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4.3.3 Farming and Other Self Employment Income

4.3.3.1 Business Operations

4.3.3.2 Identifying Farms and Other Businesses

4.3.3.3 Capital and Ordinary Gains

4.3.3.4 Rental Income

4.3.3.5 Averaging Income

4.3.3.5.1 Part Year Income

4.3.3.5.2 IRS Tax Forms

4.3.3.5.3 Worksheets

4.3.3.5.4 Self Employment Income Report Form (SEIRF)

4.3.3.6 Anticipating Earnings

4.3.3.6.1 Shelter Expense

4.3.3.6.2 Farm and Self-Employment Expenses – Utilities

4.3.3.6.3 Self-Employed Child Care Provider

4.3.3.6.4 Unearned Rental Income

7 CFR Code of Federal Regulations 273.11(a) and (b)

Self-employment income is earned directly from one's own business rather than as an employee with a specified salary from an employer. Self-employment income is reported to the IRS as farm, self-employment, rental, or royalty income. If it is not reported to the IRS, the eligibility worker must judge if it is self- employment income. All self-employment income is earned income, except royalty income and some rental income.

4.3.3.1 Business Operations

A business is operating if it is ready for business, even if there are no sales and no work is being performed. A seasonal business operates in the off season (unless there has been a significant change in circumstances) see 4.3.3.5.2 for part year income. A business isn't operating when it can't function in its specific purpose.

4.3.3.2 Identifying Farms and Other Businesses

Identify a self-employment business by the following criteria:

1. By Organization

It is organized in 1 of 3 ways:

1. 1. A sole proprietorship is an unincorporated business owned by 1 person.

   2. A partnership exists when 2 or more persons conduct business. Each contributes money, property, labor or skills, and expects to share in the profits and losses. Partnerships are unincorporated.

   3. A corporation is a legal entity authorized by a state to operate under the rules of its charter. A corporation:

1. Is taxed as an entity rather than its owners being taxed as individuals.

2.  Provides only limited liability. Each owner's loss is limited to his/her investment, while each owner of an unincorporated business is also personally liable.

2. By IRS Tax Forms

A self-employed person earning more than $400 annual net income must file an end-of-year federal tax return. Anyone who owes more than $400 in taxes at the end of the year must file quarterly estimates.

3. By Employee Status

A self-employed person earns income directly from his/her own business, and:

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

   2. Does not complete a W-4 for an employer.

   3. Is not covered by employer liability insurance or worker's compensation.

   4. Is responsible for his/her own work schedule.

Examples of self-employment are:

1. Businesses that receive income regularly, for example, daily, weekly, or monthly, such as – merchant; small business; commercial boarding house owner or operator; owner of rental property

2. Service businesses that receive income frequently and, possibly sporadically, such as - craft persons; repair persons; franchise holders; commission sales persons (door-to-door sales, delivery, etc.); subcontractors; sellers of blood and blood plasma.

3. Businesses that receive income seasonally, such as - summer or tourist oriented business; seasonal farmers; (custom farm machine operators); migrant any person who temporarily leaves a principal place of residence outside of his state and comes to this state for not more than 10 months in a year to accept seasonal employment in the planting, cultivating, raising, harvesting, handling, drying, packing, packaging, processing, freezing, grading, or storing of any agricultural or horticultural commodity in its unmanufactured state farm work crew leaders; fishers, trappers, or hunters; roofers

4. Farming, including income from cultivating the soil or raising or harvesting agricultural commodities, earned by full-time, part-time or hobby farming.

5. Fishing with gross annual proceeds or expected income of $1,000 or more.

4.3.3.3 Capital and Ordinary Gains

The IRS uses different tax rates for capital and ordinary gains from selling assets.  However, include the entire gain or loss from IRS form 4797 as earned income for food units who have an ongoing self employment business. When self employment is terminated and the business is sold, the sale of property essential to self-employment is considered an asset and therefore excluded.

