Counting Client Assets
1. Identifying Self-Employment
Note: When a client has established a corporation, they cannot be considered self-employed. The corporation is considered a separate entity and functions as an employer. This means that anyone working for their own corporation is an employee and their income is counted as wages rather than self-employment income. In other words, they do not get to deduct costs from gross wages or receipts. See Counting Client Assets policy on corporations.
There is a list of criteria in the rule to assist with identifying self-employment, and clients must meet one of the following:
- Is considered an independent contractor by the business that hires or employs him/her.
- Meets at least four of the following:
- Is engaged in an enterprise for the purpose of producing income.
- Is responsible for obtaining or providing a service or product by retaining control over the means and manner of providing the work or services offered.
- Is responsible for the success and failure of the business and has authority to hire and fire employees.
- Is not required to complete a W4 or have federal income tax or FICA payments withheld from a pay check
- Is not covered under an employer’s liability or workers’ compensation insurance.
Self-employment basically means an individual works for himself or herself in a business, and working in that business constitutes their livelihood, job, profession, or regular occupation. In other words, it’s not a hobby or something they do once in awhile to make some money (like selling eggs, fruit, or raw milk by the side of the road). It’s something they do on a regular basis which usually involves business costs or expenses as well as filing taxes as self-employed (though these are not necessarily all required).
There are some additional factors you can consider when determining if someone is self-employed:
- Is the individual making a good-faith effort to make a profit or earn income?
- Is there continuity of operations, repetition of transactions, or regularity of activity?
- Does the individual consider the activity his/her regular occupation?
- Are they holding out to others as being engaged in the selling or products or services?
Regardless of how closely they resemble self-employment, home care workers paid by APD are not self-employed.
There are certain activities that may not necessarily have all the traditional characteristics of self-employment but which the Department considers self-employment by rule. These include:
- Child care providers paid by DPU. For daycare providers, the gross self-employment income includes payments from DPU, clients, Head Start contracts and USDA meal reimbursements.
- Adult foster home providers paid by APD
- Realty agents
- Clients who sell plasma, redeem beverage containers, pick mushrooms for sale, organize and hold regular or frequent yard sales, or similar enterprises are considered to be self-employed. These activities are considered self-employment because of the time, effort, and work involved (i.e. they are “earning” the money).
Q: Why do we consider redeeming bottles and cans as self-employment? That doesn’t sound like a business or trade.
A: The reason that gathering cans and bottles and picking mushrooms can be considered self-employment is because there’s no property involved and there is no employer, so there’s no other category left for the money earned but self-employment. Holding regular yard sales does involve property, but the items for sale cannot be income-producing property because they don’t produce income, they are converted to income. Also, valuing the specific items for sale would be impractical and isn’t facilitated in rule (e.g. there’s no rule for toasters or skateboards or baby clothes). These types of items would normally fall under personal property, property, or heirlooms and excluded anyway. They resemble work-related inventory more than anything else, and because of the amount of work involved in organizing and holding yard sales, it makes much more sense to consider it a type of self-employment.
In most cases, determining whether an individual earns money from an employer or through their own business is relatively simple. For example, sales associates working the cash registers at Target are undoubtedly employees of the corporation. Conversely, a person who works as a gardener, advertises his work, sets his own schedule and prices, and is solely responsible for all business decisions is clearly self-employed.
However, many working individuals have a balance of responsibilities and freedoms that fall between these two extremes. The following examples walk through several case situations, using the tests cited above to answer the question: is this person self-employed?
Examples of self-employment:
- Bob fixes cars out of his home garage. He named his business Bob’s Car Repair and advertises in the Penny Saver and through word-of-mouth. He has expenses for parts and supplies and a cell phone that he uses just for the business. He files self-employment taxes.
- Peggy buys items at yard sales or Wal-Mart and re-sells them on eBay. She also sells items for others in exchange for half the final sale price (she handles all the photographing, on-line posting, packaging, auction monitoring, and shipping). She doesn’t have a business name, but she has expenses such as buying inventory and shipping supplies. She does this at least 4 – 6 days per week for several hours a day and makes decent money (especially around Christmas). She doesn’t file her taxes but keeps records of what she buys and sells.
