Criteria for Eligibility for the SETC Tax Credit
Being self-employed is just the first requirement to be eligible for the SETC Tax Credit.
Certain requirements exist you must satisfy to be eligible.
For instance, you must show a positive net income from self-employment as reported on IRS Form 1040 Schedule SE for 2019, 2020, or 2021.
This indicates you should have had higher earnings than expenses in your business.
However, if you didn’t have positive earnings in 2020 or 2021 because of COVID-19, you can use your 2019 net income to qualify for the SETC Tax Credit.
This is particularly helpful for those who are self-employed who encountered financial difficulties during the pandemic.
Furthermore, if you and your spouse are self-employed and submit a joint tax return, you both can qualify for the SETC Tax Credit.
However, it's important to note that, you can’t claim the same COVID-related days for eligibility.
It should also be noted that even if unemployment benefits were received, you may still qualify for the SETC Tax Credit.
It’s prohibited to claim the days when you received unemployment benefits as days you couldn’t work as a result of COVID-19.
These days are considered separate from pandemic-related work absences.
Criteria for Self-Employment Status
The term ‘self-employed’ encompasses a broad spectrum of professionals, such as self-employed taxpayers.
To qualify for the SETC tax credit, self-employed status includes:
Sole proprietors
Independent business owners
1099 contractors
Independent freelancers
Workers in the gig economy
Single-member LLCs treated as sole proprietorships
It is important for these individuals to be aware of their self-employment tax obligations.
So, if you’re a freelancer working from home, a gig worker in the fast-paced on-demand service industry, or a sole proprietor running your own business, you could potentially be eligible for the specialized tax credit designed for individuals like you, referred to as the SETC Tax Credit.
In addition to individual professionals, those in multi-member LLCs click here and eligible joint ventures may also be eligible for SETC.
As an example, partners in partnerships that are taxed as sole proprietorships and general partners in partnerships could potentially qualify for SETC, if they satisfy other eligibility criteria.
All you need to do as a U.S. citizen, permanent resident, or qualifying resident alien who is self-employed is filing a Schedule SE showing positive net income.
Income Tax Liability Considerations
A key factor in determining your eligibility is your income tax liability for the SETC Tax Credit.
To be eligible, you must have positive net income in one of the approved years (2019, 2020, or 2021).
However, if you lacked positive earnings in 2020 or 2021 because of COVID-19, you can use your 2019 net income to qualify for the SETC Tax Credit.
Additionally, the employed tax credit SETC, or SETC tax credit, can reduce your self-employment tax liability or even be refunded if it surpasses the tax liability.
It’s important to note that the full SETC amount may not be available to individuals who received employer pay for family or sick leave, or unemployment benefits in 2020 or 2021.
This is where the self-employed tax credit can play a significant role in reducing your tax burden.
Additionally, while individuals who received unemployment benefits what is the setc tax credit can claim the SETC tax credit, they are barred from claiming days they were receiving these benefits as days unable to work due to COVID-19.
COVID-Related Business Disruptions and Qualified Sick Leave
The challenges of self-employment have been intensified by the uncertainties brought on by the COVID-19 pandemic.
However, the SETC Tax Credit is intended to offer financial relief to those whose businesses were disrupted by COVID-19.
From managing government quarantine mandates to coping with symptoms or attending to family members and navigating school or childcare closures — if your ability to work was affected during the period from April 1, 2020, to September 30, 2021, you could qualify for the SETC Tax Credit.
However, the SETC Tax Credit has specific caveats.
Self-employed individuals who received unemployment benefits during the COVID-19 pandemic can still qualify for the SETC Tax Credit.
Still, they cannot claim credits for days when unemployment benefits were received.
Additionally, it is essential to keep accurate records of how COVID-19 impacted your ability to work, as the IRS could ask for these records during an audit.