4.3.3.4 Rental Income

7 CFR 273.9(b)(1)(ii)

Rental income is earned if the owner actively manages the property on an average of 20 or more hours a week. See 4.3.4.1 Unearned Income if the person manages the property less than 20 hours a week.  

Include gross receipts minus allowable business expenses as earned income. Tax Forms 1040 C or E are used to determine rental income.  Use that income recorded on the tax forms plus the principal paid if using tax from E to estimate future income. If the client has not completed a scheduled C or E tax form, use the following method to calculate earned income.

1. When the owner is not an occupant, "net rent" is the total rent payment(s) received minus the total mortgage payment (principal and interest) and other verified operational costs such as (but not limited to) hazard insurance, mortgage insurance and taxes.

2. When income is received from a multi-unit property and the owner lives in one of the units, compute "net rent" as follows:

1. Add the total mortgage payment (principal and interest) and other verified operational costs such as (but not limited to) hazard insurance, mortgage insurance and taxes common to the entire operation.

2. Multiply the number of rental units by the total in step (i).

3. Divide the result in (ii) by the total number of units, to get the proportionate share.

4. Add the proportionate share to any operating costs paid that are unique to the rental unit. This equals total expenses.

5. Subtract total expenses from total rent payments to get net rent.

4.3.3.5 Averaging Income

Average self-employment income that represents a food unit’s yearly income over a 12 month period, even if the income is received within only a short period of time during that 12 months.

4.3.3.5.1 Part Year Income

Average self-employment income that is intended to meet the food unit’s needs for only part of the year over the period of time the income is intended to cover.

4.3.3.5.2 IRS Tax Forms

Use IRS tax forms to average income only if:

1. The business was in operation at least 1 full month during the previous tax year,

2. The business has been in operation 6 or more months at the time of the application, and

3. The person does not claim a significant change in circumstances since the previous year.

If all 3 conditions are met, and the tax forms are not complete, ask the client to either complete the appropriate tax form(s) or have the client complete one SEIRF for the previous year’s circumstances.  Completing the form(s) is solely the client’s responsibility.

4.3.3.5.3 Worksheets

To calculate self-employment income, use the self-employment income worksheets to adjust the income figure on the IRS tax forms. The worksheets identify net income and depreciation. Add back in depreciation on the IRS form as indicated on the worksheet.

For each operation, select the worksheet needed. Use the provided tax forms and/or schedule, to complete the worksheet.

The worksheets are:

1. Sole Proprietor (F-16037)

2. 1. IRS Schedule C, Form 1040: Nonfarm Business Income

   2. IRS Schedule F, Form 1040: Farm Income

   3. IRS Form 4797: Capital & Ordinary Gains

2. Partnership (F-16036)

1. IRS Form 1065: Partnership Income

2. IRS Schedule K-1, Form 1065: Partner's Share of Income

3. Corporation (F-16034)

IRS Form 1120: Corporation Income

4. Subchapter S Corporation (F-16035)

1. IRS Form 1120S: Small Business Corporation Income

2. IRS Schedule K-1, Form 1120S: Shareholder's Share of Income

Next, divide self-employment  income by the number of months the business was in operation, including partial months, during the previous tax year. The result is monthly income. Add this to the food unit’s other earned. If monthly income is a loss, add zero to the income.

When a food unit has more than 1 self-employment operation, the losses of one can offset the profits of another. Do not use losses from self-employment to offset other earned or unearned income.

Exception: Offset farm income losses with any other countable income only if the farmer received or anticipates receiving annual gross proceeds of $1,000 or more from the farm operation.

If more than 1 worksheet is used because there is more than 1 operation, combine the result of each worksheet into 1 monthly self-employment income amount. Then add that total to any other income. A salary or wage paid to a food unit member is an allowable business expense, but included in the earned income of the payee.  Next, divide self-employment  income by the number of months the business was in operation, including partial months, during the previous tax year. The result is monthly income. Add this to the food unit’s other earned. If monthly income is a loss, add zero to the income.

