 government shutdown orders for 27 days. He qualifies for a $5,110 family leave credit for 10 of those days. The remaining 17 days do not qualify.

Example 2. Lucy has $150,000 of Schedule C net income and qualifies for three days because of a government order and 14 days for taking care of her roommate who had COVID-19. Lucy qualifies for a family leave credit of $2,933: ($511 x 3) + ($200 x 7). The seven days not used do not qualify for any family leave credit.

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You Need a Child for the $10,000

Taking care of a son or daughter under the age of 18 because of COVID-19 can create up to $200 a day in tax credits, as follows:

• $200 a day for up to 10 days in Part 1 of Form 7202 (maximum $2,000). Remember, in Part 1, you can qualify as an individual for up to $5,110 in tax credits.
• $200 a day for up to 50 days in Part II of Form 7202 (maximum $10,000).

You qualify for a 2020 family leave credit for any day you were unable to perform services as a self-employed individual because you had to care for a son or daughter

• whose school or place of care was closed due to the COVID-19 emergency, or
• whose childcare provider was unavailable due to the COVID-19 emergency.

Your son or daughter had to be under 18 years of age or, if older, unable to care for himself or herself due to a mental or physical disability. For these purposes, a “son or daughter” is your own child, which includes your biological, adopted, or foster child; your stepchild; a legal ward; or a child for whom you had day-to-day responsibilities to care for or financially support.

A “place of care” includes day care facilities, preschools, before- and after-school care programs, summer camps, summer enrichment programs, and respite care programs. A “childcare provider” is someone who cared for your child. This includes paid childcare providers such as nannies, au pairs, and babysitters. It also includes those who provided free childcare on a regular basis without a license—for example, grandparents, aunts, uncles, or neighbors.

If the physical location where your child received instruction or care was closed, then that school or place of care was “closed” for purposes of paid family leave. This is true even if some or all instruction was provided online.

You can claim the family leave credit for up to 50 days during April 1, 2020, through December 31, 2020. The credit is equal to 67 percent of the average self-employment income you earned per day, capped at $200 per day. Thus, the maximum credit is $10,000.

But based on the child alone, you could also claim up to $2,000 in sick leave credit, giving you a possible $12,000 in combined sick and family leave credits because of your child.

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Finding Daily Net Self-Employment Income

You determine your average daily net self-employment income by dividing your total net self-employment income for the year or the prior year by 260. You could use either your 2020 or 2019 self-employment income for this calculation.

Example 3. Jane is a sole-proprietor consultant with two small children. She took 20 days off during July 2020 to care for her three minor children because their caregiver was unable to work due to COVID-19. She is entitled to claim a family leave credit. Her net self-employment income for 2020 was $150,000.

Her average daily net self-employment income was $577 ($150,000 ÷ 260); 67 percent of $577 = $387. However, her family leave credit is capped at $200 per day. Thus, she is entitled to a family leave credit of $4,000 (20 days x $200).

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Amending Your 2020 Form 1040

You were supposed to claim the credit by filing IRS Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, with your 2020 Form 1040.8 You can still claim the credit by amending your 2020 tax return. File a completed 2020 Form 7202 together with IRS Form 1040-X.

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Proof

You need not include with your amended tax return any proof that you took time off to care for a child due to COVID-19. But you should have documentation in your records. Your records should include

• all the dates for which you’re claiming family leave,
• the specific reasons for the leave for each date,
• the name and age of the child (or children) you cared for,
• the name of the school or childcare provider that closed (or the place of care that was unavailable), and
• a statement that no other person provided care for the child during the time period.

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Claiming 2020 COVID Family Leave Credits for C and S Corporation Owners

If you operate your business as a corporation, you are an employee of that corporation.

If you performed services for your corporation, your corporation should have paid you a salary, and should have withheld and paid payroll taxes to the IRS using IRS Form 941.

Now, here’s good news: if your employer corporation paid you while you were not working because of COVID-19, your corporation may have qualified for sick or family leave tax credits.

