American Rescue Plan: Self-Employed Paid Family and Medical Leave

The American Rescue Plan Act of 2021 extends and modifies COVID-19 self-employment tax credits for paid sick and family leave created under the Families First Coronavirus Response Act and amended by the Coronavirus Aid, Relief, and Economic Security Act. The credits are “equivalent” to those available to an eligible employer that pays required paid sick leave or family leave to an employee who cannot work due to COVID-19.

The sick leave credit is available if the individual is quarantined, has been advised to self-quarantine, has COVID-19 symptoms and is seeking a medical diagnosis, is waiting for the results of a COVID-19 diagnostic test or medical diagnosis, is obtaining or recovering from COVID-19 immunization, or is caring for someone with COVID-19 or for a child whose school or care facility is closed or whose care provider is unavailable. The family leave credit is available if the individual is caring for a child whose school or care facility is closed, or whose care provider is unavailable, or for any reason for sick leave. The credits have per-day and maximum dollar limits.

The refundable credits for qualified sick leave or family leave for self-employed individuals is extended under the American Rescue Plan for days during the period beginning on April 1, 2021 and ending on September 30, 2021. Each credit has its own unique rules and limitations, but there are also rules that apply generally to both credits.

A self-employed individual is eligible for the qualified sick leave or family leave equivalent credits if they:

  • regularly carry on a trade or business for self-employment tax purposes; and
  • would be entitled to receive paid leave during the tax year if the individual were an employee of an employer (other than himself or herself).

Credit for Qualified Sick Leave

The limit on the credit for sick leave wages is determined by multiplying the number of days the self-employed person is unable to perform services in their trade or business by the lesser of 67% of the taxpayer’s average daily self-employment income, or $200. The number of days is limited to 10 for the tax year.

The limits are increased to 100% and $511, respectively if the self-employed person is unable to perform services for the following reasons:

  • Is subject to a federal, state or local quarantine or isolation order related to COVID-19;
  • Has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
  • Is experiencing symptoms of COVID-19 and seeking a medical diagnosis;
  • Is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19 and he or she has been exposed to COVID-19 or is unable to work pending the results of the test or diagnosis; or
  • Is obtaining an immunization related to COVID-19 or recovering from any injury, disability, illness, or condition related to the immunization.

If an eligible self-employed individual also receives qualified sick leave wages as an employee, his or her qualified sick leave equivalent amount is reduced (but not below zero) to the extent that the sum of the qualified sick leave equivalent amount plus the qualified sick leave wages is more than $2,000 ($5,110 in the case of any day covered for the five reasons described above).

Credit for Qualified Family Leave

The same calculation is made for family leave wages, with days unable to perform services multiplied by the lesser of 67% of the taxpayer’s average daily self-employment income, or $200. The number of days is limited to 60 for the tax year.

The amount of the family leave credit is reduced by any family leave wages in excess of $12,000 that the taxpayer might receive as an employee.

Of course, any day taken into account in determining the qualified sick leave equivalent amount cannot be taken into account in determining the qualified family leave equivalent amount.

Average Daily Self-Employment Income

The taxpayer’s average daily self-employment income is defined as the amount of net earnings from self-employment for the tax year divided by 260. For calculating the qualified sick leave equivalent amount or the qualified family leave equivalent amount, the individual can elect to use net earnings from self-employment income for the prior tax year, instead of the current tax year, to determine his or her average daily self-employment income.

The Atherton team has found that many clients’ payroll returns have not recognized these qualified credits dating back to the 2nd quarter of 2020. If your business has paid an employee under the circumstances noted above, please review your tax returns and notify your payroll company or call our office and we will be happy to guide you.