*** The Health Care Programs Manual (HCPM) has been replaced by the Minnesota Health Care Programs Eligibility Policy Manual (EPM) as of June 1, 2016. Please refer to the EPM for current health care program policy information. ***
Effective: June 1, 2011 |
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20.25.20 - Self-Employment Income |
Archived: June 1, 2016 (Previous Versions) |
Self-employment income must be counted when determining Minnesota Health Care Programs eligibility. This section provides information on how to determine if a client is self-employed and the different ways a client may be self-employed.
For information on calculating self-employment income, see MinnesotaCare Self-Employment Income and MA Self-Employment Income.
For information on changes in self-employment income, see Income Changes.
Independent Contractor versus Employee.
Self-employed clients generally meet the following conditions; they
l Work for themselves rather than for an employer.
l Are responsible for their own work schedule.
l Are not covered under an employer's liability insurance or Workers' Compensation.
l May or may not have Social Security tax (FICA) deducted from the pay.
Examples of self-employment enterprises include:
l Farming.
l Product sales such as Avon, Tupperware, etc.
l Small businesses.
l Services, such as day care.
l Skilled trades such as roofers, painters, etc.
Independent Contractor versus Employee
Independent contractors can be part of any type of trade or business. They are individuals hired to do a particular job, receiving payment only for work being done. Independent contractors are business employers and not their clients’ employees. They do not received employee benefits or the same legal protections as employees. For example, they are not covered by their clients’ workers’ compensation benefits. Independent contractors are often responsible for their own expenses. An independent contractor’s client does not withhold or pay taxes, including income, FICA and unemployment taxes for the contractor. The general rule is that an individual is an independent contractor, not an employee, if the person for whom the services are performed has the right to control or direct only the result of the work and not the means and methods of accomplishing the result.
Example:
Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. She also performs additional electrical installations under contracts with other companies that she obtained through advertisements. Vera is an independent contractor.
Clients classify their income as either earned income, self-employed earned income or unearned income on the application. Accept this classification unless:
l There is conflicting information (for example, the client classifies the income as unearned but submits verification that shows it as self-employment income), or
l MHCP policy requires that we treat the income another way.
Some self-employed people may have an employer or work out of another person’s or agency’s business location. Examples include:
l Real estate sales people.
l People who work for commission sales.
l Manufacturer's representatives.
l Independent contractors.
l Some members of the clergy.
If an applicant or enrollee who has an employer or works from another person’s business location classifies himself or herself as self-employed, review one or more of the following documents to confirm that they are in fact self-employed.
l Paychecks.
l Type of tax forms filed by the client.
l Contact the client.
l Contact the entity that pays the client, but only with the client's consent.
When beginning a self-employed business, clients choose what form of business entity to establish. The form of business determines which income tax return forms the self-employed individual must file. The most common forms of business are:
l Sole Proprietorship.
l Partnership.
l Corporations.
n C-Corporations.
n S-Corporations.
l Limited Liability Company (LLC).
A sole proprietorship:
l Is owned and controlled by one individual.
l Is not required to file a separate business tax return.
l Must include the profit or loss from all sole proprietorships on the client’s federal 1040 tax forms.
l Must file a separate tax schedule for each business operated as a sole proprietorship depending on the type of business:
n Farm: Must file a separate Schedule F.
n Non-farm: Must file a separate Schedule C.
A partnership:
l Is owned by two or more individuals.
l Must file a return on federal Form 1065 however it is not taxed as a separate entity.
Note: Farm partnerships must file a Schedule F along with a Form 1065.
l Each partner will also receive a Schedule K-1 (Form 1065) showing his/her distributive share of income, gain, loss, deduction, or credit. Count profits as earned income.
n Partners may receive differing shares depending on the original partnership agreement.
n Partners not working for the business still receive Schedule K-1 forms and are entitled to a distributive share of profit or loss. Count profits as unearned income.
Example:
A family of two adults and five children are members of a religious community that operates several businesses. None of the children work in any of the businesses. Each member of the community receives a Schedule K-1 form showing a distributive share of $4,000 for the previous tax year.
Action:
Count the $4,000 as unearned income to the children and as earned self-employment income to the parents.
A corporation exists separately from the individuals who own interest in it. A corporation must file a separate corporate tax return. There are two types of corporations: C-Corporations and S-Corporations.
l C-Corporation.
n C-corporations are taxed on the corporation's ordinary income on the corporation's tax return.
n Shareholders receive profits in the form of dividends. The dividends must be reported on the shareholder's individual tax return and are counted as unearned income to the client.
n Shareholders who perform work for the corporation are paid as employees and receive a W-2 form reporting their wages. The wages are counted as earned income to the client.
n Use the individual wages and dividends instead of the self-employment figures to compute income.
l S-Corporation.
n An S-corporation is a small business corporation of 35 or fewer shareholders and are taxed only at the shareholder level.
n An S-corporation is similar to a partnership in that each partner separately reports his or her share of the income, deductions, loss, and credits on their personal tax forms.
n Unlike a C-corporation, taxable distributions of profits are treated as capital gains rather than dividends, and are reported on Schedule D.
n S-corporations must file a tax return on form 1120-S.
Note: Farm S-corporations must file a form 1120-S and are not required to file a Schedule F. However, some farm corporations may file both forms.
A Limited Liability Company (LLC):
l Is a business structure allowed by state statute.
l Like corporations, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
l Is owned by "members”. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit "single member” LLCs, those having only one owner.
l Is not recognized by the federal government as a classification for federal tax purposes. An LLC business entity must file as a corporation, partnership or sole proprietorship tax return.