SETC Tax Credit Explained

What exactly is SETC Tax Credit? A Detailed Guide for Those Who are Self-Employed =================================================================================

The Self-Employed Tax Credit is a refundable tax credit created as part of a financial relief effort for independent contractors suffering from the COVID-19 pandemic. Initially rolled out under Self-employed tax credit SETC eligibility in 2020, this credit was later expanded through the CARES Act to offer monetary relief for income lost due to personal illness, mandatory isolation, or caretaking duties.

This article explains what the SETC is, who qualifies for it, the method of calculating the credit, and the procedure to claim it.

What exactly is SETC Tax Credit?

SETC is a tax credit tailored for freelancers and independent contractors who faced work disturbances due to COVID-19. The credit provides economic assistance for those unable to work either because they were feeling unwell, under quarantine, or were responsible for caregiving during the pandemic. The credit reimburses the income lost during this time.

Requirements for SETC

To qualify for the SETC, an individual must meet the following conditions:

Standard employees who receive W-2 forms are ineligible for this credit.

Method for Calculating the SETC

The sum you can claim from the SETC depends on your daily earnings from self-employment. It is split into two key categories:

  1. Credit for Sick Leave: Eligible for those who couldn’t perform their job due to personal illness or quarantine. You can claim 100% of your average daily income, up to $511 per day, for a limit of 10 days.

  2. Family Leave Credit: Available for those unable to work due to caregiving responsibilities. You can claim 67% of your daily income, capped at $200 per day, for a maximum of 50 days.

The maximum total credit that can be claimed over 2020 and 2021 is $32,220. This combines both the sick leave and family care parts, resulting in a significant relief for those severely affected by the pandemic.

Filing Requirements and How to Claim the SETC

To claim the SETC, you should complete Form 7202 from the IRS, which helps calculate the credit based on your earnings from self-employment and the days missed due to COVID-19. Here is a simplified guide to the process:

  1. Calculate Your Average Daily Earnings:

    • Figure out your total self-employment income for the year and divide it by 260 (representing the assumed workdays in a year).

  2. Calculate Your Leave Credits:

    • When calculating sick leave: Take your daily earnings by the number of days missed, capped at 10 days.
    • For family leave: Take 67% of your daily income by the number of days missed, capped at 50 days.

  3. File your tax documentation:

    • Attach Form 7202 to your IRS Form 1040 when filing your tax return.
    • If you have already filed your 2020 or 2021 tax return without claiming the SETC, you can submit an amended return using Form 1040-X.

Recordkeeping and Compliance

Keeping precise documentation is critical when filing for the SETC. Ensure you retain the following records:

It's necessary to keep copies of both your original tax returns and any corrections filed for future reference, as the IRS demands supporting documentation to support your self-employment status and the impact COVID-19 had on your ability to work.

SETC Claim Deadlines

The SETC is eligible to be claimed by submitting a corrected return within 3 years from the original due date or two years from the date the tax was paid, whichever is later. For instance:

Refundable Nature of the SETC

One of the most important advantages of the SETC is that it is refundable, meaning if the credit exceeds the taxes owed, the IRS will issue the remaining balance as a reimbursement. This is especially advantageous for individuals who earned less taxable income or minimal tax liability during the pandemic.

Common FAQs About the SETC

  1. Is the SETC available to individuals with W-2 income? Yes, as long as you have self-employment income reported on your tax return. However, any qualified leave wages received from your employer will decrease the amount of the credit.

  2. What if I didn’t miss any workdays? No, you cannot claim for the SETC if you did not miss workdays because of COVID-19.

  3. How quickly will I get the refund? Once the IRS processes your claim, it usually takes about 20 weeks to receive the refund via check or bank deposit.

  4. Is there a cap on the amount I can claim? The largest sum you can claim is $32,220 over the two tax years. This covers both the sick and family leave portions.

  5. Can I amend my tax return to claim the SETC? Yes, you can file an amended return using Form 1040-X if you didn't initially claim the credit on your initial tax filing.

  6. What documentation do I need? Maintain documentation of your self-employed earnings, medical records, evidence of quarantine, and any documentation related to childcare to support your claim.

Conclusion

The Self-Employed Tax Credit is a critical source of relief for freelancers, self-employed professionals, and other self-employed individuals who suffered due to the COVID-19 pandemic. By understanding the eligibility requirements and claiming the credit accurately, you can benefit from significant monetary assistance. If you haven’t already filed for the SETC, look into submitting an amended tax filing to take full advantage of this financial benefit.