Greetings ,
Are you a self-employed individual who was impacted of the COVID-19 pandemic? If this describes you, you may be eligible for the Self-Employed Tax Credit (SETC), a valuable financial relief measure that can provide up to $32,220 in tax credits for the 2020 and 2021 tax years. This detailed guide is intended specifically for self-employed individuals, including sole proprietors, independent contractors, and gig workers, to help you understand what the SETC is, who qualifies, how to calculate your credit, and how to file for it on your tax returns.
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The SETC was created as part of the Families First Coronavirus Response Act and later extended through the Consolidated Appropriations Act and American Rescue Plan Act to support self-employed individuals who suffered income loss due to COVID-19 related reasons. By the end of this guide, you'll have a comprehensive understanding of how the SETC can aid you and the steps you need to take to obtain this significant credit.
What is the Self-Employed Tax Credit (SETC)?
The Self-Employed Tax Credit (SETC) is a reimbursable tax credit intended to give financial relief to self-employed individuals who were affected by the COVID-19 pandemic. It provides up to $32,220 in support for eligible self-employed workers, including sole proprietors, independent contractors, freelancers, and gig workers.
Definition of the SETC
The SETC is a informal term that refers to the provisional sick and family leave tax credits for self-employed individuals implemented under the Families First Coronavirus Response Act (FFCRA). These credits are intended to reimburse self-employed workers for income lost due to COVID-19-related reasons.
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Origin of the SETC (Families First Coronavirus Response Act)
The SETC started from the Families First Coronavirus Response Act (FFCRA), which was signed into law in March 2020. The FFCRA initially targeted providing paid sick leave and unemployment benefits for employees of certain small businesses hit by COVID-19.
Extension of the SETC (Consolidated Appropriations Act and American Rescue Plan Act)
In December 2020, the Consolidated Appropriations Act extended the FFCRA's provisions to cover self-employed individuals. The American Rescue Plan Act, approved in March 2021, further extended and augmented the SETC, making it available for self-employed workers who faced income disruptions due to the pandemic in 2020 and 2021.
Who Qualifies for the SETC?
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To be eligible for the Self-Employed Tax Credit, individuals must fulfill the following criteria:
Self-employed individuals
- Sole proprietors: Self-employed individuals who operate businesses with or without employees. Independent contractors: Workers who render services to clients on a contract basis, such as freelancers and 1099 subcontractors. Gig workers: Individuals who make income through gig economy platforms, such as rideshare and delivery drivers.
Eligibility also necessitates that self-employed individuals:
- Filed a Schedule SE (Form 1040) for 2020 or 2021, reporting positive net income and paying self-employment taxes. Were unable to work or telework due to COVID-19 related reasons, such as being infected with the virus, being under quarantine, or caring for someone hit by the pandemic.
In essence, the SETC offers substantial financial aid to a wide range of self-employed professionals who experienced loss of income due to COVID-19 in 2020-2021. Sole proprietors, independent contractors, and gig workers who meet the eligibility criteria may qualify for this significant tax credit.
Calculating Your SETC
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The Self-Employed Tax Credit (SETC) includes two main components: the qualified sick leave equivalent amount and the qualified family leave equivalent amount. Here's how to compute each:
Qualified sick leave equivalent amount
- If you were unable to work due to being under a quarantine or isolation order, recommended to self-quarantine, or experiencing COVID-19 symptoms and seeking a medical diagnosis, you can receive up to $511 per day for a maximum of 10 days. The maximum credit for qualified sick leave is $5,110 per individual.
Qualified family leave equivalent amount
- If you were unable to work because you were looking after someone subject to a quarantine order or advised to self-quarantine, or caring for a child whose school or place of care was closed due to COVID-19, you can obtain up to $200 per day. In 2020, the maximum period for this credit was 50 days, yielding a maximum credit of $10,000. In 2021, the maximum period was raised to 60 days, leading to a maximum credit of $12,000.
To determine your average daily self-employment income, divide your net earnings from self-employment for the taxable year by 260. If you have self-employment income for both 2020 and 2021, you must compute the credit separately for each year.
Limitations and exceptions
- The SETC is filed on Form 7202, which must be submitted with your income tax return for the applicable year. If you received wages from an employer for sick or family leave, your SETC will be reduced by those amounts to avoid double benefits. You must have positive net earnings from self-employment to be eligible for the SETC. If your business had a net loss, you won't be eligible. Certain days are not considered from the SETC calculation, such as days you obtained unemployment benefits.