- Donna owns 6 horses and gives riding lessons on the weekends. She will also take small groups on trail rides during the summer months. She gets her business through word of mouth and from a homemade sign she stuck in front of her driveway facing the road. She charges students $25 per lesson and considers the hay, oats, tack, and vet bills business expenses. She doesn’t file taxes, but she keeps records of how much she gets in fees and has receipts for costs.
Examples of activities that are not self-employment:
- Toby gave up on farming due to the drought so his shiny green John Deere tractor just sits on his property. Once in awhile his neighbors (who aren’t so easily discouraged) borrow the tractor when theirs is down for whatever reason. He charges them $50 per day, and they have to agree to return it with a full tank. He only does this a couple of times a year and there aren’t any costs associated with it (if they break it, they fix it). This tractor would be considered income-producing property and the $50 would be counted as unearned income since he doesn’t spend 20 hours a week “managing the property”.
- Jillian loves chickens and has about 10 of them running around her property, several of which are egg-laying hens. She and her husband can’t possibly eat all the eggs they produce, so when she’s home, she places a sign near her driveway facing the road advertising fresh eggs for sale. She doesn’t consider herself in business, she just hates to see the eggs go to waste. The chickens could conceivably be considered income-producing property, but because the chickens are a source of food for her family, their value is excluded (see OAR 461-145-0010 Animals). The time and effort it takes to put the sign out on the road and hand eggs to customers is minimal, so the money she gets is considered unearned income, but she gets to exclude the cost of the cartons she buys.
- Bill inherited Grandma’s house but has no intention of moving into it (he likes his own house just fine). Grandma wanted to keep it in the family, so until his own son is old enough to own it, he decides to rent it out for $1,000 per month. The house would be considered income-producing property. If he spends at least 20 hours per week “managing the property”, the $1,000 could be treated as earned income with costs excluded. Remember, owning the house isn’t considered self-employment in itself, we will just count the income as such (i.e. we will exclude costs and then apply the earned income deductions). Bill isn’t in the business of buying and renting houses, he just happens to have a house he can rent out. If he doesn’t meet the 20-hour-per-week requirement, the $1,000 would be counted as unearned income and the equity value of the house would either be countable or subject to a $6,000 exclusion (see OAR 461-145-0252).
- Tim bought a fishing boat, rents a slip at the Newport marina, bought a commercial fishing license, and takes people out tuna fishing. His brother is an attorney and advises him to incorporate his business (Tim’s Tuna Tours, Inc.) and helps him with all the paperwork. Tim is an employee of Tim’s Tuna Tours, Inc. and not self-employed. What he pays himself is considered wages and any dividends or profits he keeps are counted as unearned income. He cannot exclude expenses from his gross receipts, but any income that’s retained by the business is not treated as countable income for Tim. The boat, the fishing license, and any other equipment owned by the corporation is excluded (see Corporations and Business Entities).
More examples of various work situations:
- A married couple has incorporated their tile installation business. They select the stock, set the process, hire their own employees, and determine their own business methods. They take a salary from their business, they did complete a W4 for the corporation and are covered under the corporation’s worker compensation insurance.
- A glassblower makes beads, ornaments and other decorative items on demand for a local shop owner. The owner sets the prices and puts in orders according to current need. The glassblower purchases his own supplies. He does business only with one shop. He does not have tax withholding through the business and is not covered by their employee worker comp/liability policy because they consider him an independent contractor.
- A woman works for a tax accounting business every January through April. She travels among three of the business's offices as scheduled, and has a desk and computer set up at each location for her use. She takes as many clients as she can each day, and is paid commission of 50% of what her clients are charged. The business has her fill out a W-4 and covers her under their liability policy. She tells us she is self-employed because she is not contractually obligated to work only for them.
- An exotic dancer pays weekly rental for her "station" in the club. She is paid no salary, but keeps all her tips. The club provides a DJ and expects her to work a minimum of 20 hours per week. She is responsible for providing her own outfits.
Control over services
No W-4 form
No Workers Comp
Reasons for these decisions:
- Tile company. The company is incorporated, so there is no need to go through the 5-criteria test.
