How to determine if income is self-employment

• Person files or would be able to file taxes as self-employed or declares themselves as self-employed
• Person says they are an independent contractor
• If in doubt, check with the parent company to see if it considers the client to be self-employed or an employee.
  • If the business says that it considers the person to be an independent contractor, then the person is self-employed, barring any other evidence to the contrary.

Does an employer/employee relationship exist?

• Is there an established work schedule?
• Are there specified wages?
• Does the employer withhold FICA and income taxes from earnings?
• If the person is not sure, ask them about the following:
  • An employer/employee relationship exists IF:
    • They receive extensive instructions on how work is to be done, who they may hire to assist them.
    • If they receive less extensive instructions such as what should be done, but not how it must be done, they may be an independent contractor.
    • They receive benefits.
      • However, if they do not receive benefits, they could be either an employee or an independent contractor.
    • The person may be an independent contractor if they have a significant investment in their work and are not necessarily reimbursed for all of their expenses and have the potential of realizing a profit or incurring a loss.
    • There is no federal rule that the self-employed individual must have full responsibility for the success or failure of the business operation to be considered self-employed.
  • Occasional odd jobs such as lawn mowing for extra money, collecting cans, etc is not considered self-employment.
    • This would be earned income with the last 30 – 60 days income used for an average, unless the person states they are self-employed and this is their only source of income.

• For ABD-related benefits, the selling of plasma or whole blood is always treated as self-employment.

Commission only income, such as real estate sales people or other sales people can either be treated as earned income or self-employment income.  The key in making a determination is whether or not the client classifies themselves as self-employed.

• If the person is on SSI, the person’s statement can be accepted for business income and expenses

NOTE: Self-employment is a form of earned income so the ABD earned income formula is applied to the net earnings from self-employment.

The following information provides explanation on the different types of self-employment you may encounter as well as provides a link to coding instructions in the headings.

Sole Proprietorships

• Sole Proprietorships
  • Is an unincorporated business that is owned by one individual.
  • The simplest form of business organization to start and maintain.
  • The business has no existence apart from the owner, its liabilities are the owner’s personal liabilities
    • The owner accepts all the risks of the business as well as for all assets owned, whether used in the business or for personal use.

Partnerships

• Partnerships
  • A partnership is the relationship existing between two or more persons who 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.
    • A partnership is not a taxable entity.
    • Each partner includes his or her share of the partnership’s income or loss on his or her tax return.

S-Corporations

• S Corporation
  • An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S Corporation.
    • An S corporation generally is exempt from federal income tax.
    • It’s shareholders include on their tax returns their share of the corporation’s separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss.

Capital Gains

For ABD, capital gains is part of changing a resource from one form to another and not treated as income. If it’s entered into the Income tab for other programs, divert the capital gains so it is not counted for ABD-related benefits.