Author Archives: c29455507

The Cost of Your Tax Return Filing

With the current tax deadline of July 15th fast approaching, as of June 12th the IRS is down 12% processed compared to the 2018 tax return filing season or over 17 million.  However, the rules for penalties and interest still apply for filing and payments made making this deadline next month, and below are some of the more prominent items to consider if you are not able to make your deadline.

There are what is called system generated penalties that do not require IRS manager approval listed below:

  • Failure to file is one of the most common
    • 5% of the net tax due for each month the return is late up to 25% or 5 months; minimum failure to file penalty is $425 or 100% of the net tax due if not filed within 60 days
  • Failure to pay again one of the most common
    • 5% per month with the maximum penalty 25% of the net tax due for up to 50 months
  • Failure to deposit penalty rates are
    • 2% for 1-5 days late; 5% for 6-15 days late; 10% for deposits made more than 15 days late
  • Bad check for checks less than $25
    • a penalty the amount of the check; if your $20 check bounced, you’ll now owe the IRS $40; checks between $25 and $1,250, a flat penalty of $25, checks of $1,250 or more, a penalty of 2% of the amount of the check
  • Estimated tax the standard penalty is 3.398% of your underpayment, but it gets reduced slightly if you pay up before July 15
    • if you owe a total of $14,000 in federal income taxes for 2019 and you do not pay at least $12,600 of that during 2019, you’ll be assessed the penalty

Manually generated penalties requiring an IRS manager approval

  • Accuracy again one of the most common
    • 20% penalty on the underpayment of tax
  • Fraud and false statements
    • upon conviction, the taxpayer is guilty of a felony and is subject to (1) imprisonment for no more than 3 years, (2) a fine of not more than $250,000 for individuals or $500,000 for corporations, or (3) both penalties, plus the cost of prosecution (26 USC 7206(1))
  • Fraudulent failure to file
    • 15% of the net tax due, increases up to 75% of the net tax due

There are opportunities to request abatement on interest and penalties through proper channels and persistence, which include:

  • Reasonable cause
  • Undue hardship defense
  • First time abatement
  • Correction of an IRS error
  • Penalty abatement

Above all else, if you owe taxes and cannot pay, file your return on time and pay what you can online.  It will save you a substantial amount of penalties as evidenced above.  Due to the Covid-19 pandemic, phone operator service is still very intermittent as the IRS has been shut down for several weeks and millions of pieces of unprocessed mail stored in containers are slowly being sifted through, as employees are returning to offices in shifts while practicing social distancing and promoting a safe work environment to return.

Dwayne J. Briscoe

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The Business of Bankruptcy

The Covid-19 pandemic has brought the economy to an unprecedented standstill in a variety of ways, and many large companies have already begun the process of bankruptcy already this year.  More well known companies such as Pier 1 Imports, Neiman Marcus, Stage Stores, as well as JC Penney just to name a few have been on the verge a few times already, but due to the current economic climate they’ve had to move forward with their filings in order to either shut down permanent or seek reorganization for potential survival.  What does that mean for small businesses who may just be one person?  The following are some general descriptions of key items to think about.

When filing for bankruptcy, a company must first determine if it is insolvent or bankrupt.  Insolvency refers to having sufficient income or liquid assets but still needs protection from creditors.  Bankruptcy is defined as having insufficient income or not enough liquid assets to cover all its outstanding liabilities.  For businesses, they can file for Chapter 7 or Chapter 11 bankruptcy, which the following are a few highlights.

Chapter 7

  • Debtor will turn over non-exempt assets to an assigned US Trustee who liquidates or abandons those assets
  • The Trustee then pays creditors from the funds available
  • Debt can still survive bankruptcy such as tax debt, governmental fines and penalties, and personal injury or death caused by the debtor
    • In addition to the petition for bankruptcy, the debtor must also file with the court:
      • Schedules of assets and liabilities
      • Schedule of current income and expenditures
      • A statement of financial affairs
      • A schedule of executory contracts and unexpired leases
    • All tax returns must be current and appropriate copies filed with the petition