- Glassblower. The glassblower is considered an independent contractor, so there is no need to go through the 5-criteria test.
- Accountant. She is covered by the business liability policy, files a W-4, and is directed by the company. She is not self-employed.
- Exotic dancer. The dancer is paid nothing by the club she works in; she merely pays a fee to be allowed to work there. The club is not her employer; they provide no income, no Workers Comp, no UC, no benefits. She is free to perform in multiple clubs. Although she has to work a minimum number of hours, she sets her own schedule.
Below are some examples of occupations that are usually challenging. For each of these, an example of a self-employed client vs. an employee is given, again using the test of meeting at least four out of the five criteria.
- Minister A is selected by the local Methodist church to fill their vacancy. The church provides housing, a living stipend and insurance for the minister and his family, but no salary. The church reports his compensation and covers him with the liability policy. The church reports his compensation and covers him with the liability policy. The minister takes his other living expenses out of the love offerings (membership donations/pledges) made at the end of each service and for officiating at other ceremonies (e.g., weddings and funerals) as required.
- Decision: He is not self-employed. He meets none of the tests.
- Minister B has started his own small church. It is not affiliated with or authorized by any existing religious organization. He has total control over how he presents his theology and over the content of his communication with parishioners. He is supported by donations, plus income from yard sales, bake sales, etc.
- Decision: He is self-employed. The church and the person are one. He meets all five tests for self-employment.
- Hairstylist A rents out a station in a local salon. Her station rental pays for the chair, her share of electricity, use of the salon towels, sinks, etc. She purchases all her own hair products, sets her own hours and prices, decides which services she will offer. She is not on the salon's payroll.
- Decision: Because of the costs incurred, the lack of employee status through taxes and her freedom to make decisions, she is self-employed.
- Hairstylist B works at a chain salon. She is hired for a hourly rate, plus tips. Her hours, services offered and the cost of those services are set by the company. She files a W-4 and is covered by liability.
- Decision: She is not self-employed.
- Cab driver A uses a car that the cab company provides. The company pays the insurance on the vehicle and he pays for gas and maintenance. His gross income is a percentage of his fares and is based on a sliding scale. He also receives tips, but they are separate from the fare percentage. He has chosen to work nights, he determines which fares he will accept and the geographic area he will serve. He uses a Schedule C for his taxes.
- Decision: He is self-employed.
- Cab driver B works for a medi-cab company. She rents her cab and pays gas and maintenance. Her pay is a percentage of the fares, plus tips. She can only pick up fares given to her by dispatch. She does not control her territory or hours.
- Decision: She is not self-employed.
- Newspaper carrier A picks up copies of the Oregonian each morning at 3:00. He puts each copy into a plastic bag before he delivers them to the subscribers. When the subscriber's monthly fee is due, the carrier encloses the bill with the newspaper. The subscribers will mail him the payments which average about $2,400 a month. He sends them to the Oregonian. He pays for gas, insurance and maintenance of his vehicle, cost of the papers, plastic bags and rubber bands. The Oregonian considers him an independent contractor but will reimburse him for gas. He uses a Schedule C for his taxes.
- Decision: He is self-employed. His gross income is $2400.00.
- Newspaper carrier B works for the Healthy Food Weekly (HFW). He drives a car that the company provides. The company pays the insurance on the vehicle and reimburses him for gas. He delivers the weekly paper to a paper stand every Monday so that they can be available to readers each Tuesday morning. He is paid on a weekly basis on the number of deliveries he makes each week. HFW pays him $.75 for each delivery to the paper stand and his average weekly pay is $100. Federal and state income taxes are being deducted from his pay check. HFW also offers a health insurance policy for him at a reduced rate since he is not a full-time employee.
- Decision: He is not self-employed. His income will be counted as wages.
2. Identifying Self-Employment Income
Self-employment income is income earned from one's own business, trade, or profession, rather than earning a salary or wages from an employer. The amount of countable self-employment income can be reduced by the costs of doing business. After costs are excluded, the rest is subject to the regular earned income deductions.
