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

The SETC is a reimbursable tax credit established as part of a monetary support plan for self-employed individuals suffering from the COVID-19 pandemic. Initially rolled out under the FFCRA in 2020, this credit was later expanded through the CARES Act to offer reimbursement for lost earnings due to personal illness, quarantine, or the need to care for others.

This article explains what the SETC is, eligibility criteria 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 gig workers who faced work disturbances due to COVID-19. The credit provides monetary support for those who missed work either because they were ill, under mandatory isolation, or had to care for others during the pandemic.  setc tax credit deadline  compensates them for the income lost during this time.

Conditions for SETC

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

• Operate as a self-employed individual, including freelancers, gig workers, and entrepreneurs.
• Have declared self-employment income 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:
• Mandatory quarantine due to COVID-19.
• Suffering from COVID-19 symptoms or illness.
• Providing care for someone impacted by COVID-19.
• Having to care for children due to COVID-19-related school shutdowns.

Employees on W-2 forms who receive W-2 forms are not eligible for this credit.

Method for Calculating the SETC

The sum you can claim from the SETC depends on your average daily self-employment income. It is categorized into two main categories:

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

Credit for Family Care: Available for those incapable of working due to the need to care for others. You can claim two-thirds of your daily income, capped at $200 per day, for a maximum of 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.

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 number of days missed due to COVID-19. Here is a simplified guide to the process:

Determine your average daily income:

• Determine your net 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 average daily income by the days not worked, limited at 10 days.
• For family leave: Take two-thirds of your daily income by the number of days missed, limited at 50 days.

Submit Your Tax Forms:

• Attach Form 7202 to your IRS Form 1040 when submitting your tax documents.
• Should you have previously submitted your 2020 or 2021 tax return without claiming the SETC, you can submit an amended return using Form 1040-X.

Recordkeeping and Compliance

Maintaining accurate records is important when claiming the SETC. Ensure you retain the following documentation:

• Proof of self-employment income (e.g., 1099 forms from the IRS, Schedule C forms, 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 filing for family care leave.

You must retain copies of both your original tax returns and any corrections filed for potential future audits, 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 can 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:

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

Refundable Nature of the SETC

One of the most notable benefits 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 makes the credit particularly beneficial 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? Yes, as long as you have self-employment income reported on your tax filings. That said, any qualified leave wages received from your employer will lower the amount of the credit.

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.

How quickly will I get the refund? After the IRS has handled your claim, it usually takes about 20 weeks to receive the refund through a check or bank deposit.

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 sick leave and family leave credits.

Is it possible to 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.

What documentation do I need? Maintain documentation of your self-employed earnings, medical records, quarantine orders, and any documentation related to childcare to validate your request.

Final Thoughts

The SETC is a important financial lifeline for independent contractors, gig workers, and other self-employed individuals who suffered due to the COVID-19 pandemic. By knowing the qualification criteria and claiming the credit accurately, you can benefit from significant financial relief. If you haven’t yet claimed the SETC, consider filing an amended return to take full advantage of this financial benefit.