In conclusion, the SETC offers substantial financial relief for self-employed individuals who were unable to work due to various COVID-19-related circumstances. By grasping the calculation methods and limitations, you can figure out the credit amount you're eligible to claim on your corrected tax returns.
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Steps to Claim the SETC
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To claim the Self-Employed Tax Credit (SETC), you should amend your 2020 and/or 2021 tax returns. Here is how:
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Amending 2020 and 2021 tax returns
- File an amended return (Form 1040-X) for each applicable year, 2020 and/or 2021. Attach a completed Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, to each amended return.
Form 7202: Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals
- Form 7202 captures your SETC eligibility information and credit calculations. Complete Part I if claiming the credit for sick leave, and Part II for family leave. The credit calculated on Form 7202 flows to Schedule 3 (Form 1040), line 12b for 2020 and line 13b or 13h for 2021. If you're filing a joint return and both spouses are eligible self-employed individuals, each must complete a separate Form 7202.
Deadlines for claiming the credit
There are two key deadlines to be aware of when claiming the SETC:
April 15, 2024 for 2020 tax year
- The deadline to amend your 2020 tax return and claim the SETC for leave taken between April 1, 2020, and March 31, 2021 is April 15, 2024. This portion accounts for a maximum of $15,110 of the total SETC.
April 15, 2025 for 2021 tax year
- To claim the SETC for leave taken between April 1, 2021, and September 30, 2021, you have until April 15, 2025 to amend your 2021 tax return. This portion accounts for a maximum of $17,110 of the total SETC.
It's important to note that the IRS will acknowledge your SETC claim within about 3 weeks and then take up to 20 weeks to process it and issue your refund via check or direct deposit.
Gathering the required documentation and completing the necessary tax forms can be complex, so consider working with a tax professional to ensure accuracy and timeliness. Some online services can also assist in preparing and submitting your SETC claim.
Frequently Asked Questions about the Self-Employed Tax Credit (SETC)
What is the Self-Employed Tax Credit (SETC)?
>>> Calculate Your SETC Refund using this tool
The Self-Employed Tax Credit (SETC) is a refundable tax credit intended to give financial relief to self-employed individuals who were affected by the COVID-19 pandemic. It was introduced as part of the Families First Coronavirus Response Act (FFCRA) in 2020 and later prolonged through the Consolidated Appropriations Act and American Rescue Plan Act.
Who qualifies for the SETC?
To be eligible for the SETC, you must fulfill the following criteria:
- You were self-employed in 2020 and/or 2021, including sole proprietors, independent contractors, freelancers, and gig workers. You had positive net income from self-employment on your 2019, 2020, or 2021 tax return (Schedule SE). If your income was negative in 2020-2021 due to COVID-19, your 2019 income can be used to qualify. You were unable to work due to COVID-19 illness, quarantine, or family care responsibilities.
How much is the SETC worth?
The SETC offers up to $32,220 in total aid for eligible self-employed individuals. It comprises two parts:
Qualified sick leave credit: Up to $511 per day for 10 days (max $5,110) if you were unable to work due to COVID-19 illness or quarantine. Qualified family leave credit: Up to $200 per day for 50 days in 2020 (max $10,000) and 60 days in 2021 (max $12,000) if you were unable to work because you were looking after someone impacted by COVID-19 or your child's school/care was closed.How do I calculate my SETC?
>>> Calculate Your SETC Refund using this tool
To determine your SETC, you need to compute your average daily self-employment income by dividing your annual net earnings from self employed tax credit self-employment by 260. The credit for each qualified sick leave day is the lesser of $511 or 100% of your average daily income. For family leave, it's the lesser of $200 or 67% of your average daily income.
How do I claim the SETC?
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You claim the SETC by filing Form 7202 with your 2020 and 2021 tax returns. If you already filed those returns, you'll need to complete amended returns (Form 1040-X) and include Form 7202. If you're filing a joint return and both spouses are self-employed, each must complete a separate Form 7202.
What are the deadlines for claiming the SETC?
The deadline to amend your 2020 return and claim the SETC for that year is April 15, 2024. For the 2021 tax year, you have until April 15, 2025 to file an amended return.
Can I claim the SETC if I received other COVID-19 benefits?
If you received wages, unemployment benefits, or other COVID-19 relief for the same time period, your SETC will be lessened to avoid double benefits. However, receiving a Paycheck Protection Program (PPP) loan does not disqualify you from claiming the SETC.
Is the SETC taxable?
No, the SETC is a refundable tax credit and is not considered taxable income.
How long does it take to receive the SETC refund?
After submitting your amended returns with Form 7202, it typically takes the IRS 12-16 weeks to process your SETC claim and issue your refund via check or direct deposit.