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Effective: December 1, 2006 |
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20.25.20ar1 - Self-Employment Income (Archive) |
Archived: April 1, 2009 |
Self-employment income is treated differently than other types of income in the health care eligibility determination process. It is necessary to evaluate the employment to determine if it is considered self-employment income.
In general, countable gross income for a self-employed client is the gross receipts from the business minus the allowable costs of doing business.
Determining Gross Self-Employment Income.
Self-employed clients generally meet the following conditions, they:
l Work for themselves rather than for an employer.
Note: Some self-employed people may have an employer or work out of another's business location.
Examples include:
n Real estate sales people.
n People who work for commission sales.
n Manufacturer's representatives.
n Independent contractors.
n Some members of the clergy.
l Are responsible for their own work schedule.
l May not be 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.
If you are unsure whether a person who has an employer or works from another person’r;s business location is self-employed confirm by reviewing one or more of the following:
l Paychecks.
l Type of tax forms filed by the client.
l Contact the individual.
l Contact the entity that pays the client, but only with the client's consent.
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:
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.
Determining Gross Self-Employment Income
In general, countable income for a self-employed client is the gross receipts from the business minus the allowable costs of doing business.
To determine the countable income for self employment use the previous year’s tax forms or business records if tax forms are not available, or do not accurately reflect current income.
Note: If using business records request them for the previous 12 months, or since the business began, whichever is less.
Examples of acceptable documentation include:
l Business financial statement.
l Detailed records of gross receipts and expenses.
l Business quarterly report which may be filed for tax purposes.
l Signed statement from the business’s accountant verifying projected business income or expenses.
For instructions regarding allowable self-employment deductions, and how to arrive at countable income, see MinnesotaCare Self-Employment Income or MA/GAMC Self-Employment Income.
A substantial change in self-employment income does not include normal fluctuations from year to year. Review and evaluate the potential effect on self-employment income if the nature or scope of the business has changed.
For more information regarding substantial change, see Income Changes.