Self-Employment Tax Credit: What It Is + Can You Claim It?

As an entrepreneur, you might have seen social media content about a self-employment tax credit (SETC). Some influencers have claimed that self-employed people can take a credit and receive a federal tax refund of up to $32,000.

If you’re self-employed, you know how valuable it can be to lower your tax liability. Self-employed individuals can claim numerous tax deductions to reduce their taxable income. However, the self-employment tax credit only applies to a limited group of taxpayers.

Hearing about a tax credit windfall sounds exciting, but some social media promoters offer incorrect tax advice. Fortunately, 1-800Accountant offers numerous self-employment resources and tax advice you can rely on. 

You may be eligible for more tax write-offs than you expect. Keep reading to learn who can claim the self-employment tax credit. We’ll also share a list of tax credits and deductions for small business owners.

What Is the “Self-Employment Tax Credit”?

Some social media influencers have promoted bad tax advice, claiming entrepreneurs can receive a tax credit for being self-employed. The media content describes a “self-employment tax credit” offering payments of up to $32,000.

In reality, the Internal Revenue Service (IRS) offers a limited tax credit related to the COVID-19 pandemic period.

In 2020, the Families First Coronavirus Response Act (FFCRA) established tax credits for paid leave. The incentives were available to companies and individuals affected by the COVID-19 pandemic. The relevant credit period was April 1st, 2020, through March 31st, 2021. In March 2021, the American Rescue Plan Act of 2021 (ARP) enacted changes and extended the applicable timeframe to September 30th, 2021.

The FFCRA and ARP offer tax credits for employers, with an equivalent credit available to self-employed individuals. Taxpayers can generate separate credits for each period.

The credits were available for tax years 2020 and 2021. However, the deadline for amending tax year 2020 returns was May 17th, 2024. Taxpayers can no longer claim credits for 2020. To claim the credits for 2021, taxpayers meeting the eligibility requirements must amend tax year 2021 returns before April 18th, 2025. October 17th, 2025, is the last day to amend an extended 2021 return is October 17th, 2025.

The IRS offers tax credits for two periods during tax year 2021, each with separate limitations.

• Q1: January 1st through March 31st, 2021

  • Maximum sick leave credit: $5,110

  • Maximum family leave credit: $10,000

• Q2–Q3: April 1st through September 30th, 2021

  • Maximum sick leave credit: $5,110

  • Maximum family leave credit: $12,000

Whether or not you can claim paid leave tax credits, 1-800Accountant can help you file amended returns for yourself and your small business. Consider partnering with tax professionals to claim refunds you might have missed.

Who Can Claim Tax Credits for Paid Leave?

Eligible individuals include self-employed taxpayers who were unable to work during the period January 1st, 2021, through September 30th, 2021. (Taxpayers can no longer amend 2020 tax returns to claim paid leave credits during the 2020 eligibility period.) 

Filers must meet specific eligibility requirements to qualify for the credits. First, eligible individuals must actively participate in a business as any of the following: 

• Sole proprietor

• Independent contractor

• Freelancer

• Gig worker

• Individual single-member LLC owner

Individuals can also qualify by owning an interest in a partnership. The partnership must have an active business, excluding real estate and passive investments.

The paid leave tax credits have two components: the credit for qualified sick leave wages and the credit for qualified family leave wages. Each part has additional limitations and eligibility requirements.

Qualified Sick Leave

Self-employed taxpayers can qualify for the sick leave wages credit if they were unable to work during the period January 1st–September 20th, 2021, for one of the following reasons:

• A federal, state, or local quarantine or COVID-19 isolation order

• Self-quarantine due to one of the following:

  • Advice from a healthcare provider

  • Experiencing symptoms of COVID-19

  • Waiting for test results or diagnosis after exposure to COVID-19

  • Obtaining a COVID-19 immunization

Qualified Family Leave

Self-employed taxpayers can qualify for the family leave wages credit if they were unable to work during the period January 1st–September 20th, 2021, for one of the following reasons:

• Caring for an individual meeting one of the following criteria:

  • Subject to an isolation order or self-quarantine

  • Obtaining or recovering from a COVID-19 immunization

• Caring for a child due to school closures or unavailable childcare providers

How to Calculate Tax Credits for Paid Leave

Small business owners meeting the eligibility requirements must determine the following for each eligibility period:

• The number of sick leave days

• The number of family leave days

• Average daily self-employment income

To calculate your average daily self-employment income, divide your net earnings for the year by 260. Net earnings represent gross income from self-employment (including partnership distributions) reduced by business expenses. Next, multiply your average daily self-employment income by the number of sick leave and family leave days during each period.