4.3.3.5.4 Self Employment Income Report Form (SEIRF)

The SEIRF Self-employment Income Report Form simplifies reporting income and expenses when earnings must be anticipated. The client must enter previous and/or expected income information on the SEIRF to determine an average. Budget this average prospectively.  Use it to report income for any type of business.  If the SEIRF is not completed, ask the client to complete it.  Do not fill out the SEIRF yourself.

Tip: Farm operators may find it easier to complete the IRS tax form when income and expenses are more complex.

4.3.3.6 Anticipating Earnings

Calculate self-employment income based on anticipated earnings when:

1. The business was not in operation for at least one full month in the prior tax year.

2. The business has not been in operation for six or more months at the time of the application.

3. Past circumstances do not represent the present.

Examples of changed circumstances are:

1. The start of a business.

2. The owner sold a part or all  his business.

3. The owner is ill or injured and will be unable to operate the business.

4. There's a substantial cost increase causing less profit for each unit sold.

5. Sales are consistently below previous levels beyond normal sakes fluctuations.

6. The business is consistently earning above previous levels beyond normal fluctuations.

Changes are effective according to the normal prospective budgeting cycle. The date of an income change is the date you agree a significant change occurred.  You must judge whether the person's report was timely to decide any over or underpayment.

Self employment income, by its very nature is somewhat uncertain.  Use of SEIRFs and/or IRS forms to determine monthly average income takes this into consideration.

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:

1. When six or more months of actual self-employment information is available, calculate monthly average self-employment income using at least six months of  prior  earnings beginning from the date self employment began or the date of the significant change.

2. When two or more full months of actual self-employment income information is available, use all of the actual income available to establish a monthly net income amount.  See example 5.

3. When at least one full month but less than two full months of actual self-employment income information is available, calculate a monthly average net income amount 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 6.

4. When there is less than one full month of actual income information available, calculate a monthly average net self-employment income 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 7.

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

4.3.3.6.1 Shelter Expense

If the FS group claims the total shelter costs as a business expense, do not allow any shelter deduction.  If a FS group claims a percentage of it's shelter costs as a business expense, the remaining percentage is a shelter deduction.

4.3.3.6.2 Farm and Self-Employment Expenses – Utilities

If the group deducts a percentage of its utility expenses on taxes, it is allowed the full SUA Standard Utility Allowance for the utility expenses. If the FS group claims the total utility costs as a business expense, do not allow a utility deduction.

4.3.3.6.3 Self-Employed Child Care Provider

A child care provider can deduct the cost of meals provided to the enrolled children from the income earned by the child care business. They may report the actual cost of the meals or they may use the federal standard deductions. Tier 1 applies to households with income at or below 185% of the Federal Poverty Level income guidelines; Tier 2 applies to all other households.

4.3.3.6.4 Unearned Rental Income

If someone receives rental income but does not actively manage the property 20 or more hours a week the income is unearned.  See Self-Employment 4.3.3.4 if he/she does manage the property for at least 20 hours a week.

1. When the owner is not an occupant, "net rent" is the total rent payment(s) received minus the total mortgage payment (principal and interest) and other verified operational costs such as (but not limited to) hazard insurance, mortgage insurance, and taxes.

2. When income is received from a multi-unit property and the owner lives in one of the units, compute "net rent" as follows:

3. 1. Add the total mortgage payment (principal and interest) and other verified operational costs such as (but not limited to) hazard insurance, mortgage insurance, and taxes common to the entire operation.

   2. Multiply the number of rental units by the total in step (a).

   3. Divide the result in (b) by the total number of units, to get the proportionate share.

   4. Add the proportionate share to any operating costs paid that are unique to the rental unit. This equals total expenses.

   5. Subtract total expenses from total rent payments to get net rent.

This page last updated in Release Number: 09-02

Release Date: 06/26/09

Effective Date: 06/26/09