15.6 Self-Employment Income

A business is operating when it is ready to function in its specific purpose. The period of operation begins when the business first opens and generally continues uninterrupted up to the present. A business is operating even if there are no sales and no work is being performed. Thus a seasonal business operates in the off season unless there has been a significant change in circumstances (see Section 15.6.5.3 Anticipating Earnings).

A business is not operating when it cannot function in its specific purpose. For instance, if a mechanic cannot work for four months because of an illness or injury, he or she may claim his or her business was not in operation for those months.

15.6.1.4 Income Maintenance Income

IM income is self-employment income that is counted in determining IM eligibility and benefits.

15.6.1.5 Real Property

Real prope rty means land and most things attached to the land, such as buildings and vegetation.

15.6.1.6 Non-real Property

Non- real property means all property other than real property.

15.6.2 Ways to Identify

Section 15.6.2.1 By Organization

Section 15.6.2.2 By IRS Tax Forms

Section 15.6.2.3 Employee Status

Identify a farm or other business according to the following criteria.

15.6.2.1 By Organization

A farm or other business is organized in one of the following ways:

A sole proprietorship, which is an unincorporated business owned by one person.
A partnership, which exists when 2 or more persons associate to conduct business. Each person contributes money, property, labor, or skills, and expects to share in the profits and losses. Partnerships are unincorporated.
A corporation is a legal entity authorized by a state to operate under the rules of the entity's charter. There may be one or more owners. A corporation differs from the other forms because a corporation:

Is taxed as a separate entity rather than the owners being taxed as individuals, and
Provides only limited liability. Each owners' loss is limited to their investment in the corporation while the owners of unincorporated business is also personally liable.

An LLC , a business structure that combines the pass-through taxation of a partnership or sole proprietorship (the members are taxed directly) with the limited liability of a corporation.

15.6.2.2 By IRS Tax Forms

A self-employed person who earns more than $400 net income must file an end-of-year return with the IRS . A person who will owe more than $400 in taxes at the end of the year must file quarterly estimates.

IRS tax forms for reporting self-employment income are listed below.

Form 1065 - Partnership or multi-member LLC
Form 1120 - Corporation or LLC electing to be taxed as a corporation
Form 1120S - S Corporation
Form 4562 - Depreciation & Amortization
Form 1040 - Sole Proprietorship or single member LLC

Schedule C ( Form 1040) - Business (non-farm)
Schedule E ( Form 1040) - Rental and Royalty
Schedule F ( Form 1040) - Farm Income
Schedule SE ( Form 1040) - Social Security Self-Employment

15.6.2.3 Employee Status

A person is an employee if he or she is under the direct "wield and control" of an employer. The employer has the right to control the method and result of the employee's service. A self-employed person earns income directly from his or her own business, and all of the following applies:

Does not have federal income tax and FICA payments withheld from a paycheck.

Note: A babysitter who works in someone else's home is considered an employee of that household, even if the individual employing him or her does not withhold taxes or FICA.

Does not complete a W-4 for an employer.
Is not covered by employer liability insurance or worker's compensation.
Is responsible for his or her own work schedule.

15.6.3 Self-Employment Income Assets

Section 15.6.3.1 Business Assets

Section 15.6.3.2 Bank Accounts

Section 15.6.3.3 Disallowed Expenses

15.6.3.1 Business Assets

Business assets are generally income producing property. Exclude assets directly related and essential to producing goods or services.

In EBD cases, all real and non-real business property is exempt if the business is currently operating (see Section 15.6.1.3 Operating) for the self-support of the EBD individual. There is no profitability test.

Note: See Section 16.9 Non-Home Property Exclusions.

Ask the EBD person to furnish the documents needed to:

Describe the business, its properties, and its assets.
Show the number of years it has been operating.
Identify any co-owners.
Show the estimated gross and net earnings for the current tax year.

If the property is not currently operating, exempt it if there is reasonable expectation it will resume operating within the next 12 months. Base your reasonable expectation on the following information:

Date of last use.
Reason property is not in current use.
Estimated date the person expects to resume use.

If he or she decides not to resume, the property becomes a countable asset in the month after the decision not to resume.

Extend the 12 months only when a disabling condition prevents the person from resuming business use of the property.

15.6.3.2 Bank Accounts

With corporations you can easily distinguish between personal and business checking and savings accounts. A corporation is a separate legal entity and the accounts it owns must be in the corporation's name. Accounts in the name of the owners are personal accounts.

For partnerships and sole-proprietorships, a cash account is a business account if the person claims that it is a business account. Disregard a business account, if the profitability test is passed, even if a partner or sole-proprietor makes withdrawals from the account for personal use. You don’t need a profitability test for EBD cases.

