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

The Self-Employed Tax Credit is a reimbursable tax credit introduced as part of a financial relief effort for freelancers impacted by the COVID-19 pandemic. Originally implemented under the Families First Coronavirus Response Act in 2020, this credit was eventually extended through the CARES Act to offer monetary relief for income forfeited due to sickness, self-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 is SETC Tax Credit?

SETC is a tax credit tailored for self-employed individuals who experienced disruptions due to COVID-19. The credit offers economic assistance for those who couldn't work either because they were feeling unwell, under self-isolation, or had to care for others during the pandemic. The credit reimburses income forgone during this time.

Requirements for SETC

To be eligible for the SETC, an individual must satisfy the following conditions:

Operate as a self-employed individual, including freelancers, gig workers, and small business owners.
Have declared self-employment income on IRS Form 1040's Schedule SE 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.
Suffering from COVID-19 symptoms or illness.
Providing care for someone impacted by COVID-19.
Needing to provide childcare due to pandemic-related school closures.

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

Method for Calculating the SETC

The amount you can claim from the SETC depends on your average daily self-employment income. It is categorized into two primary types:

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

Family Leave Credit: Available for those incapable of working due to the need to care for others. You can claim two-thirds 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, making it a substantial financial aid for those severely affected by the pandemic.

Filing Requirements and How to Claim the SETC

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

Determine your average daily income:

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

Compute your leave-related credits:

When calculating sick leave: Multiply your average daily income by the number of days missed, capped at 10 days.
When calculating family care leave: Take two-thirds of your daily income by the missed workdays, capped at 50 days.

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 file a correction using IRS Form 1040-X.

Documentation and Compliance

Maintaining accurate records is important when filing for the SETC. Be sure to keep the following records:

Verification of self-employment earnings (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 potential future audits, as the IRS requires substantiating evidence to support your self-employment status and the impact COVID-19 had on your ability to work.

SETC Claim Deadlines

The SETC can be claimed by filing an amended tax return within 3 years from the initial filing deadline or two years from the date the tax was paid, whichever is more recent. For example:

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

Refundable Nature of the SETC

One of the most important advantages of the SETC is that it is reimbursable, 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 had little tax due during the pandemic.

Frequently Asked Questions about the SETC

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 paid by your employer will decrease the amount of the credit.

Am I eligible if I didn't miss work? You are not eligible 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 usually takes about 20 weeks to get the refund through a check or direct deposit.

What’s the maximum amount I can claim? The largest sum you can claim is $32,220 over the 2020 and 2021 tax periods. This includes 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 IRS 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 support your claim.

Final Thoughts

The Self-Employed Tax Credit is a critical source of relief for independent contractors, gig workers, and other self-employed individuals who were impacted by the COVID-19 pandemic. By knowing elementor refund and claiming the credit accurately, you can gain substantial financial relief. If you haven’t already filed for the SETC, consider submitting an amended tax filing to take full advantage of this financial benefit.