Chapter 11

  • Debtor chooses either federal or state exemptions, depending upon where the entity is set-up and whichever exemptions are deemed more favorable to the business
  • Debt can still survive bankruptcy such as tax debt, governmental fines and penalties, and personal injury or death caused by the debtor
    • In addition to the petition for bankruptcy, the debtor must also file with the court:
      • Schedules of assets and liabilities
      • Schedule of current income and expenditures
      • A statement of financial affairs
      • A schedule of executory contracts and unexpired leases
    • All tax returns must be current and appropriate copies filed with the petition
    • You do have the ability to continue operating the business
    • You can repay your creditors through a court-approved plan of reorganization
    • A debtor repays a portion and/or discharges other creditor claims
      • Under Chapter 11, Subchapter 5 option, only the debtor files a reorganization plan and there are no competing plans from creditors
    • The debtor can not only terminate burdensome contracts and leases, recover assets, and rescale to profitability

Key Points

  • You will still need to file tax returns during the bankruptcy process for your business, for which the bankruptcy trustee files a Form 1041 for the bankruptcy estate
  • Chapter 11 is the most expensive option to file

Due to the complexities that any potential bankruptcy can involve, it is valuable that you not only research your options but also ideally consider choosing a licensed attorney in the state that your business is located in.  Although board certifications such as bankruptcy are voluntary, it means an extra layer of education and commitment to your situation.  It’s nothing to be taken randomly, and with a good attorney, you need a good accounting of your business resources to make sure that all of your financials and tax returns are complete and up-to-date.

Dwayne J. Briscoe

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COVID-19 Post #6 – PPP Updates Signed into Law 6/5/20

The Payroll Protection Program (PPP) of the Small Business Administration’s debt relief efforts during the Covid-19 Pandemic, have had numerous challenges since it was first introduced, and there has been numerous updates, sometimes weekly.  However there have been sweeping changes implemented today by Congress, with more expected to still be introduced.

Today, there have been a number of updates which were signed into law today, and are outlined below, which take effect on the date of the bill’s enactment and apply to all PPP loans made on or after, with the government guaranteeing the remainder of the loan.  The following items have been outlined by the National Association of Tax Professionals regarding the changes loan holders need to be aware of.

  • the PPP lifespan from June 30, 2020, to December 31, 2020, for using loan proceeds
  • extending the period during which businesses may spend PPP loan funds from eight weeks after issuance to the earlier of 24 weeks after issuance or December 31, 2020 (though eligible employers may elect to retain the eight-week period instead)
  • specifying that PPP loans can be forgiven even if the number of full-time employees decreases, as long as the employer can prove: it attempted to rehire the same number of employees, but its former employees were unavailable; similarly qualified were unavailable; or its business is unable to return to the same level of activity it had before February 15, 2020
  • lowers the amount that must be spent on payroll to be eligible for forgiveness from 75% to 60%
  • allowing all employers to take advantage of the CARES Act deferral of the 6.2% employer portion of Social Security payroll taxes, regardless of whether they have had a PPP loan forgiven

With 4.5 million businesses receiving approval for loans totaling $510.6 billion, there is still currently $130 billion remaining available for loans.

Dwayne J. Briscoe

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Adapting to New Partnerships in 2020’s Darwinism of Business

  • Develop a plan and update it regularly
  • Reach out to your network and potential competitors about work-share options
  • Never fail to know what your business’ limits are

The aftermath that this pandemic has affected businesses is being felt around the globe, and although major corporations will survive undoubtedly, Main Street will be left tattered and in shambles if people are not open to adapting into how things need to be affected by change.  A young 25-year old man kept explaining to me on numerous occasions that he had everything planned out for his schooling, when he was going to be graduating, where he was going to be moving to next, down to the year in his life he was going to be retiring.  Then all of this happened, and all he wanted was for everything to go back to normal like it was before.

Everything is about adapting for every situation, and this has been no difference.  From quarantine lockdowns, to social distancing, curbside pickups, as well as occupancy limits.  The question becomes how we learn to not only survive but also adapt to once again flourish in these challenging times.  Between PPP loans, lines of credit, personal credit cards, as well as personal loans from family and friends, you have to understand there is no rule book as to how this is supposed to work.

People who will survive through this enormity of a challenge, will stick to a written Plan of Action (POA), and keep modifying it at least weekly to make sure they are hitting their targets and goals.  Thinking about a new audience to market to, or a new product/service to develop, doesn’t always work unless you physically write it down and keep measuring your work on how far along you are making progress on it.

Not everyone believes that someone in their network, whether it’s a competitor or colleague, can be of benefit to the other, but until you actually start talking to each other there’s no option for collaboration.  I was speaking with a printer client and asked them about an industry that was booming right now which they had worked in some years back but never considered until I brought it up.  Turns out they know someone within their networking group that they have never approached about because they did not think that it would lead to very steady work.