If a client has more than one self-employment business, the income from each business is determined separately.
- Note: Sometimes other types of earned income can be treated as self-employment income, even if the client doesn’t meet the self-employment test, such as certain income from income-producing property.
Q: What is the difference between income from income-producing property and self-employment income?
A: There is often no difference in how the income itself is treated. For example, income from income-producing property can be treated as self-employment income if there is work involved, namely 20 hours or more per week (meaning costs are excluded and earned income deductions apply). If there’s no work involved, then it’s only similar in that self-employment costs can be excluded but the income is unearned and no earned income deductions apply.
Q: Why wouldn’t someone who is managing their own property 20 hours a week or more be considered self-employed?
A: The difference could be as basic as whether or not the individual considers themselves in business. Someone who owns rental properties is different from someone who just rents out the house he inherited from Grandma. When there is property or resources to evaluate, the presence of a business or trade becomes much more important because property used in self-employment is treated much differently than income-producing property. So sometimes you may have to ask more questions about what exactly the individual does and how often; and sometimes you just have to make a judgement call.
- Note: Self-employment begins when the person is working to earn income, as opposed to preparing the groundwork to get their business started.
3. Self-Employment; Costs That Are Excluded to Determine Countable Income
All the costs currently allowed by the IRS are now allowed for OSIPM and QMB/SMB/SMF, which basically means the expenses listed on the IRS Schedule C. If the client has filed a schedule C, then it’s easy to determine the allowable costs. But if the client doesn’t or hasn’t filed taxes, he/she can claim similar expenses for anything related to the business. If the expenses are for both personal and business, for example a personal car or truck that’s also used for delivering a product, then the client has to break out what portion is attributed to business use. The following expenses are potentially allowed:
- Car and truck expenses.
- Commissions and fees.
- Contract labor.
- Employee benefit programs.
- Insurance, other than health.
- Mortgage interest.
- Legal and professional services.
- Office expenses.
- Pension and profit-sharing plans.
- Rent or lease of vehicles, machinery, equipment, and other business property.
- Repairs and maintenance.
- Taxes and licenses.
- Travel, meals, and entertainment.
- Wages, less employment credits.
- Meals and snacks provided by family day care providers for children in their care except the provider's own children. The actual cost of the meals is used if the provider is able to document the cost. If the provider is unable to document the actual cost, the USDA meal reimbursement rates are used.
- Materials purchased for resale, such as cosmetic products.
- For newspaper carriers, the cost of newspapers, bags, and rubber bands.
4. Treatment of Self-Employment Income
- Gross self-employment income (including micro enterprise) is the gross sales or receipts (before costs).
- Self-employment income is counted as earned income.
All allowable costs are excluded from gross self-employment receipts or income (after general exclusions) to determine countable income, earned income deductions are taken to determine adjusted income, and then the adjusted income is compared to the adjusted income limit.
How to Estimate Countable Self-Employment Income for the Current Taxable Year
Countable income is determined on a taxable year basis (January – December). There are four different methods of estimating self-employment income for the current taxable year:
- Using the prior year’s income to anticipate income for the current year
- Applying last year’s gross-to-net ratio to the current year
- Projecting a partial year’s net income to the remainder of the year
- Using the individual’s best estimate for the current year
The method you will use depends on how long the individual has been in business and whether changes are anticipated.
Use the prior year’s income when an individual:
- Has been conducting the same trade or business for several years;
- Has self-employment income that has been fairly constant from year-to-year; and
- Anticipates no change or gives satisfactory explanation of why current income would be substantially lower than past income
Use the gross-net ratio method when an individual:
- Is engaged in the same business only in the preceding taxable year; and
- Anticipates no change or gives no satisfactory explanation of why current income would be substantially different than the past
Project the partial year’s income for the whole year when an individual:
- Is engaged in a new business
Use the individual’s estimate when an individual:
- Is engaged in a new business and records are not yet available; or
- Is engaged in a business that has been going on for some time but no records were kept; or
- Has been in business two or more years and:
- Alleges that current year’s income will vary from past years; and
- Gives a satisfactory explanation for the variation
Example 1 – Using the prior year’s income
Megan is a self-employed dog groomer. She applies for OSIPM in May 2015 and provides her 2014 tax forms. The net profit on her Schedule C is $13,874 and she does not anticipate a huge change for 2015. Her anticipated monthly countable self-employment income for 2015 would be $1,156.16 ($13,874/12).
