E-6000, Self-Employment Income

Revision 16-4; Effective December 1, 2016

 

Self-employment income is usually income from an individual's own business, trade, or profession rather than from an employer. The method and rate of payment involved in self-employment will differ, as will the allowable expenses involved in producing the income.

 

E-6100 Materially Participating

Revision 16-4; Effective December 1, 2016

 

For earned income to be considered self-employment, either the person individual or the individual's spouse must be actively involved or materially participating in producing the income. See Section E-3100, Types of Earned Income.

Materially participating. An individual business owner is determined to be materially participating if the individual meets any one of the following criteria:

  • the individual engages in periodic advice and consultation with the tenant, inspection of the production activities, and furnishing of machinery, equipment, livestock and production expenses;
  • the individual makes management decisions that affect the success of the enterprise;
  • the individual performs a specified amount of physical labor to produce the commodities raised; or
  • the individual does not meet the full requirements above, but the individual's involvement in crop production is nevertheless significant.

Consider income from the sale of timber "farm" income if:

  • the timber was grown on the farm;
  • the income is not treated as capital gains; and
  • the timber operations are incidental to or tied in with the operation of the farm to constitute one business.

 

E-6200 Net Self-Employment Earnings

Revision 09-4; Effective December 1, 2009

 

Net earnings (gross income less allowable deductions) are used in budgeting. Net earnings from self-employment also include any profit or loss incurred in partnership agreements (within a self-employment related context). Verified net losses from self-employment can be deducted from other earned income received in the same year the loss was incurred.

In a couple case, the loss can be deducted from either spouse's earned income, regardless of which spouse incurred the loss.

Losses cannot be deducted from unearned income or carried over from a previous period.

 

E-6210 Self-Employment Expenses

Revision 16-4; Effective December 1, 2016

 

Some common expenses that arise in budgeting self-employment income are provided below. The following lists are not intended to be all-inclusive; however, supervisory approval should be obtained when other questionable deductions arise.

 

Self-Employment Expenses

Allowable self-employment expenses are based on costs that can be deducted from federal income taxes according to the IRS Schedule C, Form 1040 - Profit or Loss from Business.

Expense Types MEPD Programs
Advertising Allowed
Car and truck expenses Allowed
Commissions and fees Allowed
Contract labor Allowed
Costs not related to self-employment Non-Allowed
Costs related to producing income gained from illegal activities, such as prostitution and the sale of illegal drugs Non-Allowed
Depletion Allowed
Depreciation Allowed
Employee benefit programs Allowed
Insurance Allowed
Interest * Allowed
Legal and professional services Allowed
Net loss that occurred in a previous period Non-allowed
Office expense Allowed
Pension and profit-sharing plans Allowed
Rent or lease ** Allowed
Repairs and maintenance Allowed
Supplies Allowed
Taxes and licenses Allowed
Travel, meals, and entertainment Allowed
Travel to and from place of business Non-allowed
Utilities Allowed
Wages Allowed
Other expenses Allowed

 

*Interest includes mortgage (paid to banks, etc.) or other interest.         

**Rent or lease may include rent of vehicles, machinery, equipment, or other business property.

NoteThe IRS Schedule F, Form 1040 - Profit or Loss from Farming, lists the acceptable expenses  for farm income.

 

E-6300 Budget Options for Self-Employment

Revision 09-4; Effective December 1, 2009

 

The procedure for calculating the eligibility budget may differ, and will depend on which method is more advantageous to the person.

 

E-6310 Annual Projection

Revision 16-4; Effective December 1, 2016

 

Divide the individual's entire taxable year's income (as shown on the previous year's income tax,  IRS Schedule C, Form 1040 - Profit or Loss from Business, or IRS Schedule F, Form- 1040 - Profit or Loss from Farming, Schedule F) equally among 12 months. This procedure should be followed even if the business is seasonal, starts late in the year, or ceases operation before the end of the taxable year.

