Self-employment income is income received by household members from a business they own entirely or partially, or when the household member works for an employer, but is considered self-employed per policy.

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.

Self-Employment Business Structures

Sole Proprietorship – A single person operates the business and is fully responsible for all losses and receives all profits.

Partnerships – 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.

S-Corporation – Can have between 1 and 100 shareholders. Owners are paid through a combination of salary and shareholder distribution. Profits and losses are passed through directly to owner’s personal income.

Self-employed Farmer– Operating a farm for profit either as owner or tenant. To be considered self-employed, the farmer must receive or anticipate receiving gross income of $1,000 or more annually from farming.

Limited Liability Companies (LLC) – Can be single-member (one owner) or multi-member (two or more owners). Single-member LLC’s may be similar to Sole Proprietorships. Multi-member LLC’s may be similar to Partnerships.

Independent Contractors – A single person operating a business or performing “gig” work (e.g. DoorDash/Uber, lawn care, freelance). Taxes may be similar to Sole Proprietorships.

Other Types of Self-Employment Income

Rental Income – Income received from rental property. If owner actively manages property 20 hours per week the rental income is considered earned self-employment. If owner does not actively manage the property at least 20 hours per week, the rental income is considered unearned self-employment.

Profit Sharing or Dividends – A portion of a company’s net profits distributed to shareholders or owners as income. Profit-sharing income received from an S-Corporation is considered unearned self-employment. Profit-sharing income received from a Partnership or LLC may be considered either earned or unearned self-employment, depending on the individual’s role and level of participation in the business.

Capital Gains – Income generated from the sale of capital goods or equipment. Typically considered earned self-employment.

No taxes – Client declares they do not file taxes (e.g. odd jobs, paid in cash, panhandling), the business is new and they have not yet filed taxes, or their taxes are no longer representative due to a significant income change.

Verification

There are many different tax forms used to report self-employment income. As a best practice, obtain the full individual tax return and, when applicable, the full business tax return.

Below are examples of tax forms that may be needed to verify self-employment income.

Note: This list is not exhaustive. Required verification may vary depending on the individual self-employment situation.

Sole Proprietorship – Form 1040 (Individual Income Tax Return) and Schedule C (Profit or Loss from Business).

Partnerships – Form 1065 (U.S. Return of Partnership Income) and Schedule K-1 (Form 1065).

S-Corporation – Form W-2 (Wage and Tax Statement) if client pays themselves a salary, Form 1040 (Individual Income Tax Return), and Schedule K-1 (Form 1120-S).

Self-employed Farmer– Form 1040 (Individual Income Tax Return) and Schedule F (Profit or Loss from Farming).

Limited Liability Companies (LLCs) – Form 1065 (U.S. Return of Partnership Income), and either Schedule K-1 (Form 1065) or Schedule C (Profit or Loss from Business).

Independent Contractors – Form 1040 (Individual Income Tax Return) and Schedule C (Profit or Loss from Business).

Rental Income – Form 1040 (Individual Income Tax Return) and Schedule E (Supplemental Income and Loss).

No taxes – When taxes are not available, self-employment income must be verified using records from the past 12 months. Monthly gross income may be verified through accounting or sales software, app or website earnings records, or a written log provided by the client.

• If the client has been self-employed for less than one year, records must cover the entire period of self-employment.
• When taxes are no longer representative, calculate the self-employment income using only the income that can reasonably be anticipated to project future earnings.

Expenses

It is important to remember that business expenses are not automatic. A client can meet the self-employment definition and not have business expenses. Be sure to ask the client if they declare any business expenses during the interview. Only allow the business expense deduction when appropriate.

• When business expenses are declared, 50% of the gross self-employment income is subtracted as a business expense deduction.
• Business expenses are deducted before determining if the household meets the maximum gross income standards and EO screening.
• Both earned and unearned rental income is eligible for a business expense deduction.
• Capital gains and unearned profit-sharing income are not eligible for business expense deductions.

Resources:

340:50-7-30 Self-employed households