Another option is doing work-share, in which you discuss with members within your particular chamber of commerce, association, or networking group more indepth what types of work you can offer that others may not know, and if you can possibly do cheaper for another member to sub-out to you.  This way you both can keep your doors open.

Finally, so many small business’ worry about their employees and with good reason, because they are what has been the backbone of making them successful.  Unfortunately, although this is not a popular outlook you should run your business into the ground by taking care of everyone else before your own family.  You will still have much larger loans, rent, utilities, as well as your own family to support.  It’s a difficult challenge in determining who gets paid when, and a valiant effort to consider the needs of your employees before your own, but if you’re destitute and can’t take care of yourself, how can you take care of anyone else.

Dwayne J. Briscoe

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Update on IRS Operations

As reported by the Internal Revenue Service on May 18, 2020, the IRS continues to protect the public and its employees, and in compliance with orders of local health authorities around the country, certain IRS services such as live assistance on telephones, processing paper tax returns and responding to correspondence are extremely limited. All Taxpayer Assistance Centers remain temporarily closed as are many volunteer tax preparation sites until further notice.

Although the tax filing deadline has been extended to July 15, 2020, from April 15, the IRS continues to process electronic tax returns, issue direct deposit refunds and accept electronic payments.  All taxpayers should file electronically through their tax preparer, tax software provider or IRS Free File if possible. The IRS is not currently able to process individual paper tax returns. If you already have filed via paper but it has not yet been processed, do not file a second tax return or write to the IRS to inquire about the status of your return or your economic impact payment. Paper returns will be processed once processing centers are able to reopen.

The IRS’s National Distribution Center is closed until further notice and is not able to take any orders for forms or publications to be mailed during this time. IRS.gov remains the best source for tax law questions, checks on refund status and tax payments. Tax transcripts are only available online currently.  Taxpayers also can make tax payments through Direct Pay. Taxes due must be paid by July 15. The Interactive Tax Assistant can help answer tax law questions. There currently are no email options that will generate answers to questions posed by taxpayers. Publication 5136, IRS Services Guide, is a good source of information.

Taxpayers who previously have been issued an Identity Protection PIN but lost it, must use the Get an IP PIN tool to retrieve their numbers.

Automated phone lines: which handle most taxpayer calls – also will remain available during this period. Some tax compliance lines also remain available. IRS phone lines supported by customer service representatives for both taxpayers and tax professionals are not staffed at this time. To check on regular tax refund status via automated phone, call 800-829-1954. (This line has no information on Economic Impact Payments.)

While the IRS is receiving and storing mail, our mail processing functions have been scaled back to comply with social distancing recommendations. Currently, we have reduced responses to paper correspondence. Our primary concern is serving taxpayers as indicated in the People First Initiative, which includes numerous actions to alleviate taxpayer burden during this time.

Taxpayers who mail correspondence to the IRS during this period should expect to wait longer than usual for a response. Once normal operations resume it will take the IRS time to work through any correspondence backlog. Correspondence sent to IRS offices may be returned to the taxpayer if that office is closed and no one is available to accept them.

Statute of limitations issues. The IRS will continue working cases where a statute of limitation is pending. In some of these situations, the IRS will work with the taxpayer or their representative to obtain an extension of the statute.

At this time, Appeals employees will continue to work their cases. Although Appeals is not currently holding in-person conferences with taxpayers, conferences may be held over the telephone or by video conference. To the extent they can, taxpayers are encouraged to promptly respond to any outstanding requests for information for all cases in the Independent Office of Appeals.

Currently, Taxpayer Advocate Services remains open to receive phone calls at the local phone numbers but has suspended walk-in services in their offices and their toll-free centralized number is unavailable until further notice. Please visit taxpayeradvocate.irs.gov to locate your local office phone number.

There are other numerous other services that are still being modified accordingly during this challenging environment, and the Internal Revenue Service is doing their best.

Dwayne J. Briscoe

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Business Versus Personal Travel Expenses – How Can You Defend It?

Numerous discussions with clients have been made with regards to how they have made business trips into family vacations, for as long as the IRS has been around.  However, the challenge has always been when the legitimate business attendees are attending a business conference, continuing education seminar, etc. and choose to bring nonemployees along for the “ride” as a bonus for everyone involved.

