What Is the Self-Employed Tax Credit (SETC) and How Does It Work?
Learn how the Self-Employed Tax Credit (SETC) can impact your tax obligations, who qualifies, and the steps to claim it effectively.
The Self-Employed Tax Credit (SETC) was introduced to provide financial relief for self-employed workers affected by the COVID-19 pandemic, helping them offset lost income due to illness or caregiving responsibilities. Unlike traditional employees who received paid leave, self-employed individuals had no such benefits, making this credit an essential form of support. Understanding how it works can help eligible taxpayers reduce their tax burden and potentially increase their refunds.
Eligibility Criteria
To qualify for the SETC, individuals must have reported self-employment income on their tax return for the applicable year. This includes sole proprietors, independent contractors, and freelancers who file a Schedule C (Form 1040) or report earnings from a partnership on Schedule K-1. A minimum of $400 in net earnings from self-employment is required to ensure only active business participants can claim the credit.
Eligibility also depends on whether the individual was unable to work due to COVID-19-related circumstances, such as being diagnosed with the virus, experiencing symptoms while seeking a medical diagnosis, or caring for a family member with COVID-19. Those who had to care for a child due to school or daycare closures may also qualify. These provisions align with the Families First Coronavirus Response Act (FFCRA), which extended similar benefits to employees.
Calculation Steps
The SETC is based on a taxpayer’s average daily self-employment income, determined by dividing net earnings for the applicable tax year by 260, representing the number of working days in a year when excluding weekends.
The IRS allows up to 10 days for those unable to work due to personal illness, with a maximum credit of $511 per day. For individuals who missed work due to caregiving responsibilities, the credit is calculated at two-thirds of the daily income, capped at $200 per day, for up to 50 days. These limits ensure self-employed individuals receive benefits comparable to employees who were eligible for paid leave.
If the credit exceeds the taxpayer’s self-employment tax liability, the excess is refundable, meaning it can increase the overall tax refund.
Filing Procedures
To claim the SETC, taxpayers must complete Form 7202 and attach it to Form 1040 or 1040-SR. This form requires details about the qualified leave days taken due to illness or caregiving responsibilities, along with net earnings from self-employment.
Proper documentation is necessary to support the claim. Medical records, school closure notices, or written statements explaining the inability to work should be retained for at least three years in case of an IRS audit. While these documents do not need to be submitted with the tax return, failing to maintain them could lead to challenges if the claim is questioned.
Electronic filing is recommended for faster processing. The IRS typically processes e-filed returns within 21 days, while paper submissions can take six weeks or longer. Taxpayers using professional tax software or working with a preparer should ensure Form 7202 is included before submission.
Effects on Refunds or Liabilities
Claiming the SETC directly affects a taxpayer’s financial position by reducing the amount owed or increasing the potential refund. Because the credit is refundable, it can generate a payment from the IRS even if no income tax is due.
For self-employed individuals who make estimated tax payments, the SETC can offset those prepayments, potentially leading to a refund of excess amounts paid. However, taxpayers with outstanding federal or state debts, delinquent student loans, or unpaid child support should be aware that any refund generated by the SETC may be subject to offset under the Treasury Offset Program (TOP). Checking IRS account transcripts can help taxpayers anticipate any reductions in their expected refund.