Limitations and restrictions complicate the calculations. Taxpayers should review IRS instructions to understand the nuances. 

We recommend consulting CPAs for help with tax forms and credit calculations. 1-800Accountant’s team of experts offers reliable tax advice.

How to Claim Tax Credits for Paid Leave

Self-employed individuals must use IRS Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, to report paid leave wages and calculate the available tax credit. Attach Form 7202 to IRS Form 1040, U.S. Individual Income Tax Return.

As mentioned above, taxpayers must amend their 2021 personal tax returns to claim tax credits for paid leave. If a filer claimed paid leave tax credits on a 2020 tax return, the individual must reduce the January 1st–March 31st, 2021, limitation by the amount claimed for 2020.

What Tax Credits Can You Claim?

Even if you cannot claim tax credits for paid leave, you may be eligible for other credits to lower your tax liability. Common tax credits for small business owners include the following:

• Earned Income Tax Credit: Assistance for low- and moderate-income workers

• Child Tax Credit: Credits for qualifying child dependents 

• Work Opportunity Tax Credit: Incentives for wages paid to employees in targeted demographic groups

• Research and development (R&D) credit: Incentives for specific research activities

• Child and Dependent Care Credit: Credits for childcare costs and expenses incurred to care for other dependents

1-800Accountant offers numerous resources for tax savings, including a list of business tax credits for 2024.

Lower Your Tax Bill: Deductions Self-Employed Individuals Can Claim

As a sole proprietor, you can lower your taxable income with numerous business tax deductions. Consider the following list of common business expenses to help you lower your tax liability.

Report the following business deductions on IRS Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). 

• Home office deduction: Entrepreneurs who maintain a dedicated home office space can deduct certain expenses related to the business use of their home.

• Mileage deduction: Self-employed taxpayers can deduct business-related travel costs. Business owners can report actual vehicle costs, such as gas, repairs, and insurance. Alternatively, taxpayers can claim the standard mileage deduction of 70 cents per business mile in 2025.

• Ordinary and necessary business expenses: Sole proprietors can deduct additional operational costs, such as professional fees, rent, supplies, and employee wages. Business expenses lower your sole proprietorship net income.

Use IRS Schedule SE (Form 1040), Self-Employment Tax, to report the following deductions. 

• Self-employment tax deduction: Small business owners must pay self-employment taxes, which cover Social Security and Medicare taxes. The self-employment tax rate is 15.3%, but taxpayers can deduct half of their self-employment tax liability. The deduction lowers federal taxable income.

• Self-employment health insurance deduction: Self-employed taxpayers without access to employer-sponsored healthcare can deduct health insurance premiums for eligible health plans.

Use IRS Schedule 1 (Form 1040), Additional Income and Adjustments to Income, to report the following. 

• Retirement plan contributions: Self-employed taxpayers can deduct a portion of their contributions to qualified retirement plans. Filers should review the annual contribution limits to avoid penalties.

Attach Schedule C, Schedule SE, and Schedule 1 to your personal income tax return, IRS Form 1040.

Get Your Tax (And Tax Credit) Advice from Experts at 1-800Accountant

Social media provides entertainment and tips on many topics, but entrepreneurs need tax advice from reliable experts. 1-800Accountant can support your small business with year-round financial planning, tax preparation, and return filing support. 

As a self-employed professional, you can rely on 1-800Accountant for specialized guidance to support your business. Whether you need a dedicated accounting team, outsourced bookkeeping, or assistance with quarterly estimated tax payments, you’ll find budget-friendly services to support your business. 1-800Accountant’s tax experts support a range of small business owners and help entrepreneurs gain peace of mind.

Schedule a free consultation with 1-800Accountant to learn even more ways to lower your self-employment tax liability.