The term earned income refers to monies earned by an individual through the receipt of wages, salary, commission, or profit from activities in which the individual is engaged as self-employed or as an employee.
A person is considered self-employed when:
- A person declares they are self-employed
- there is an employer/employee relationship and the employer does not withhold income taxes of Federal Insurance Contributions Act (FICA)
- the employer withholds taxes but the person files taxes as self-employed and provides that verification.
Ask if any household members are self-employed, how long they have been self-employed with the current business, if they file their taxes as self-employed, and if they have business expenses.
The answers to these questions to determine if the client is self-employed.
Self-Employment Business Structures
Sole Proprietorship – A single person operates the business and is fully responsible for all losses and receives all profits. Gross income appears on line 3 of the Schedule C.
Partnership – Two or more persons agree to conduct a trade or business. Members share profits and losses. Each partner pays taxes individually. The IRS does not tax the partnership. Consider the type of partnership (limited and general), and the client’s share of income or loss on their Schedule K-1.
Self-employed Farm Income – the farm must receive or anticipate receiving gross income of $1,000 or more annually from farming. Consider reported losses and offset the loss against other household income.
Independent Contractors – these workers may have an employer/employee relationship, but they file a tax return as self-employed. Use the client’s tax return to determine gross annual Self-employment income. If the tax return or Form 1099 is not available, you may use a letter from employer, pay ledger, or self-employment logs to document the client’s income. The verification should cover the last 12 months unless the client has not been working for the employer that long or the client experienced a substantial change. In those situations, the verification must cover the entire time the client has been with the employer or the representative period. When the client has worked less than one month and the employer pays on a regular schedule, you may average the gross pay amounts the client has already received or use the hours the employer anticipates the client working and a weekly, biweekly, or bimonthly conversion factor or to anticipate income.
Self-employed individuals will need to provide one of the following verification:
- For Sole Proprietorships, 1040 plus Schedule C or C-EZ, or a log of gross income and expenses for all months the individual was self-employed
- For partnerships, the partnership files a Form 1065 and Schedule K-1. The client provides the Schedule K-1 and other tax return forms.
- For self-employed farm income, the 1040 plus Schedule F.
- For independent contractors, obtain the most recent tax return the client completed or verification of business income from the last 12 months. SNAP prefers verification from the employer, but self-employment logs are acceptable when needed.
Ask the client if they have business expenses and allow the 50% deduction when appropriate.
Please reference the following articles for additional examples and FAQs on Self-Employment Income:
- Income – Self-Employment (Contract Laborers)
- Income – Self-Employment (S-Corporations)
- Income – Self-Employment (Sole Proprietorship)
- QUIZ – Self-Employment Income