Example 2 – Applying last year’s gross-net ratio to the current year
Sean has been in business as a self-employed video game tester for a little over a year and a half. He applies for QMB in September of 2015 and brings in business records for 2014 and proof of what he’s earned so far in 2015 ($9,800 in gross receipts from January - August). In 2014 he earned $12,000 gross and $9,600 net after costs and states that he doesn’t anticipate a huge change in 2015. His profit-loss ratio is 80% ($9,600 net/$12,000 gross = .80 profit-loss ratio). He has earned $9,800 in the first 8 months, which averages out to $1,225 per month ($9,800/8 months = $1,225). We project that monthly amount for the rest of the year, so total anticipated gross income for 2015 is $14,700 ($1,225 x 12 = $14,700). Applying the 80% profit-loss ratio, we determine that Sean’s anticipated countable income for 2015 is $11,760 ($14,700 x .80 = $11,760). His monthly countable self-employment income would be $980 ($11,760/12 = $980).
- He may have verified costs for 2015; however, we want to use a whole year’s worth in order to calculate the profit-loss ratio as it is a more accurate picture of the entire year.
- Even if net earnings information is available for the prior year, it cannot be used if the individual has been in business less than two years.
Example 3 –Projecting a partial year’s income for the rest of the year
Let’s say that Sean (our video game tester) has only been in business since April 2015. It’s now September and he is applying for medical benefits. He doesn’t have a full taxable year from which we can calculate and apply a profit-loss ratio, so we’ll just calculate his profit (or net) so far (April – Aug) and project it for the rest of the taxable year. He brings in proof of $4,800 gross receipts and $1,000 in costs. He has $3,800 in profit or net income from April– August, which is $760 per month ($3,800 / 5 = $760). We will use that as his monthly countable income for the rest of the year.
Example 4 – Using the individual’s estimate
Albert has a business in which he takes couples on romantic, overnight trail rides in the wilderness. He’s been in business several years and has done very well for himself; however, wildfires have destroyed the areas he uses for his rides. He applies for medical benefits in August 2015 and is able to provide business records showing he has earned over $5,000 per month up until July, when the fires started. He is now giving riding lessons, but estimates he will only make about $1,200 per month after costs for the foreseeable future. He has provided a satisfactory explanation of why his income will be much lower than the past, so we can use his estimate of $1,200 until his redetermination (or until he reports a change) at which time his income will be reevaluated.
How to determine adjusted self-employment income (except EPD)
Please see the EPD worker guide in the OSIPM manual for information on how to determine adjusted income in the Employed Persons with Disabilities.
Adjusted income is calculated by applying the earned income deductions from countable income. The deductions are:
- One standard deduction of $20 (see note below).
- One standard earned income deduction of:
- $65 for disabled or aged clients OR
- $85 for blind clients.
- Allow an additional earned income deduction for documented impairment-related work expenses or blind work expenses.
- One half of the remaining earned income.
- Deductions under a Plan for Self-Support for blind and disabled clients.
Note: Subtract the $20 standard deduction from unearned income. If the financial group has no unearned income or less than $20 in unearned income, subtract the remainder from any earned income.
Using the examples from above, adjusted income would be calculated as follows:
Example 1 – Megan the Dog Groomer
Megan has $700 in SSDI in addition to her $1,156.16 countable self-employment income. Her adjusted income is calculated as follows:
- $700 SSDI - $20 standard deduction = $680 adjusted unearned income
- $1,156.16 - $65 standard earned income deduction for disabled = $1,091.16 – one half (or x .5)= $545.58 adjusted earned income
- $680 + $545.58 = $1,225.58 total adjusted income
- Megan is eligible for SMF*
Example 2 – Sean the Game Tester
Sean has $800 in SSDI in addition to his $980 in countable self-employment income. His adjusted income is calculated as follows:
- $900 SSDI - $20 standard deduction = $880 adjusted unearned income
- $980 - $65 standard earned income deduction for disabled = $915 – one half (or x .5) = $457.50 adjusted earned income
- $880 + $457.50 = $1,337.50 total adjusted income
- Sean is ineligible for all Medicare Savings Programs*
*Don’t forget about EPD! Remember that if Sean is eligible for EPD, he would be coded as SBI.