15.6.3.3 Disallowed Expenses

Expenses that are allowed self-employment deductions on the IRS business tax forms are allowed expenses for Medicaid. Some specific expenses that have been identified as not allowed in the calculation of Self Employment Income on the IRS tax forms and therefore not allowed for Medicaid are:

Net loss carryover from previous periods,
Federal, State, and local income taxes,
Charitable donations,
Work-related personal expenses, such as transportation to and from work,
Work-related personal expenses such as pensions, employee benefit and retirement programs and/or profit sharing expenses (Business expenses for employees’ pensions, benefits, retirement programs, and profit sharing expenses are allowable, but the work-related personal expenses of the employer are not), or
Principal payments on loans for the purchase price of income producing real estate, capital assets/equipment, and durable goods.

15.6.4 Self-Employed Income Sources

All self-employment income is earned income, except royalty income and some rental income.

Self-employment income is income that is reported to IRS as farm or other self-employment income or as rental or royalty income. When income is not reported to the IRS, you must judge whether or not it is self-employment income.

Self-employment income sources are:

Business. Income from operating a business.
Capital Gains. Business income from selling securities and other property is counted. Personal capital gains are not counted as income.
Rental. Rental income is rent received from properties owned or controlled. Rental income is either earned or unearned. It is earned only if the owner actively manages the property on an average of 20 or more hours per week. It is unearned when the owner reports it to the IRS as other than self-employment income.

Use "net" rental income in the eligibility determination. "Net" rental income means gross rental receipts minus business expenses.

When the owner is not an occupant, net rental income is the rent payment received minus the interest portion of the mortgage payment and other verified operational costs.

When a life estate (see Section 16.8.1.6 Life Estate) holder moves off the property and the property is rented, net rental income is the rent payment received minus taxes, insurance, and operational costs. The operational costs are the same as the costs the holder was liable for when living on the property.

When the owner lives in one of the units of a multiple unit dwelling, compute the annual net rental income as follows:

Add the annual interest portion of the mortgage payment and other annual operational costs (including taxes) common to the entire operation.
Divide the result in step 1 by the total number of units to get the proportionate share.
Multiply the amount in step 2 (the proportionate share) by the number of rental units. Rental units means the total number of units minus the unit the owner lives in.
This equals total expenses.
Subtract total annual expenses from the total annual rental income to get net annual rental income.
Divide the net annual rental income by 12 to get the net monthly rental income. Budget this amount.

Example 1: George owns a 4 unit apartment building and lives in unit 1. His annual interest paid on his mortgage for the most recent tax year is $9,765. His operational expenses, including taxes on the house from the most recent taxes is $12,359. This totals $22,124. This amount divided by 4 units = a proportionate share of $5,531.

$5,531 * 3 rental units = $16,593. This represents his total budgetable annual expenses. His total annual rental income = $28, 800 ($800 per unit per month).

$28,800

-$16,593

$12,207

$12,207 / 12 = $1,017.25 net monthly rental income.

Royalties. Royalty income is unearned income received for granting the use of property owned or controlled. Examples are patents, copyrighted materials, or a natural resource. The right to income is often expressed as a percentage of receipts from using the property or as an amount per unit produced.

15.6.5 Calculating Income Maintenance Income

Section 15.6.5.1 IRS Tax Forms

Section 15.6.5.2 Worksheets

Section 15.6.5.2.1 Depreciation

Section 15.6.5.3 Anticipated Earnings

IM income (see Section 15.6.1.1 Income) is anything you receive in cash or in-kind that you can use to meet your needs for food, clothing, and shelter by either:

Using IRS tax forms completed for the previous year, or
Anticipating earnings (see Section 15.6.5.3 Anticipated Earnings)

15.6.5.1 IRS Tax Forms

Do not fill out any IRS tax forms (or the Self-Employment Income Report Form [F-00107]) yourself. This is the responsibility of the member.

Consult IRS tax forms only if:

The business was in operation at least one full month during the previous tax year, and
The business has been in operation six or more months at the time of the application, and
The person does not claim a change in circumstances since the previous year.

If all three conditions are not met, use anticipated earnings (see Section 15.6.5.3 Anticipating Earnings).

15.6.5.2 Worksheets

If you decide to use IRS tax forms, use them together with the self-employment income worksheets (F-16034, F-16035, F-16036, and F-16037).

The worksheets identify net income and depreciation by line on the IRS tax forms.

For each operation, select the worksheet you need and, using the provided tax forms and/or schedule, complete the worksheet. These are:

Sole Proprietor - Farm and Other Business

IRS Schedule C (Form 1040) - Non-farm Business Income
IRS Schedule E (Form 1040) - Rental and Royalty Income
IRS Schedule F (Form 1040) - Farm Income
IRS Form 4797 - Capital & Ordinary Gains

Partnership

IRS Form 1065 - Partnership Income
IRS Schedule K-1 (Form 1065) - Partner's Share of Income

Corporation

IRS Form 1120 - Corporation Income

Subchapter S Corporation

IRS Form - 1120S - Small Business Corporation Income
IRS Schedule K-1 (Form 1120S - Shareholder's Share of Income

Next, divide IM income by the number of months that the business was in operation during the previous tax year.

