Self-employed income is usually income from an individual’s own business, trade, or profession rather than from an employer. However, some individuals may have an employer and receive a regular salary.
If an employer does not withhold income taxes or FICA, even if required to do so by law, the person is considered self-employed.
Some types of self-employment include:
- Earnings from occasional and/or seasonal jobs, such as mowing lawns, babysitting, collecting cans, and cleaning houses;
- Income which results from owning a private business such as a beauty salon or auto mechanic shop;
- Farm Income;
- Income from property;
- Income received as an independent contractor.
The following tips are provided to assist you in recognizing self-employment:
- If the employer withholds taxes, it is earned income and an employee/employer relationship exists unless the person provides proof that they file taxes as self-employed.
- If the employer does not withhold taxes then it is self-employed income.
- If the individual does occasional or seasonal jobs it is self-employment income if taxes are not withheld.
Selling plasma or blood products is always considered earned income for the SNAP, Child Care, and TANF programs. The Health Benefits program considers this type of income as self-employment.
Always refer to policy and review the self-employment instructions for the specific program which you are working.
Refer to Section 340:50-7-29 and 340:50-7-30 for the full SNAP self-employment policy. Section 340:40-7-11 covers the self-employment policy for child care and 340:10-3-31 and 340:10-3-32 for the TANF program.
Determining Self-Employment Income
For the SNAP, Child Care, and TANF Programs, self-employed income is determined by using the Gross income reported on Line 3, IRS form 1040, Schedule C; minus 50% deduction for declared business expenses is then calculated. Then the net self-employment income is divided by the number of months to be averaged. This is done by determining the number of months the individual was involved in self-employment for that tax year.
If there is no tax form available, the worker adds together all the gross self-employment (including capital gains) and subtracts 50% of it for individuals who declare that they have business expenses. The net self-employment is then divided by the number of months to be averaged, by determining the number of months the individual was involved in self-employment for that year.
For new self-employment income where the monthly amount cannot be anticipated, refer to policy 340:50-7-30(b)(6)(B) and ITS 7.
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 your interview.
For Health Benefits, self-employed income is determined by deducting all allowable self-employment business expenses from the gross profit. The resulting net profit is then divided by the number of months in which the income was received.
Under SSI Criteria, we allow the same business expenses as SSI and the IRS.
Types of Self-Employment and Tax Forms
There are many different tax forms used to report self-employment. Some of these forms include the following:
- Form 1040 with a Schedule C or C-EZ Sole Proprietorship
- A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. The business has no existence apart from the owner. The income and expenses of the business are included on the individual’s own tax return.
- Form 1040 with a Schedule F
- Farmers use Form 1040, Schedule F to report profit and losses from farming.
- Form 1065 with Schedule K-1– Partnership
- A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. The partnership could be considered a General Partnership or Limited Partnership (Limited Liability Company).
- Form 1120-S with Schedule K-1, W-2, personal return – S Corporations:
- These are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S- corporations to avoid double taxation on the corporate income.