What exactly is SETC Tax Credit? An In-Depth Guide for Self-Employed Individuals

The SETC is a refundable tax credit created as part of a economic relief initiative for self-employed individuals impacted by the COVID-19 pandemic. Originally implemented under the FFCRA in 2020, this credit was later expanded through the CARES Act to offer monetary relief for lost earnings due to personal illness, quarantine, or caretaking duties.

This article explains the nature of the SETC, who qualifies for it, how the credit is calculated, and the steps needed to claim it.

What exactly is SETC Tax Credit?

The SETC is a tax credit tailored for freelancers and independent contractors who faced work disturbances due to COVID-19. The credit gives financial relief for those who missed work due to the fact that they were feeling unwell, under self-isolation, or needed to provide care during the pandemic. The credit reimburses lost wages during this time.

Requirements for SETC

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

• Operate as a self-employed individual, including freelancers, gig workers, and sole proprietors.
• Reported earnings from self-employment on Schedule SE of IRS Form 1040 in the tax years 2020 or 2021.
• Incapable of working for a valid COVID-19-related reason, such as:
• Being under quarantine due to COVID-19.
• Experiencing COVID-19 symptoms or illness.
• Caring for someone affected by COVID-19.
• Caring for children due to pandemic-related school closures.

Regular employees who receive W-2 forms are not eligible for this credit.

Method for Calculating the SETC

The amount you can claim from the SETC is calculated based on your average daily self-employment income. It is divided into two main categories:

Sick Leave Credit: Eligible for those who couldn’t work due to sickness or quarantine. You can claim the full amount of your average daily income, up to $511 per day, for a limit of 10 days.

Credit for Family Care: Available for those incapable of working due to caregiving responsibilities. You can claim 67% of your daily income, 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 considerable assistance for those heavily impacted by the pandemic.

Claiming the SETC and Filing Process

To claim the SETC, you must complete IRS Form 7202, 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:

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).

Compute your leave-related credits:

• For sick leave: Take your daily earnings by the days not worked, limited at 10 days.
• When calculating family care leave: Take 67% of your daily income by the missed workdays, capped at 50 days.

Submit Your Tax Forms:

• Include Form 7202 to your Form 1040 when filing your tax return.
• Should you have previously submitted your 2020 or 2021 tax return without claiming the SETC, you can file a correction using Form 1040-X.

Documentation and Compliance

Keeping precise documentation is important when claiming the SETC. Be sure to keep the following records:

• Verification of self-employment earnings (e.g., IRS 1099 forms, Schedule SE, Schedule C, etc.).
• Health records or medical documents from healthcare providers if you were ill or under quarantine.
• Proof of school or daycare closures if you are claiming family leave.

You must retain 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 extent to which COVID-19 affected your 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 more recent. For instance:

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

SETC as a Refundable Credit

One of the most important benefits of the SETC is that it is refundable, meaning if the credit exceeds the taxes owed, the IRS will provide the excess amount as a reimbursement. This is especially advantageous for self-employed workers who earned less taxable income or had little tax due during the pandemic.

Frequently Asked Questions about the SETC

Can I claim the SETC if I also had W-2 income? Indeed, provided that you have self-employment income reported on your tax filings. However, any paid leave earnings paid by your employer will decrease the amount of the credit.

Am I eligible if I didn't miss work? No, you cannot claim for the SETC if you did not miss workdays due to COVID-19-related reasons.

How quickly will I get the refund? Once the IRS processes your claim, it generally takes about 20 weeks to be sent the refund through a check or direct deposit.

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

Is it possible to amend my tax return to claim the SETC? Yes, you can file an amended return using Form 1040-X if you missed claiming the credit on your initial tax filing.

What records should I keep for my claim? Maintain documentation of your self-employment income, health documentation, evidence of quarantine, and any documentation related to childcare to validate your request.

Conclusion

The SETC is a critical source of relief for freelancers, gig workers, and other business owners who suffered due to the COVID-19 pandemic. By knowing the qualification criteria and filing correctly, you can benefit from significant financial relief. If you haven’t yet claimed the SETC, consider filing an amended return to capitalize on this opportunity.