The result is monthly IM income. Add this to the fiscal test group's other earned and unearned income. If monthly IM income is a loss, add zero to the non self-employment income.

When a household has more than one self-employment operation, the losses of one may be used to offset the profits of another. Apply this offset only to those self-employment operations that produced earned income. Do not apply a loss from unearned income to a gain in earned income. Losses from self-employment cannot be used to offset other earned or unearned income.

15.6.5.2.1 Depreciation

Depreciation is an allowable deduction for EBD MA cases.

15.6.5.3 Anticipated Earnings

If past circumstances don't represent present circumstances, calculate self-employment income based on anticipated earnings. A change in circumstances is any change that can be expected to affect income over time. It is the person's responsibility to report changes.

Other instances when you would use anticipated earnings:

The business wasn't operating at least one full month during the previous tax year.
The business wasn't operating six or more months at the time of the interview.

Examples of changed circumstances are:

The owner sold or simply closed down the business.
The owner sold a part of his business (e.g., one of two retail stores).
The owner is ill or injured and will be unable to operate the business for a period of time.
A plumber gets the contract on a new apartment complex. The job will take nine months and his or her income will increase.
A farmer suffers unusual crop loss due to the weather or other circumstances.
There is a substantial cost increase for a particular material such that there will be less profit per unit sold.

The Self-Employment Income Report Form (SEIRF) (F-00107) simplifies reporting income and expenses when earnings must be anticipated. It is modeled after IRS Form 1040, Schedule C, and can be used to report income for any type of business with any form of organization. However, some, especially farm operators, may find it easier to complete the IRS tax form when income and expense items are more complex.

To compute anticipated earnings, the person must complete a SEIRF for those months of operation since the change in circumstances occurred following the guidelines below (remember, the beginning of a business is a change in circumstances). He or she may complete the SEIRF for each month separately or combine the months on one SEIRF.

When a new self-employment business is reported or when a change in circumstance occurs and the past circumstances no longer represent the present, recalculate self-employment income:

When two or more months of actual self-employment information is available, calculate a monthly self-employment net income average using all of the actual income information beginning from the date self employment began or the date of the significant change. See Example 1.
When at least one full month but less than two full months of actual self-employment income information is available, calculate a monthly net income average using the actual net income received in any partial month of operation, the one full month of operation and an estimate of net income for the next month. See Example 2.
When there is less than one full month of actual income information available, calculate a monthly net self-employment income average using the actual net income received in the partial month (since the change in circumstance occurred) and estimated income and expenses for the next two months. See Example 3.

Use the average until the person's next review or if a significant change in circumstances is reported between reviews.

Example 1: Bonnie applies for CC and Medicaid on April 5, 2014. She reports that she started self-employment in January 2014. The agency uses a SEIRF for January, February, and March to determine the prospective self-employment income estimate for Bonnie’s CC and Medicaid certification period (April 2014 - March 2015).

Example 2: Ricardo is applying for FS and Medicaid eligibility on February 5, 2014. He started self-employment on December 15th. To calculate his prospective self-employment income, he completes a SEIRF for December, January, and February including his actual and expected income and expenses for three months. The worker divides this total by three to determine an anticipated monthly average income amount. This amount is used until a change in self-employment is reported, or until Ricardo completes a new application or a review.

Example 3: Jenny is a Medicaid member who has been self-employed as a hair dresser since 2002. Jenny’s Medicaid certification period is December 2013 to November 2014. The worker used Jenny’s 2012 tax return to establish a monthly income amount.

In March 2014 Jenny reports that she has been unable to work since breaking her arm on February 17. She is not sure when she will be able to return to work, but it will not be until at least May. The worker has Jenny complete a SEIRF for February 17 - February 28 (actual income since the change in circumstance occurred) and for March and April using the best estimate of income to establish her prospective self-employment income. The worker will use these three months to determine a prospective self-employment income estimate for the remainder of the certification period. Jenny does not need to submit any additional SEIRFs.

Use the anticipated earnings amount until the person completes an IRS tax form or reports a change in circumstances.

15.6.6 Verification

Completed and signed IRS tax forms (see Section 15.6.2.2 By IRS Tax Forms) are sufficient verification of farm and self-employment income. A completed and signed SEIRF is sufficient verification.

It is not necessary to collect copies of supportive items such as receipts from sales and purchases. However, you can require verification when the information given is in question. Document the reason for the request.

15.6.7 Self-Employment Hours

Count the time a self-employed person puts in on business-related activities involving planning, selling, advertising, and management along with time put in on production of goods and providing of services as hours of work.

This page last updated in Release Number: 15-01

Release Date: 06/10/2015

Effective Date: 06/10/2015