The rules for qualification are the same as those that applied to the self-employed taxpayer discussed above.

If the corporation qualified for those sick and family leave credits but did not claim them on the 2020 returns, it should file amended payroll tax returns using Form 941-X.

The credit for family leave taken between March 31, 2020, and December 31, 2020, is reported on Form 941-X, lines 9, 10, 17, 25, 28, and 29. You must file a separate Form 941-X for each quarter you are correcting.

There are two ways to claim the credit—you can use either the adjustment process or the claim process. 

Adjustment process. Your corporation claims the credit against the regular payroll tax due on its next Form 941, and files an adjusted return on Form 941-X to report the change and claim a refund for any amount in excess of the payroll tax due. This is the fastest way to get your credit. But to use the adjustment process, you must file Form 941-X more than 90 days before the statute of limitations expires.

Claim process. With the claim process, you file Form 941-X and claim a refund of payroll tax in the amount of your credit. It will take longer to obtain your credit this way, because the IRS must process your claim.

There is a three-year statute of limitations for correcting payroll tax overpayments on Form 941-X. For these purposes, all four Forms 941 filed for a calendar year are considered filed on April 15 of the following year if filed before that date. So all Forms 941 for 2020 are considered filed on April 15, 2021.11 This means you have 

• until January 15, 2024, to use the adjustment process to claim the family leave credit, and
• until April 15, 2024, to use the claim process.

To prevent employers from enjoying a double benefit, they must include the full amount of any family leave credit (and any allocable qualified health plan expenses and the employer’s share of the Medicare tax) they receive in gross income.

The employer may deduct as a business expense the employee wages used to calculate the credits, plus allocable health plan expenses and the employer’s share of the Medicare tax. The deduction offsets some of the tax benefit of the credit.

Thus, your corporation should file an amended income tax return for 2020 including the family leave credit as income. This is done on Form 1120-X for a C corporation.

To amend a return for an S corporation, file Form 1120-S and check Box H(4) (Amended Return). List the credit amount as other income on Line 5. You’ll also need to file an amended Schedule K-1 for your S corporation, and you’ll likely have to amend your personal Form 1040 as well.

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No Double Benefit

The 2020 sick and family leave tax credits are not available on self-employed income or employee wages taken into account for the Paycheck Protection Program (PPP), the employee retention credit (ERC), and similar programs. The essence of the rule is that you can’t double-dip on the benefits.

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Takeaways

Eligibility for COVID-19 family leave tax credits. Self-employed individuals and corporations that failed to claim the sick or family leave credit on their 2020 tax return may have missed out on tax credits of up to $15,110.

Amending 2020 tax returns. It’s not too late to amend your 2020 tax returns and claim these credits. You should act promptly, as there is a time limit for filing an amended return.

Requirements for full credit. To qualify for the full $15,110, you need to meet certain requirements, including sufficient 2020 income, an inability to work due to a COVID-19-related reason, and COVID-19 reasons to care for a son or daughter who is under age 18 or is incapable of self-care due to a disability.

Two categories of tax credits. The 2020 tax credits fall into two categories: (1) up to $5,110 for individuals who were unable to work due to COVID-19, and (2) up to $10,000 for individuals who had to care for a child due to COVID-19.

Filing procedure for Schedule C taxpayers. The credit should have been claimed by filing IRS Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, with your 2020 Form 1040. You can still claim the credit by amending your 2020 tax return and filing a completed 2020 Form 7202 together with IRS Form 1040-X.

Proof and documentation. You don’t need to include proof of your leave with your amended tax return, but you should have records of dates, reasons for the leave, and details regarding the child you cared for.

Family leave credits for C and S corporation owners. If you operate a business as a corporation, your corporation may qualify for sick or family leave tax credits. If the credits were not claimed on the 2020 tax returns, amend your 2020 payroll tax returns using Form 941-X.

No double benefits. For corporations that received a forgiven PPP loan, the ERC, or another payroll-based credit, the COVID-19 sick and family leave cannot be counted as “payroll costs.”