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Counting Client Assets

C. Self-Employment


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:

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:

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:

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:

Examples of activities that are not self-employment:

More examples of various work situations:


Tile Co.









Control over services





Resp. success/failure





No W-4 form





No Workers Comp










Reasons for these decisions:

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.

Ministers/Religious Leaders


Taxicab Drivers

Newspaper Carriers


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.

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.


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:


4. Treatment of Self-Employment 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:

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:

Use the gross-net ratio method when an individual:

Project the partial year’s income for the whole year when an individual:

Use the individual’s estimate when an individual:

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).

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:

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:

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:

*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!

Example 1
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

Example 2
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. 



5. Verification

Independent contractor status must be verified. Acceptable verification includes:

Income, including money from self-employment, must be verified for all programs. Acceptable proof of self-employment income includes:

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:

Verify costs and deduct only verified costs from self-employment income as prescribed in 461-145-0920.

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