Note: If the payments were received no more than once per calendar quarter, the income is considered as infrequent or irregular. If the total earnings for each calendar quarter are $30 or less, the income is not counted in the eligibility budget and is considered in the co-payment budget. If the total earnings for each calendar quarter exceed $30, allow the $30 deduction and count the excess income in the eligibility budget. Consider the income for the co-payment budget.

If the person's tax statement is used to predict variable income, there is no need to set a six-month special review to redetermine eligibility unless a change has been reported.

 

E-6320 Six Months Projection

Revision 16-4; Effective December 1, 2016

 

When the previous year's tax statement is unavailable, or if using the IRS Schedule F, Form 1040 - Profit or Loss from Farming, or the IRS Schedule C, Form -1040 - Profit or Loss from Business, makes the person individual ineligible, request verification of earnings and allowable deductions for the previous six months. In this situation, a six-month special review is required.

 

E-6400 Variable Income for Self-Employment

 

Revision 09-4; Effective December 1, 2009

 

Follow established variable income procedures when calculating the co-payment budget. Pay attention to anticipated rate of receipt in projecting co-payment, as there is often a high degree of variability in the receipt of self-employment income. Schedule a special review when lump sum payments are anticipated to occur, so that restitution can be requested. Monitor the case and adjust the budget (if applicable) when projected variable income is expected to cease.

Because most self-employment income involves deductible expenses, inform the person to keep accurate records of all incurred expenses and receipts.

 

E-6500 Self-Employment Income Examples

Revision 16-4; Effective December 1, 2016

 

  1. An individual who resides in a nursing facility owns a 160-acre farm where the individual's spouse continues to live. One hundred acres of land are set aside in a Conservation Reserve Program (CRP). The other 60 acres are farmed by the couple's son, who pays all expenses. In return for use of the land, the son pays the individual one-quarter of the net profit he produces. For several years, the individual has received $6,000 from the CRP during the month of September. The son's most recent IRS Schedule C form shows net farming income of $7,000 for the year.

    Action:

    The income from the land set aside for CRP is considered lease or rental income. As neither the individual nor the individual's spouse participates in the production of farm income, this is also considered rental income and no deductions are given for expenses. If expenses are incurred by either the individual or the individual's spouse, consider these expenses as deductions in netting the income. Other common examples of lease income include hunting or fishing leases, subsidy payments, surface exploration, or bonuses.

 

  1. An individual supplements their Social Security income by making quilts. The quilts are sold through a consignment shop, which keeps 10 percent of the sales price. Each month the individual produces and sells two quilts, which retail for $450 each. The material for each quilt costs $75; additionally, the individual pays her niece $150 per quilt to do the actual quilting stitch. The individual's business is run out of a rented apartment, which includes a living area, kitchen, bathroom, and two bedrooms. One of the bedrooms is used as the workshop. The individual pays $400 per month in rent; utilities for the apartment run $150 per month. The individual is also repaying their son at the rate of $50 per month for money he loaned the individual for the purchase of a new sewing machine, which is used to produce the quilts.

Action:

Amount Action
$900.00 gross monthly income (two quilts @ $450 each)
– 90.00 consignment fee (10 percent of $900)
–150.00 cost of materials ($75 X 2)
–300.00 payment to niece ($150 X 2)
–100.00 rental expense for work space ($400/four rooms)
– 37.50 utility expense for work space ($150/four rooms)
$222.50 net monthly income from sale of two quilts


Note: The $50 payment on the principal of the loan to the son is not an allowable expense. Similarly, if the individual bought the sewing machine outright (purchase of a capital asset), the purchase would also not be an allowable deduction. However, the rental of a sewing machine would be allowable. See the chart in the previous section.

  1. An eligible couple produces a yearly cotton crop. The couple belongs to a co-op that stores the cotton to await a better price. The co-op members receive coupons, which are actually a loan against the eventual sale price of the crop.

    Action:

    Proceeds from the sale of the crop become income in the month the individual actually receives the profit. Any coupons cashed against the eventual sale price of the crop are considered income at the time they are cashed.