Applying self-employment losses to other earned income
If you are using income and cost records from the previous or current year, and you have verified that the individual operated or is operating at a net loss, the loss is calculated the same way as the net profit or income to determine the monthly amount. If there is no other source of earned income in the financial group, you would use $0 as the total earned income (you do not get to reduce the unearned income). But if there is another source of earned income (including other self-employment income), the loss can be excluded from the gross income. If it’s self-employment, then it would be excluded before costs; for wages, it’s excluded from the gross pay.
Important: Losses have to be documented and verified, they cannot be anticipated!
Faith earns $650 a month working part-time at a local cafe, but she also has a small business on the side baking custom cakes. Another cake lady moved in her neighborhood, so her cake business hasn’t been doing so well lately. Last year she showed a net loss of $1,000 and doesn’t expect things to change until she can move to the other side of town. Her net loss for the prior year is divided by 12, and then that amount is excluded from her monthly income from working at the café.
$1,000 / 12 = $83.33
$650 gross wages - $83.33 self-employment losses = $566.67 countable earned income
Benjamin and his wife Jessica are both self-employed and are applying for a Medicare Savings Program. Benjamin is making money doing payroll for several small businesses, but Jessica’s organic produce business is operating at a loss because her neighbor uses a lot of pesticides on his orchard, they have been blowing over into her garden, and she’s struggling to stay certified. Last year, Benjamin earned $3,000 in gross receipts, had $1,000 in costs, and Jessica showed a net loss of $800. Her losses can be excluded from Benjamin’s gross receipts before his costs are excluded.
$3,000 gross income for Benjamin - $800 loss for Jessica - $1,000 costs = $1,200 / 12 months - $100 countable monthly self-employment income for the financial group.
Independent contractor status must be verified. Acceptable verification includes:
- A signed contract specifying this.
- A 1099 (Miscellaneous Income) form issued by the business.
- A narrated conversation with the employer.
Income, including money from self-employment, must be verified for all programs. Acceptable proof of self-employment income includes:
- Income tax return - state and federal:
- Schedule C – Line entitled “Net profit or loss”
- Schedule SE: Net earnings – Section A line 4, or Section B line 4.C
- Schedule C-EZ: Line entitled “Net Profit”
- Schedule F: Line entitled “Net Profit or Loss”
- Check stubs or copies of contracts specifying payment schedule
- Self-employment bookkeeping records
- Copies of personal checking and savings account bank statements
- Copies of business account bank statements
- Proof of salary, stipend, allowance, donations, or gifts received
- Copy of any contract or work agreement
- Statement from organization or business explaining access rights to an organization’s or business’ bank accounts
The DHS 859B (Self-Employment Income) may be used to help collect information about costs related to producing self-employment income. The form cannot be accepted as verification of either income or costs for self-employed clients.
Clients with marginal employment – such as homeless people – sometimes report very limited earnings from collecting and redeeming beverage containers, selling plasma, returning airport luggage carts for the deposit money, etc. In many cases, requiring them to provide written verification of self-employment earnings would be an unreasonable barrier to eligibility. To get an acceptable estimate of their income, ask the client to write and sign a statement about their typical monthly earnings. If the person is not sure about how much money they earn, ask:
- What the money is spent on. For example, if the client says they make enough to buy cigarettes for the month, how much do they smoke?
- How many days a week they typically pick up cans (or how many times a month they sell their plasma). If the person says he picks up 3 or 4 bags of cans a week, about how many cans fit in one bag?
- How much walking around money they get. Most of the time, how much money do you have in your pocket?
- Note: If the client is claiming marginal income, but substantial living expenses, income verification must be provided.
Verify costs and deduct only verified costs from self-employment income as prescribed in 461-145-0920.
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