What is SETC Tax Credit? An In-Depth Guide for Freelancers and Independent Contractors

The Self-Employed Tax Credit is a returnable tax credit established as part of a financial relief effort for independent contractors suffering from the COVID-19 pandemic. First launched under the FFCRA in 2020, this credit was later expanded through the CARES Act to offer reimbursement for income lost due to health issues, self-isolation, or the need to care for others.

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

What is SETC Tax Credit?

SETC is a tax credit designed specifically for self-employed individuals who experienced disruptions due to COVID-19. The credit provides monetary support for those unable to work due to the fact that they were feeling unwell, under quarantine, or needed to provide care during the pandemic. The credit reimburses income forgone during this time.

Requirements for SETC

To be eligible for the SETC, an individual must meet the following criteria:

• Operate as a self-employed individual, including freelancers, gig workers, and entrepreneurs.
• Reported earnings from self-employment on IRS Form 1040's Schedule SE in either the 2020 or 2021 tax year.
• Incapable of working for a valid COVID-19-related reason, such as:
  • Mandatory quarantine due to COVID-19.
  • Suffering from COVID-19 symptoms or illness.
  • Caring for someone affected by COVID-19.
  • Having to care for children due to pandemic-related school closures.

Standard employees receiving W-2s are not eligible for this credit.

How the SETC Tax Credit is Calculated

The amount you can claim from the SETC is determined by your daily earnings from self-employment. It is divided into two key categories:

1. Credit for Sick Leave: Eligible for those who were unable to work due to sickness 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: Eligible for those incapable of working due to caregiving responsibilities. https://officialsetcrefund.com/apply/ can claim 67% of your daily earnings, capped at $200 per day, for up to 50 days.

The largest credit possible that can be claimed over 2020 and 2021 is $32,220. This combines both the sick leave and family leave portions, resulting in a significant relief for those heavily impacted by the pandemic.

Claiming the SETC and Filing Process

To claim the SETC, you need to complete Form 7202 from the IRS, which calculates the credit based on your earnings from self-employment and the number of 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. Compute your leave-related credits:

   • When calculating sick leave: Multiply your daily earnings by the days not worked, limited at 10 days.
   • When calculating family care leave: Multiply two-thirds of your daily income by the missed workdays, limited at 50 days.

3. File your tax documentation:

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

Recordkeeping and Compliance

Maintaining accurate records is critical when claiming the SETC. Be sure to keep the following records:

• Proof of self-employment income (e.g., IRS 1099 forms, Schedule SE, Schedule C, etc.).
• Medical records or documentation from healthcare providers if you were ill or under quarantine.
• Proof of school or daycare closures if you are filing for family care leave.

It's necessary to keep copies of both your initial tax filings and any amended returns for future reference, as the IRS requires substantiating evidence to support your self-employment status and the extent to which COVID-19 affected your work.

Deadlines for Claiming the SETC

The SETC is eligible to be claimed by submitting a corrected return within three years from the original due date or 2 years from the date tax payment was made, whichever is later. For instance:

• The final date to amend your 2020 tax return is April 15, 2024.
• For 2021, the final date is April 15th, 2025.

SETC as a Refundable Credit

One of the most notable benefits of the SETC is that it is reimbursable, meaning when the credit surpasses your tax liability, the IRS will provide the excess amount as a reimbursement. This makes the credit particularly beneficial for self-employed workers who had lower 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? Indeed, provided that you have self-employment income reported on your tax filings. However, any qualified leave wages received from your employer will reduce the amount of the credit.

2. What if I didn’t miss any workdays? You are not eligible for the SETC if you did not miss workdays because of COVID-19.

3. How long does it take to receive the refund? Once the IRS processes your claim, it typically takes about 20 weeks to receive the refund through a check or bank deposit.

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

5. Can I amend my tax return to claim the SETC? Indeed, you are allowed to file an adjusted tax return using IRS Form 1040-X if you missed claiming the credit on your initial tax filing.

6. What records should I keep for my claim? Keep records of your self-employed earnings, medical records, quarantine orders, and any childcare-related documents to support your claim.

Final Thoughts

The SETC is a critical financial lifeline for independent contractors, gig workers, and other business owners affected by the COVID-19 pandemic. By understanding the eligibility requirements and claiming the credit accurately, you can gain substantial financial relief. If you haven’t already filed for the SETC, consider filing an amended return to take full advantage of this financial benefit.