Self-Employed Tax Credit (SETC) — $50,000+ in Tax Credits for Entrepreneurs Self-Employed Individuals
The COVID-19 pandemic has significantly impacted entrepreneurs and self-employed individuals. The Families First Coronavirus Response Act (FFCRA), with its Sick Employees and Tax Credits (SETC) provisions, offers critical support.
Here’s why it’s essential to understand and act on these opportunities:
👉 Click here to get more information about how to claim your tax credit
Disclaimer: This article provides general information and is not legal advice. Consult with a qualified legal professional for advice tailored to your situation. The author is not liable for any errors, omissions, or actions taken based on the information provided.
Legislative Background
In March 2020, the FFCRA was enacted to help businesses provide paid sick leave and unemployment benefits due to COVID-19. Initially, it targeted W-2 employees but was later expanded under the CARES Act to include self-employed individuals, freelancers, independent contractors, and gig workers, providing them tax credits for lost income due to the pandemic.
The FFCRA offers paid sick leave, free COVID-19 testing, food assistance, and unemployment benefits, along with health insurance protection. Self-employed individuals can claim equivalent coverage through tax credits on their income tax returns, reimbursing them for periods of COVID-19 related sick leave.
Self-Employed Tax Credit (SETC) FAQs
What Is The FFCRA?
The Families First Coronavirus Response Act (FFCRA) was an early effort to help small businesses afford sick leave for employees during COVID-19. Initially focused on small business employees, it was expanded in 2021 to include self-employed individuals.
What is the Difference Between SETC and FFCRA?
The “Self-Employed Tax Credit” (SETC) refers to tax credits for self-employed individuals under the FFCRA. SETC is specifically for self-employed persons, while FFCRA targets employees.
Eligible Dates for FFCRA/SETC Income Tax Credits
Eligible dates for claiming the FFCRA/SETC income tax credit:
- April 1, 2020, to March 31, 2021
- Up to 10 days between April 1, 2021, and September 30, 2021
Breakdown of Eligible Days:
- Childcare-related time off: Up to 110 days
- 50 days (April 1, 2020 — March 31, 2021)
- 60 days (April 1, 2021 — September 30, 2021)
- Personal or family illness: Up to 20 days
- 10 days (April 1, 2020 — March 31, 2021)
- 10 days (April 1, 2021 — September 30, 2021)
Qualification Without Sick Leave Payment
The FFCRA/SETC covers self-employed individuals even if they did not pay themselves sick leave.
Finding SETC Information
SETC is an informal term for the sick and family leave tax credits for self-employed individuals introduced under the FFCRA. Look for information under the FFCRA and its application to self-employed individuals.
Self-Employment Requirement
The tax credit is specifically for self-employed individuals, small business owners, freelancers, partners in a partnership subject to self-employment taxes, and 1099 contractors.
Positive Tax Earnings Requirement
- 2020: If no positive earnings, use 2019 net income if it was positive.
- 2021: If no positive earnings, use 2020 net income if it was positive.
Tax Credit Amount
The refund amount depends on:
- Net income from Schedule C on 2019, 2020, and 2021 tax returns.
- Days missed due to sickness or quarantine from COVID-19.
- Time spent caring for a loved one affected by COVID-19.
- Duration of school or daycare closures requiring care for a minor child.
Post-Filing Qualification
Yes, even if taxes for 2020 & 2021 were filed, an amended return can be submitted with copies of your tax returns and driver’s license.
Paperwork for SETC
The process requires signing an agreement letter, completing a survey, and uploading copies of your tax returns and driver’s license.
Dual Income Qualification
You may be eligible for SETC tax credits if you earned self-employment income in addition to a W2 salary in 2020 and/or 2021. Paid leave benefits as an employee may affect the amount claimable as a self-employed individual.
Previous Sick & Family Leave Credit
Eligible if the credits were not fully utilized on previous returns.
Net vs. Gross Income for SETC
Positive net (after deductions) self-employed income for 2019, 2020, or 2021 is required, along with qualifying COVID days.
Refund Timeline
The process typically takes 12–16 weeks after submitting the necessary paperwork to receive the cash refund from the IRS.
Dual Spouse Qualification
If both spouses are self-employed, each could qualify for up to $32,220 under the right circumstances.
SETC Tax Credit Refund Limitations
The deadline to amend the 2020 tax return for SETC credits from April 1, 2020, to December 31, 2020, is April 15, 2024. For credits from January 1, 2021, to September 30, 2021, the deadline is April 18, 2025.
Unemployment Benefits and SETC
You cannot claim days when unemployment benefits were received as days unable to work due to COVID-19.
Complete Return for Amendment
A complete copy of the return is required for amendment to claim SETC credits.
SETC Credit Amount
The SETC tax credit can be up to $32,220 based on your self-employed net earnings in 2020 and 2021.
Claiming the SETC Tax Credits
Determine eligibility and amend your 2020 and/or 2021 tax returns with a Certified Public Accountant (CPA) or through Legacy Tax & Resolution Services.
IRS Refunds for COVID-19 Support
The federal government supports businesses impacted by COVID-19. Filing for SETC credits promptly is crucial.
Social Security Tax Deferral
Employers can defer the 6.2% employer portion of Social Security tax from March 27, 2020, through December 31, 2020. Self-employed taxpayers can defer 50% of their self-employment tax for the same period. Deferred amounts must be repaid by December 31, 2022.
SETC Eligibility
Self-employed individuals, including sole proprietors, 1099 contractors, freelancers, and partners in partnerships with positive net income, who filed Schedule SE and paid self-employment tax for 2019, 2020, and/or 2021, are eligible.
Exclusion of C or S Corp Income
C or S Corporation income does not count as self-employed income. However, corporations may qualify for sick or family leave tax credits under FFCRA.
