When you’re self-employed, any financial boost can make a huge difference to your bottom line. Some of the most beneficial tax credits available are the Self-Employment Tax Credits (SETC). However, understanding the qualifications and requirements is important to ensure you can take full advantage of these credits while they’re available. A key requirement for qualifying for the SETC, along with having missed work due to illness or caring for a sick dependent during COVID, is that you must have received a 1099 form and/or filed a Schedule C/E/F with your Form 1040, and not just have received W-2s[MW1] . Let’s look at the differences between these two forms and why they matter.
What is the SETC?
The Self-Employment Tax Credits (SETC) are the Emergency Paid Sick Leave Act (EPSLA) and Expanded Family Medical Leave Act (Expanded FMLA) tax credits authorized under the American Rescue Plan (ARP). These self-employment tax credits (SETC) are designed to provide self-employed individuals with the relief they would have been entitled to, had they worked for a qualified W2 employer, for enduring disruptions in their work due to the pandemic. This credit can be highly beneficial for those who had to care for children or dependents, leading to lost work time and income.
What is a 1099 Form?
A 1099 form is used to report income earned as an independent contractor or self-employed individual. Unlike traditional employees, who receive a W-2 form from their employer, freelancers, gig workers, and independent contractors should receive a 1099 form from each client or company that pays them more than $600 in a year. The 1099 form details the amount of income earned but doesn’t often withhold any taxes. As a result, self-employed people are responsible for calculating and paying their own taxes, including self-employment taxes.
What is a W-2 Form?
A W-2 form, on the other hand, is used by employers to indicate their tax situation to their employees. This form helps employees determine how much federal income tax was withheld from the employee’s paycheck. W-2 forms are used by employers who pay their employees a regular salary or wage, from which the employer withheld income taxes throughout the year. This withholding process simplifies the employee’s tax payments and reduces the burden of paying a large sum at tax time.
Key Differences Between 1099 and W-2
Type of Work
1099: Used by independent contractors and self-employed individuals who work for multiple clients or companies.
W-2: Used by employees who work for a single employer and receive a regular paycheck.
Tax Withholding
1099: No taxes are withheld; the individual is responsible for calculating and paying their own taxes.
W-2: Taxes are usually withheld by the employer based on the employee’s W-4 form. The employee can modify their tax withholdings throughout the year by filling out a new W-4.
Tax Filing
1099, Schedule C/E/F: Individuals must file their taxes as self-employed, using a Form 1040 Schedule C, E, or F to report income, expenses, depreciation, and so on.
W-2: Employees submit a form W-4 to their employer indicating how much tax they want to have withheld from their income. Employees’ taxes are withheld and paid to the IRS by their employer, and they receive a W-2 form at the end of the year detailing their earnings and taxes withheld, which they claim on their Form 1040. If the employee paid less than the amount of tax they owe on their Form 1040, the employee is responsible to pay the balance to the IRS themselves.
Why the 1099 Form Matters for the SETC
The SETC is specifically designed to provide tax relief to self-employed individuals who saw a decline in their business during the COVID-19 pandemic due to time spent sick or caring for a sick family member. To qualify, you must have income reported on a 1099 form and/or filed a Schedule C/E/F with your Form 1040, not simply have received W-2s. If you only received W2s, your employer may be eligible to claim EPSLA and Expanded FMLA if they granted you paid leave during SETC-qualifying absences. You should let them know to reach out to Pinnacle Minds to see if they left the money they are entitled to behind.
If you were working as an independent contractor or self-employed professional during the pandemic and have filed 1099 forms for your income, you could be eligible for significant tax credits under the SETC. However, navigating the application process and ensuring you meet all the requirements can be challenging.
Get Help from Pinnacle Minds
At Pinnacle Minds, we specialize in helping self-employed individuals and small business owners navigate the complexities of tax credits. Our experienced team of former IRS Auditors can guide you through the application process for the SETC, ensuring you receive the maximum credit you’re entitled to and that you comply with all requirements.
Ready to take the next step? Contact Pinnacle Minds and discover how we can assist you in applying for the Self-Employment Tax Credit and other valuable tax incentives. Your journey to financial empowerment starts here!
Various ways to qualify, and specifying that one does not receive a W-4. [MW1]
SETC programs were first available to employers, so the same requirements entitle the employee’s employer to claim these and retroactively provide paid leave to their employees. [MW2]