Criteria for Eligibility for the SETC Tax Credit
Being self-employed is just the first requirement to be eligible for the SETC Tax Credit.
There are specific conditions that you need to meet to be eligible.
Specifically, you must have earned a positive net income from self-employment as reported on IRS Form 1040 Schedule SE for 2019, 2020, or 2021.
This implies your earnings should exceed your expenses from your business operations.
Nevertheless, if your earnings were not positive in 2020 or 2021 as a result of COVID-19, you can use your 2019 net income to qualify for the SETC Tax Credit.
This is especially advantageous for those who are self-employed who faced financial challenges during the pandemic.
Moreover, if both you and your partner are self-employed and submit a joint tax return, you both can qualify for the SETC Tax Credit.
Nonetheless, you cannot use the same COVID-related days for eligibility.
Also, it’s important to note that even if you collected unemployment benefits, you are still eligible for the SETC Tax Credit.
It’s prohibited to claim the setc tax credit days you received unemployment benefits as days when you were unable to work due to COVID-19.
These days are considered separate from pandemic-related work absences.
Self-Employment Status Requirements
The term ‘self-employed’ includes a wide range of professionals, among them are self-employed taxpayers.
For SETC tax credit eligibility, self-employed status includes:
Sole proprietors
Independent entrepreneurs
1099 contractors
Freelancers
Gig workers
Single-member LLCs taxed as sole proprietorships
It is essential for these individuals to be knowledgeable about their self-employment tax obligations.
So, whether you’re a freelancer working from home, a gig worker in the dynamic on-demand services sector, or a sole proprietor running your own business, you might be eligible for the specialized tax credit designed for individuals like you, referred to as the SETC Tax Credit.
In addition to individual professionals, multi-member LLC members and eligible joint ventures may also be eligible for SETC.
As an example, partners in partnerships treated as sole proprietorships and general partners within partnerships might qualify for SETC, if they satisfy other eligibility criteria.
The only requirement 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
Your income tax liability is a significant factor in determining your eligibility for the SETC Tax Credit.
To meet the requirements, you must have positive net income in one of the eligible years (in the years 2019, 2020, or 2021).
That said, 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.
Furthermore, the SETC employed tax credit, commonly referred to as the SETC tax credit, can reduce your self-employment tax liability or could be refunded if it exceeds your tax liability.
It should be noted that the entire SETC may not be accessible to individuals who got employer pay for family or sick leave, or unemployment benefits in 2020 or 2021.
This is where the self-employment tax credit can significantly help reduce your tax burden.
Additionally, even if you received unemployment benefits, you can still claim the SETC tax credit, they cannot claim days they were receiving these benefits as days they were unable to work due to COVID-19.
COVID-Related Business Disruptions and Qualified Sick Leave
The uncertainties of self-employment have been exacerbated by the unpredictability brought on by the COVID-19 pandemic.
However, the SETC Tax Credit is designed to provide financial assistance to those who experienced business disruptions due to COVID-19.
From facing government quarantine orders to dealing with symptoms or caring for family members and even grappling with school or childcare facility 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.
setc tax credit irs That said, 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.
Yet, they are not allowed to 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.