If you’re self-employed or considering venturing into the world of self-employment, it’s important to have a clear understanding of how it affects your income and eligibility for benefits. In this article, we’ll explore the concept of self-employment income and the various factors that come into play when determining its impact.
What is Self-Employment Income?
Self-employment income refers to the money earned by individuals who work for themselves. This can include freelance work, small business ownership, or any other form of independent work. It’s crucial to note that self-employed individuals are responsible for filing their own taxes and managing their business expenses.
Clarifying Information
When it comes to defining self-employment income, there are several factors worth considering. Child care providers, even those without a current license, are considered self-employed if they are subject to licensing requirements under chapter 74.15 RCW. Child day-care center operators and family home day-care providers fall into this category.
On the other hand, unlicensed child care providers are not classified as self-employed. Instead, they are considered employees of the child(ren)’s parents.
ALTSA (Aging and Long Term Support Administration) and DDA (Developmental Disabilities Administration) pay individual providers to offer personal care to their clients. In this scenario, individual providers have an employer-employee relationship with the ALTSA/DDA customer, ALTSA, and DDA, making them employees rather than self-employed.
People who own corporations, even if they are the sole investors, are not considered self-employed. Corporations are separate entities from their investors and employees. Income received from corporations, except for wages, is classified as unearned income.
Additionally, sporadic or periodic work without a business license or an established employer-employee relationship, commonly known as “odd jobs,” is considered self-employment. However, it’s important to verify odd job income thoroughly before accepting it as proof of income.
WorkFirst, a program for TANF/SFA clients, offers more information on how self-employment affects participation. For detailed insights, refer to the WorkFirst Handbook, Section 8.2.
Determining Self-Employment (SE) Income
To calculate self-employment income, you need to add together the total sales for all items sold by the business and all income generated from providing services.
The Standard Deduction
It’s essential to allow a standard deduction of 50% of the gross self-employment income as the cost of doing business. This standard deduction applies when:
- The person claims no self-employment expenses.
- The person’s self-employment expenses are below 50% of their gross self-employment income.
- The self-employment income is treated as unearned income.
It’s worth noting that individuals claiming self-employment expenses exceeding 50% of their gross self-employment income must provide proof of these expenses.
Transportation and Business Expenses
When it comes to transportation costs like gas, oil, registration fees, and auto loans, you have two options:
- Claim the actual transportation costs.
- Claim the state standard cost per mile. You can find the standard cost for a privately-owned vehicle in section 10.90.20 of the State Administrative and Accounting Manual.
In either case, it’s crucial to provide detailed mileage records or other documentation supporting the expenses.
Regarding business expenses, individuals may claim any business expense allowed by the Internal Revenue Service (IRS) except for depreciation. Examples of allowable business expenses include materials used to produce goods, maintenance of business property, payroll or wages, and business loans. However, personal expenses such as health insurance, personal utilities, and rent or mortgage of your home are not counted as business expenses.
To substantiate expenses, keep receipts for claimed expenses, itemized bank statements, or itemized bank card statements that correspond to the claimed expenses.
Worker Responsibilities
As a worker, you have certain responsibilities when it comes to self-employment income:
Calculating SE Income
Countable self-employment income is determined by taking all income received from sales or services and subtracting 50% of the total as a business expense. If the client presents proof of expenses greater than the 50% standard, use the verified expenses instead.
Budgeting SE Income
When someone earns self-employment income, it’s important to average the income over the period it covers. If the individual has proof of actual expenses above the 50% standard, average their allowable, verified expenses over the same period. Use the income averaging (CA) method to budget self-employment income for all benefit months, including the application month.
Change in SE Income
If the averaged income does not reflect what the person will receive due to a significant increase or decrease in business, anticipate the person’s self-employment income for each month. Also, average any capital gains they will receive over the year. If the person presents proof of actual expenses greater than the 50% standard, average or anticipate the expenses for the same period.
Calculate Each SE Business Separately
Each self-employment business is separate. Calculate the net self-employment income for each business separately and avoid using losses from one business to offset the profit of another business or period.
Farming or Fishing Income for Basic Food
When it comes to farming or fishing income for Basic Food, calculate the client’s total net farm or fishing self-employment income. If allowable expenses exceed the self-employment farming/fishing income, use this loss to reduce other sources of self-employment income. Additionally, use the remaining losses to reduce other sources of earned and unearned income to the assistance unit.
Boarder and Roomer Income
Count only payments made directly to the assistance unit for room and board as income. Foster care payments are excluded.
For individuals who receive income from renting out rooms, they can choose to use their entire shelter cost as a deduction or prorate it based on the rent, mortgage, taxes, and insurance. In such cases, a 50% standard deduction is applied to the roomer income received, or verified expenses directly related to renting rooms can be used.
Rental Property
Rental property owned by an individual but not used as their residence is subject to specific criteria. Managerial duties related to the property count towards the 20-hour weekly requirement for rental property to be treated as self-employment earned income. Gross earned or unearned income from renting the property can be budgeted after subtracting the standard self-employment deduction or verified expense payments.
FAQs
Q: What is self-employment income?
Self-employment income refers to the money earned by individuals who work for themselves. It can include freelance work, small business ownership, or any other form of independent work.
Q: How is self-employment income calculated?
To calculate self-employment income, you need to add together the total sales for all items sold by the business and all income generated from providing services.
Q: What expenses can be claimed as business expenses?
Allowable business expenses include materials used to produce goods, maintenance of business property, payroll or wages, business loans, and more. However, personal expenses such as health insurance, personal utilities, and rent or mortgage of your home are not counted as business expenses.
Conclusion
Understanding self-employment income is crucial for anyone working for themselves. By familiarizing yourself with the guidelines and regulations surrounding self-employment income, you can ensure that you are properly managing your finances and meeting your obligations. Remember to consult with professionals or refer to official resources for more specific information related to your situation.