In Publication 463, the IRS does state “You can deduct all of your travel expenses if your trip was entirely business related. If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct only your business-related travel expenses. These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination.”  This is within the United States.

If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense. However, you can deduct any expenses you have while at your destination that is causally related to your business.

A trip to a resort or on a cruise ship may be a vacation even if the promoter advertises that it is primarily for business. The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip.

Example.

You work in Atlanta and take a business trip to New Orleans in May. Your business travel totals 900 miles round trip. On your way home, you stop in Mobile to visit your parents. You spend $2,165 for the 9 days you are away from home for travel, non-entertainment-related meals, lodging, and other travel expenses. If you had not stopped in Mobile, you would have been gone only 6 days, and your total cost would have been $1,633.50. You can deduct $1,633.50 for your trip, including the cost of round-trip transportation to and from New Orleans. The deduction for your non-entertainment-related meals is subject to the 50% limit on meals mentioned earlier.

Example.

Jen is employed in New Orleans as a convention planner. In March, her employer sent her on a 3-day trip to Washington, DC, to attend a planning seminar. She left her home in New Orleans at 10 a.m. on Wednesday and arrived in Washington, DC, at 5:30 p.m. After spending 2 nights there, she flew back to New Orleans on Friday and arrived back home at 8 p.m. Jen’s employer gave her a flat amount to cover her expenses and included it with her wages.

Under Method 1, Jen can claim 2½ days of the standard meal allowance for Washington, DC: 3/4 of the daily rate for Wednesday and Friday (the days she departed and returned), and the full daily rate for Thursday.

Under Method 2, Jen could also use any method that she applies consistently and that is in accordance with reasonable business practice. For example, she could claim 3 days of the standard meal allowance even though a federal employee would have to use Method 1 and be limited to only 2½ days.

Documentation is key for every business trip deduction, and it is vital to present specific information on what happened and when, including any personal side-trips or expenses that you reimburse the business.  Failure to do so can widen the burden of proof during an audit if you are discovered miscoding expenses in your favor, which could lead you to have to other legitimize other expenses.  Appearances are everything.

Dwayne J. Briscoe

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COVID-19 Post #5 – SBA Debt Relief Program

As part of the Small Business Administration’s debt relief efforts during the Covid-19 Pandemic, they have also implemented a Debt Relief Program which entails the following key points:

  • The SBA will automatically pay the principal, interest, and fees of current 7(a), 504, and microloans for a period of 6 months; and
  • The SBA will also automatically pay the principal, interest, and fees of new 7(a), 504 and microloans issued prior to September 27, 2020.
  • If your disaster loan was in “regular servicing” status on March 1, 2020, the SBA is providing automatic deferments through December 31, 2020. What this means for borrowers is the following:
  • Interest will continue to accrue on the loan
  • 1201 monthly payment notices will continue to be mailed out which will reflect the loan is deferred and no payment is due
  • The deferment will NOT cancel any established Preauthorized Debit (PAD) or recurring payments on your loan. Borrows that have established a PAD through Pay.gov or an online Bill Pay Service are responsible for canceling these recurring payments.  Borrowers that had SBA establish a PAD through Pay.gov will have to contact their SBA servicing office to cancel the PAD.
  • Borrowers preferring to continue making regular payment during the deferment period may continue remitting payments during the deferment period. SBA will apply those payments normally as if there was no deferment.
  • After this automatic deferment period, borrowers will be required to resume making regular principal and interest payments. Borrowers that cancelled recurring payments will need to reestablish the recurring payment.

Please be aware that the Debt Relief Program does not apply to the Paycheck Protection Program (PPP) loans, nor does it apply to new Economic Injury Disaster Loans (EIDL), or emergency Economic Injury Grants (EEIG).

For federal small business relief programs, you qualify based on the size of your business. Your small business must have 500 or fewer employees. Private nonprofits and 501(c)(19) veteran’s organizations also qualify. It’s possible for some companies with more than 500 employees to qualify if they align with the SBA’s size standards for certain industries. In addition, hospitality and food industry businesses could qualify at each location with fewer than 500 employees even if the overall business employs more than 500 people.

Your business qualifies if the “current economic uncertainty makes the loan necessary to support your ongoing operations,” according to an SBA fact-sheet.  Your need for a loan is contingent upon a decision from an SBA-approved lender based on SBA guidelines. But amid this coronavirus crisis, there will not be a separate review from the SBA.

