Eligibility Criteria for SETC Tax Credit
Being self-employed is just the first requirement to be eligible for the SETC Tax Credit.
Certain requirements exist that you need to meet to be eligible.
For example, you must show a positive net income from your self-employment activities as indicated on IRS Home page Form 1040 Schedule SE for 2019, 2020, or 2021.
This implies your earnings should exceed your expenses from your business operations.
Nevertheless, if you lacked positive earnings during 2020 or 2021 due to COVID-19, your 2019 net income can be utilized to qualify for the SETC Tax Credit.
This is especially advantageous for those who are self-employed who encountered financial difficulties during the pandemic.
Moreover, if you and your spouse are self-employed and submit a joint tax return, you can each qualify for the SETC Tax Credit.
However, you cannot use the same COVID-related days for eligibility.
It should also be noted that even if unemployment benefits were received, you can still qualify for the SETC Tax Credit.
It’s prohibited to claim the days you received unemployment benefits as days when you were unable to work because of COVID-19.
These days are considered separate from pandemic-related work absences.
Criteria for Self-Employment Status
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
Contractors receiving 1099 forms
Independent freelancers
Gig workers
Single-member LLCs taxed as sole proprietorships
It is crucial for these individuals to be aware of their self-employment tax obligations.
So, whether you’re a freelancer working from home, a gig worker in the fast-paced on-demand service industry, or a sole proprietor overseeing your own business, you may qualify for the targeted tax credit designed for individuals like you, known as the SETC Tax Credit.
In addition to individual professionals, members of multi-member LLCs and eligible joint ventures are also potentially eligible for SETC.
For instance, partners in partnerships treated as sole proprietorships and general partners within partnerships could potentially qualify for SETC, given that they meet other required criteria.
The only requirement for U.S. citizens, permanent residents, or qualifying resident aliens who are 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 qualifying years (2019, 2020, or 2021).
That said, if you didn’t have positive earnings in 2020 or 2021 due to COVID-19, you can use your 2019 net income to qualify for the SETC Tax Credit.
Furthermore, the employed tax credit SETC, or SETC tax credit, can offset your self-employment tax what is the setc tax credit liability or even be refunded if it surpasses the tax liability.
It should be noted that the entire SETC may not be accessible to individuals who received pay from an employer for family or sick leave, or unemployment benefits in 2020 or 2021.
This is where the self-employment tax credit can play a significant role in reducing your tax burden.
Moreover, even if you received unemployment benefits, you can still claim the SETC tax credit, they cannot count days they received these benefits as days when they were unable to work due to COVID-19.
COVID-Related Business Disruptions and Qualified Sick Leave
The unpredictability of self-employment has been further compounded 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.
Whether dealing with government quarantine orders to coping with symptoms or attending to family members and navigating school or childcare closures — if your ability to work was affected from April 1, 2020, to September 30, 2021, you could potentially 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.
Yet, they are not allowed to claim credits for days when unemployment benefits were received.
Moreover, maintaining precise documentation of how COVID-19 affected your ability to work is vital, as the IRS may request such documentation during an audit.