How the covid-19 relief bill will affect your taxes as a freelancer

Freelancers are eligible to collect unemployment benefits, but this counts as taxable income. Find out more about how the Covid-19 relief bill affects you.
How the covid-19 relief bill will affect your taxes as a freelancer

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To say 2020 was an unprecedented year is a little like saying the sun is kind of warm or the ocean is a little damp. The year brought a level of global chaos and disaster unlike anything we’ve seen in living memory, and perhaps the largest upheaval of all came with the novel coronavirus. In under a year, this disease infected more than 92 million people, killed nearly 2 million, and changed life as we know it forever.

In order to cope with the fallout of the pandemic, the U.S. government passed a COVID-19 relief bill that gave millions of Americans stimulus checks. But as a freelancer, you may now be wondering how these will impact your taxes for this year. Read on to learn more about how to handle this and other pandemic-related tax issues.

Overview of the checks

Before we dive into how this year’s stimulus checks will impact your taxes, let’s do a quick review of how those checks worked. The first check was a part of the CARES Act, which was signed into law on March 27, 2020.

This first stimulus check was for $1,200 and was available to American adults making less than $99,000 per year ($198,000 for married couples). This check also included a $500 supplement for households with children under the age of 17.

The second stimulus bill was signed in December 2020, and the checks it provided were much smaller. Each American adult making $75,000 a year or less ($150,000 for married couples) received a $600 check.

Does the check count as income?

The big question on all of our minds is do those stimulus checks count as income for tax purposes? You’ll be relieved that it does not – you will neither have to report, nor pay taxes on, either of the stimulus checks you received this year. They will not be counted as a part of your other freelance income, since they weren’t income in the traditional sense.

Because of the extraordinary circumstances this year, the government recognizes that people may not have had their normal income to cover bills and other expenses. The two stimulus checks were meant to help people survive the hardships of the pandemic, as well as to keep the economy moving. The government therefore won’t be collecting taxes on these checks, since they were survival checks, rather than direct income. 

If you didn't get the check 

In some cases, you may have qualified for one or both of the stimulus checks, but you may not have received the money you were supposed to. You may also have gotten the wrong amount in your automatic payment. If either of these is the case for you, you could qualify for the Rebate Recovery Credit.

The Rebate Recovery Credit is a credit towards the taxes you owe the government for this year. If you didn’t receive one or both of your checks, or if you received the wrong amount, this credit will cover the amount you didn’t get. If that amount is more than you owe in taxes, the government will give you a tax refund with the remaining credit amount.

Qualified paid leave credit

Aside from the stimulus checks, 2020 raised a number of questions about how to calculate freelancer taxes in light of the pandemic. For one, what do you do if you were one of the 23 million people who contracted COVID-19 this year? You may not have been able to work for days or weeks, and as a freelancer, that means lost income.

If you had to take time off for illness, you could qualify for a paid leave credit for your taxes. You can claim up to ten days of sick pay at your average daily rate, with a maximum of $511 per day. If you were caring for a quarantined family member, you could claim up to two-thirds of your daily rate, with a maximum of $200 per day.

Qualified family leave credit 

Many of us also found our work-from-home lives disrupted this year because of school shifts to distance learning. You may have had to take on homeschool responsibilities, and simply having the rest of your family home all day can make it harder to earn what you need to. If that was the case for you this year, you could qualify for a family leave credit on your taxes.

If your child’s school or daycare closed due to COVID-19, you could claim up to fifty days of income at two-thirds of your average daily rate. As with the paid leave credit, this has a maximum limit of $200 per day. This is a refundable tax credit that will offset the amount you owe to the government for this year’s taxes. 

Proving that you qualify 

In order to get the paid leave or family leave credit, you must be able to prove that you experienced one of the situations we mentioned. To start with, you’ll need to have a specific record of which days you were unable to work. In the case of the paid leave credit, this will include the days you were sick; for the family leave credit, it will include the days your child’s school was closed.

You will also need to specify which client or company you work for and from whom you lost income during the pandemic. You will need to specify the reason you were unable to work – for instance, your child’s daycare closed or you contracted COVID-19. You may also need to include the name and age of the child or children you were caring for and the name of the school that closed.

Calculating daily average income 

If you plan to apply for either of these tax credits, you’ll need to know what your average daily income is. Depending on the nature of your work, this may not be a consistent number every day. In order to calculate your average daily income, you’ll need to look at your overall annual income and divide it by the number of working days. 

For instance, let’s say in 2019, you grossed $45,000 and you worked five days a week for fifty-two weeks out of the year. You would subtract your usual expenses, such as a mortgage and bills, divide that $45,000 by 260 – the number of days you worked. If you pay $1,500 a month in bills, your average daily net income would be $103. 

Unemployment benefit taxes

Last year, more than 14 million Americans filed for unemployment benefits of some kind. If you were one of them, you may be wondering what those unemployment checks will mean for your taxes this year. This may also be your first time handling unemployment benefit taxes, since freelancers only became eligible to apply for these benefits as a result of the CARES Act

Unemployment benefits, unlike the stimulus checks, are considered income for tax purposes. This includes the $600 additional benefit all unemployment recipients got from the federal government this year. If you prefer and you’re still receiving unemployment benefits, you can opt to have taxes withheld from your checks, rather than setting that money aside yourself.

Qualifying for unemployment

There are a number of situations that arose last year that could qualify you for unemployment. In simplest terms, if you became unemployed or partially employed as a result of the pandemic, you’re likely to qualify for benefits. As a freelancer, your benefit amount will be based on your previous income, with a minimum amount of half your state’s average weekly unemployment insurance payment. 

If you qualify for either of the qualified credits we discussed earlier, chances are you also qualify for unemployment. This also applies if you were about to start a new job and couldn’t or had to quit your current job because of the pandemic. However, if you were able to continue working normally from home or if you were receiving paid sick leave or family leave, you won’t qualify. 

Tax refund garnishments

If you’ve defaulted on your student loans, any previous tax refunds you may have received were likely garnished to cover your debt. So you may be wondering if those stimulus checks you received are going to be garnished to cover that debt, too. The short answer is no, your stimulus checks are safe.

The federal government suspended all student loan obligations, and tax garnishing programs at the start of the pandemic. Even if you owe money to the IRS itself for previous tax bills, they can’t take that money out of your stimulus check. The only possible exception to this is any child support payments you’re behind on.

Learn more about the impact of the COVID-19 relief bill

Last year was strange in many ways, and filing taxes this year is going to be a very different experience for all of us. If you only received the stimulus checks, you don’t need to worry; your taxes won’t be impacted. But if you received unemployment benefits as part of the COVID-19 relief bill, you will need to plan on paying taxes for those.

If you’d like to get more help with your career as a freelancer, check out the rest of our site at Moxie. We’re here to help freelancers just getting started get off on the right foot. Start for free today with Moxie and start managing your entire freelance business the smarter way.

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