Normally, there are much more stringent requirements and documentation, but the loans offered under the CARES Act are being given under looser guidelines, allowing banks and other lenders to get money to companies quickly so they can cover things like rent and payroll.

There are also individual state and local programs, each of which has its own guidelines. The size varies by state. For instance, in San Francisco the business must have less than $2.5 million in revenue while in Delaware the number is $1.5 million. Some programs are based on the number of employees a business has — one program in New York, for instance, is for businesses with less than 100 employees.

Dwayne J. Briscoe

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COVID-19 Post #4 – Unemployment for the Self-Employed

COVID-19 Post #4 – Texas Workforce Commission Promotes Unemployment Insurance for 1099 Contractors and the Self-Employed

As posted by the Texas Workforce Commission on April 13, 2020, as part of the CARES Act unemployment portion regarding Pandemic Unemployment Assistance (PUA) for self-employed and 1099 contractors was implemented.  It’s recommended through PUA as a result of COVID-19 benefits online through Unemployment Benefit Services 24 hours a day, 7 days a week, or by calling a TWC Tele-Center any day between 7AM and 7PM at 800-939-6631.  When applying, individuals affected by the pandemic indicate that as the reason they lost their job.

Pandemic Unemployment Assistance provides up to 39 weeks of unemployment benefits for persons impacted by COVID-19 and covers individuals who are self-employed, who otherwise would not qualify for regular unemployment compensation, or who have exhausted state benefits.

Additionally, TWC has begun rolling out the Federal Pandemic Unemployment Compensation (FPUC), adding an additional $600 per week for claimants.  Individuals receiving Unemployment Insurance (UI) or federal extended benefits qualify for the additional $600.

If you have already applied for traditional UI benefits, you do not need to take any further action to qualify for PUA.  Do not apply for benefits again.  TWC will review eligibility for PUA for all existing applicants automatically and notify claimants by mail or electronic correspondence of their eligibility.

If you are an independent contractor, self-employed or a 1099 worker, you have until December 26, 2020, to provide your 2019 Internal Revenue Service Form 1040 and Schedule C, F, or SE.

If you are needing to contact the Texas Workforce Commission via telephone, it’s recommended to contact them during the following access times:

Area Codes Beginning with 9                         Monday – Wednesday – Friday          8AM – Noon

Area Codes Beginning with 3, 4, 5, 6             Monday – Wednesday – Friday          1PM – 5PM

Area Codes Beginning with 7, 8                     Tuesday – Thursday – Saturday         8AM – Noon

Area Codes Beginning with 2                         Tuesday – Thursday – Saturday         1PM – 5PM

Texans will not be penalized for a delay due to call or user volume.  Claims for individuals affected by COVID-19 are eligible to be backdated.  Staggering claims will provide help to reduce frustrations for many Texans and provide better access to needed services.

Unemployment benefits are taxable income reportable to the Internal Revenue Service under federal law.  You must report all unemployment benefits you receive to the IRS on your federal tax return.  Tax withholding is completely voluntary; withholding taxes is not required.  If you ask TWC to withhold taxes, they will withhold 10% of the gross amount of each of the benefit payments and send it to the IRS.  Once people have filed for unemployment, they must request payment every 2 weeks.

For a more step-by-step instructional pdf, click on the following pdf: TWC  Disaster Unemployment Assistance Payments Online.pdf and follow the directions provided by the Texas Workforce Commission.

Dwayne J. Briscoe

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COVID-19 Post #3 – Other SBA Loan Options

Express Bridge Loans

The purpose of the SBA Express Bridge Loans help enables small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000 quickly.  These loans can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing and can be a term loans or used to bridge the gap while applying for a direct SBA Economic Injury Disaster loan.  If a small business has an urgent need for cash while waiting for decision and disbursement on an Economic Injury Disaster Loan, they may qualify for an SBA Express Disaster Bridge Loan.

Express Bridge Loan Pilot Program Guide

Terms

  • Up to $25,000
  • Fast turnaround
  • Will be repaid in full or in part by proceeds from the Emergency Injury Disaster Loan

SBA Express Loan

The purpose of SBA Express Loans standard fall under the federal government’s SBA Loan Guarantee Program. Though similar to the SBA 7(a) loan, which offers up to $5 million and has a guarantee of up to 85% of the loan amount, the “express” loan sets itself apart by being approved or denied within 36 hours.

