During the pandemic, many self-employed businesses went through hardships. Some of the problems they faced during lockdowns and quarantines were job search, meeting existing commitments, or realizing payments. This further led to a big financial impact on their livelihoods when it came to paying taxes.
Given the extraordinary circumstances, Government offered Self-Employed Tax Credit of up to $32,000 to help the self-employed sector recuperate from their losses. However, most individuals failed to claim it due to a lack of knowledge and awareness. If you are one of them, you need not worry as it is not too late. But for that, you must first understand what SETC is and how you can apply for it.
Read on till the end to learn about SETC in detail.
What is Self-Employed Tax Credit?
So, before we get into SETC, we must understand what a tax credit is. A tax credit is basically a tax deduction or a credit for businesses that can be deducted from their income tax. Think of it as a dollar-for-dollar deduction on your income tax.
The SETC, in simple terms, is a targeted tax credit for the benefit of independent contractors, self employed individuals, freelancers etc. It is a tax credit to help mitigate losses and relieve financial burden of the self employed sector.
The Self Employed Tax Credit scheme was brought about to help the small businesses that were negatively impacted by the onset of Covid-19. During times of difficulty, the Self Employed Tax Credit can be a financial lifeline. Claiming these benefits can have a great impact on your annual due to the IRS. You can use this credit for income tax for the tax years of 2020 and 2021.
Eligibility & Required Documents Self-Employed Tax Credit
There are certain rules and criteria you must fall under to claim SETC. Some of these eligibility criteria are:
1. Eligibility Condition for the Self-Employed Tax Credit
The most basic condition of eligibility for self-employed tax credit is that you must have a small business or be an independent contractor. Moreover, you must have faced some COVID-19-related problems leading to a loss in your work or a prolonged leave of absence from your workplace. There are 3 types of leaves eligible:
● Illness
Income loss due to contracting COVID-19, showing symptoms, contracting any related disease, or being sent home to quarantine.
● Taking Care of an Ill Person
Income loss due to staying home to take care of someone who contracted Covid-19, shows symptoms, has a Covid-19-related illness, or is sent to quarantine.
● Taking care of dependent
Income loss due to staying home to take care of a minor due to daycare or school being closed due to quarantine or them being sick due to COVID-19.
2. Form 7202
The IRS Form 7202 is a necessary document you will require to claim eligibility for Self Employed Tax Credit. This form assesses your situation and predicts a correct credit amount for you to avail yourself of on your individual tax returns for the tax years in question.
3. Income Tax
Your net income tax is also very important and should be taken into consideration when deciding on your eligibility for the Self Employed Tax Credit. You need to be able to show a net positive income in any of the tax years to qualify. If you cannot show positive income in 2021 or 2020, you can use your 2019 income as a benchmark to qualify for SETC.
4. Disruptions Due to Covid-19
Another important factor taken into account is the economic disruption your business faced during the pandemic. There are many reasons for disruption, like lockdowns, quarantines, etc. If your ability to conduct your business or your work was hampered due to COVID-19, it can make you eligible for Self Employed Tax Credit.
How Does the Families First Coronavirus Response Act Affect Your Eligibility for SETC?
The Families First Coronavirus Response Act is a relief act signed on March 18, 2020. It was brought forward as a response to help the Small Businesses recover and provide some sort of relief from the distress during the pandemic. A lot of businesses were hit, and many independent contractors could not work due to government regulations and lockdowns.
To help such small self-employed businesses and freelancers reduce the financial burden a system was set up. The Families First Coronavirus Response Act established rules and regulations to determine the eligibility criteria for the Self Employed Tax Credit scheme.
How can you Apply for Self-Employed Tax Credit?
Applying for the Self-Employed Tax Credit (SETC) can be difficult. Thus, you must follow the steps below to ensure an effortless and transparent process:
Step 1: Get an Estimate
You can use a tool to calculate your SETC or consult a professional to help you throughout the process. This would prove ideal to give a rough estimate. Further, helping you get a better understanding of your tax credit eligibility.
Step 2: Collect Proper Documentation
Make sure all your documentation is in order. You will need documents like your tax returns for the years 2020 and 2021, proper identification, etc. This is a vital step, and it is highly recommended that you use the help of a taxation expert to bolster your application.
Step 3: Complete the SETC Application
Now, you must fill out the forms, upload the required ID proof, and provide all the relevant information in detail.
Step 4: Wait for Confirmation
Once you have submitted all the required forms and provided the necessary documentation, wait for the IRS to approve and process your claims. Once the process is complete, you can expect your claim in the form of a refund check from the IRS. It can also be issued as a direct deposit(ACH).
Conclusion
In uncertain economic times, knowing about tax benefits like the Self-Employed Tax Credit (SETC) is vital. The SETC offers substantial relief to self employed professionals like freelancers, small business owners, contractors, etc.
Now armed with knowledge, it is time to act. It would be best to consult a taxation expert to help you smoothly with the SETC application. So, don’t wait—claim what’s rightfully yours today with the help of ProfitsView.