Health Insurance Requirement
Health insurance coverage is not required for SETC eligibility.
Unpaid Medical Bills
The SETC credit only considers average daily wages and missed days due to COVID-19-related issues.
Valid Reasons for Claiming SETC
Valid reasons include quarantine orders, self-quarantine advised by a healthcare provider, caring for someone under quarantine, experiencing COVID-19 symptoms, waiting for test results, getting vaccinated, experiencing vaccine side effects, and caring for a child due to school or daycare closure.
Refund Timeline
Once the necessary paperwork is submitted, the process typically takes 12–16 weeks to receive the cash refund from the IRS.
Dual Spouse Qualification
Both spouses can qualify for the maximum credit but cannot share qualifying COVID days.
Taxability of SETC Credit
The SETC tax credit is not taxable.
IRS Debt or Treasury Offset
A $0 balance with the IRS is required to receive a refund. Outstanding debts must be paid first.
Dual Income and SETC
If you earned self-employment income in addition to a W2 salary, you may still be eligible for SETC tax credits. However, receiving paid leave benefits as an employee may affect the amount you can claim as a self-employed individual.
Weekends and SETC
Weekends can be claimed if self-employment work is typically done on weekends. If not, weekends cannot be claimed.
Dependent Definition
A dependent is a qualifying child or relative of the taxpayer. A child must have lived with the taxpayer for over half the tax year, and the taxpayer must have provided more than half of the relative’s total support. Gross income thresholds and other criteria apply.
Divorce and SETC Claims
If the 2020 and/or 2021 tax returns were filed jointly, both taxpayer and spouse must sign the amended returns. If filed as Head of Household or Married Filing Separate, only the taxpayer’s signature is required.
Caring for a Non-Dependent Child
Only days taken to care for a dependent can be claimed.
Multiple Parent/Guardian Claims
Parents or guardians cannot claim the same dates twice.
Online Schooling and SETC
If the physical location of the school or place of care is closed, it is considered “closed” for the purposes of the credit, even if the child is expected to complete assignments.
Self-Employed Definition
A self-employed person carries on a trade or business as a sole proprietor, independent contractor, or a member of a partnership that conducts a trade or business, including part-time businesses
and gig workers.
Unemployment Benefits and SETC
Days receiving unemployment benefits cannot be claimed as days unable to work due to COVID-19.
Refund Disbursement
Refunds for 2020 and 2021 will be sent directly by the IRS via check to the address provided on the amended return(s).
Positive Net Earnings Requirement
Positive net earnings indicate taxable income against which the credit can be applied. If no positive earnings were available in 2020 due to COVID-19, 2019 net income may be used.
Dual Income and SETC
If you earned self-employment income in addition to a W2 salary, you may still be eligible for SETC tax credits. However, receiving paid leave benefits as an employee may affect the amount you can claim as a self-employed individual.
Weekends and SETC
Weekends can be claimed if self-employment work is typically done on weekends. If not, weekends cannot be claimed.
Caring for a Non-Dependent Child
Only days taken to care for a dependent can be claimed.
Multiple Parent/Guardian Claims
Parents or guardians cannot claim the same dates twice.
Online Schooling and SETC
If the physical location of the school or place of care is closed, it is considered “closed” for the purposes of the credit, even if the child is expected to complete assignments.
Required Documentation
A complete copy of the 2019, 2020, and 2021 tax returns, including Schedule C and a copy of the driver’s license for identification, is required.
Form 1040 SE
Form 1040 SE is used to calculate self-employment taxes, including Social Security and Medicare taxes for individuals who work for themselves.
Form 1040-X
Form 1040-X is used to amend previously filed individual tax returns to claim the FFCRA/SETC credits.
Schedule C
Schedule C is used by self-employed individuals to report business income and expenses. The net income from Schedule C calculates self-employment income on Schedule SE.
Form 7202
Form 7202 is used to claim the FFCRA credits for self-employed individuals, detailing eligibility and tax credit calculations.
Form 8821
Form 8821 authorizes the release of tax information to a third party, allowing the calculation of SETC credits and the amendment of tax returns.
Processing Fees
Legacy Tax & Resolution Services charges no upfront fee. The fee for filing tax returns is $395, with an additional 20% of the refund amount due after the refund is received.
Impact on 2023 Income Taxes
Filing for SETC credits does not impact the filing of 2023 income taxes. Amendments are made to previously filed returns for 2020 and/or 2021.
Related Reading:
Dual Spouse Qualification
Both can receive the credit but cannot share qualifying COVID days.
SETC Tax Credit Taxability
The SETC tax credit is not taxable.
Refund Timeline
Once the necessary paperwork is submitted, it typically takes 12–16 weeks to receive the cash refund from the IRS.
IRS Debt or Treasury Offset
A $0 balance with the IRS is required to receive a refund. Outstanding debts must be paid first.
Dual Income and SETC
If you earned self-employment income in addition to a W2 salary, you may still be eligible for SETC tax credits. However, receiving paid leave benefits as an employee may affect the amount you can claim as a self-employed individual.
Weekends and SETC
Weekends can be claimed if self-employment work is typically done on weekends. If not, weekends cannot be claimed.
Caring for a Non-Dependent Child
Only days taken to care for a dependent can be claimed.
Multiple Parent/Guardian Claims
Parents or guardians cannot claim the same dates twice.
Online Schooling and SETC
If the physical location of the school or place of care is closed, it is considered “closed” for the purposes of the credit, even if the child is expected to complete assignments.
Required Documentation
A complete copy of the 2019, 2020, and 2021 tax returns, including Schedule C and a copy of the driver’s license for identification, is required.
👉 Click here to get more information about how to claim your tax credit