If approved, funds become available to the business owner within 90 days. This is a far cry from the notoriously grueling process surrounding the SBA 7(a) loan, which requires lengthy application paperwork and even longer lead times for approvals or denials.

ACCEPTABLE USES FOR SBA EXPRESS LOAN PROCEEDS

  • Providing long-term working capital
  • Accounts payable, purchasing inventory, and other operational expenses
  • Providing short-term working capital
  • Seasonal financing, contract performance, construction financing, and/or export
  • Purchasing real estate
  • Purchasing equipment, furniture, machinery, supplies, and materials
  • Covering construction and/or renovation costs
  • Establishing or acquiring a new business, or expanding an existing business
  • Refinancing existing business debt (so long as the lender and ultimately the SBA are not in a position to sustain a loss through refinancing)

WHAT LOAN PROCEEDS CANNOT BE USED FOR

  • Reimbursing an owner for any previous personal investments toward the business
  • Repaying any delinquent withholding taxes
  • Affecting any change or change of business ownership that will not have a positive effect on the business
  • Any purpose did not deem as “sound business purpose,” as determined by the SBA

Dwayne J. Briscoe

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COVID-19 Post #2 – Paid Family Leave

Paid Family Leave Refundable Credit for COVID-19 Affected Employees

The Families First Coronavirus Response Act has provided an employer refundable credit signed by President Trump on March 18, 2020, providing small and midsize employers refundable tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19.  Who does this affect and how?

  • Employers with fewer than 500 employees, funds to provide employees with paid sick and family and medical leave for reasons related to COVID-19, either for the employee’s own health needs or to care for family members. Workers may receive up to 80 hours of paid sick leave for their own health needs or to care for others and up to an additional ten weeks of paid family leave to care for a child whose school or place of care is closed or child care provider is closed or unavailable due to COVID-19 precautions.
  • The refundable tax credits apply to qualified sick leave wages and qualified family leave wages paid for certain periods when an employee is unable to work, as described below, during the period beginning April 1, 2020, and ending December 31, 2020, up to $200.00 per day and $10,000 in the aggregate, or up to 80 hours, if they are unable to work for the following reasons:
  • the employee is under a Federal, State, or local quarantine or isolation order related to COVID-19;
  • the employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
  • the employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis;
  • the employee 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;
  • the employee is caring for the child of such employee if the school or place of care of the child has been closed, or the childcare provider of such child is unavailable, due to COVID–19 precautions;
  • the employee is experiencing any other substantially similar condition specified by the U.S. Department of Health and Human Services.

Eligible Employers that pay qualified leave wages will be able to retain an amount of all federal employment taxes equal to the amount of the qualified leave wages paid, plus the allocable qualified health plan expenses and the amount of the employer’s share of Medicare tax imposed on those wages, rather than depositing them with the IRS.  The federal employment taxes that are available for retention by Eligible Employers include federal income taxes withheld from employees, the employees’ share of social security and Medicare taxes, and the employer’s share of social security and Medicare taxes with respect to all employees.

Example: Company A pays $10,000 in qualified sick leave wages and qualified family leave wages in Q2 2020.  It does not owe the employer’s share of social security tax on the $10,000, but it will owe $145 for the employer’s share of Medicare tax (1.45%).  Its credits equal $10,145, which include the $10,000 in qualified leave wages plus $145 for the Eligible Employer’s share of Medicare tax (this example does not include any qualified health plan expenses allocable to the qualified leave wages).  This amount may be applied against any federal employment taxes that Eligible Employer is liable for on any wages paid in Q2 2020.  Any excess over the federal employment tax liabilities is refunded in accord with normal procedures.  Eligible Employer must still withhold the employee’s share of social security and Medicare taxes on the qualified leave wages paid.

If an Eligible Employer does not have enough federal employment taxes set aside for deposit to cover its obligation to provide qualified leave wages (and allocable qualified health plan expenses and the Employer’s share of Medicare tax on the qualified leave wages), the employer may request an advance of the credits by completing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Self-Employed Individuals

The same requirements as a standard employee noted above, a self-employed individual must face the same stipulations.

The average daily self-employment income is determined by 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.

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.

Self-employed individuals can take both deductions however the qualified sick or family leave equivalent amounts are offset by the qualified sick or family leave wages.  The refundable credits are claimed on the self-employed individual’s Form 1040, U.S. Individual Income Tax Return, tax return for the 2020 tax year.

Dwayne J. Briscoe

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