Choosing the self-employed life has many perks.
You can be your own boss, set your own hours, and pop out for coffee, a workout, or even a little retail therapy anytime you want.
But being self-employed has its setbacks too, especially when it comes to taxes.
People who work for themselves (looking at you, fellow entrepreneurs!) are responsible for paying Social Security and Medicare taxes, also known as “self-employment tax.” Typically, salaried and hourly wage-earners pay these taxes through their W-2 paychecks. But you? You pay them all through your own hard-earned, pre-tax cash!
Because self-employment increases your personal tax liability, you’re probably always on the lookout for ways to lower your bill.
The Earned Income Tax Credit is one potential avenue to accomplish this.
So what exactly is the Earned Income Tax Credit? And do you qualify? Read on to find out.
What is the Earned Income Tax Credit?
The Earned Income Tax Credit (EITC) is an anti-poverty tax initiative credit offered by the IRS to low and middle income families. The purpose of the credit is to reduce the tax burden of workers in these groups who meet certain criteria.
What Can The EITC Potentially Do For Me?
If you qualify, the EITC can lower your overall tax bill, or increase your tax refund. The amount of your refund is affected by your total income and how many dependents you do (or don’t) have. Generally speaking, the more dependents you have, the larger your credit.
Who Qualifies for the EITC?
Because the EITC is designed to reduce poverty and encourage work, those claiming the credit must meet specific criteria. To qualify, an individual generally must:
- Have worked and made an income under a specific number relative to the number of dependents you have (check out the IRS table below!)
- Have investment income below $10,300.
- Have a Social Security Number.
- Be a U.S. citizen or resident alien.
- Not earned income abroad.
Here’s a table from the IRS explaining the credit’s income requirements:
Children or Relatives Claimed | Filing as Single, Head of Household, or Widowed | Filing as Married Filing Jointly |
Zero | $17,640 | $24,210 |
One | $46,560 | $53,120 |
Two | $52,918 | $59,478 |
Three | $56,838 | $63,698 |
While these are the basic qualifying criteria, applicants may need to consider other circumstances as well. For more information, check out the IRS page discussing the EITC.
Can Self-Employed Workers Claim the EITC?
If you’re self-employed and you also meet the basic qualifying criteria listed above, then yes, you can most likely claim the EITC.
To find out if your income qualifies, subtract your expenses from your total income. If the total is $59,187 or less, and you meet the basic criteria, then you can claim the credit.
Are There Any Downsides to Taking the Credit?
It’s Complicated
The EITC is one of the most error-prone tax credits. Taxpayers often misreport income, list their marital status incorrectly, or
Your Return May Be Delayed
By law, the IRS must wait until mid-February to pay refunds to those claiming the EITC. This is to give the agency time to detect errors and fraud.
Still Wondering if You Qualify?
We’d love to help! Visit the TSJ strategy page today to see our 2023 tax planning packages.