Earned Income From Self-Employment 400-19-55-15-25

(Revised 6/1/10 ML #3218)

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(N.D.A.C.75-02-01.2-50(3))

 

To arrive at the most equitable method for determining the amount of a household's countable earned income from self-employment, it is necessary to consider the type of business activity, expense, and income. Based on this, utilize one of the applicable calculations identified below.

Note: Items such as interest, depreciation, personal business and entertainment expenses, personal transportation, purchase of capital equipment, and payments on the principle of loans for capital assets or durable goods are not business expenses.

 

  1. Self-employed individuals whose business does not require the purchase of goods for resale. An example of this type of business is a person who provides child care services in their own home, a Qualified Service Provider (QSP) who is not an employee of an agency, etc. Such income may be accounted for on a monthly basis, or the income tax return from the previous year may be used if it reflects a full year’s operation.  When the tax return is used, 1/12th of the annual gross income is monthly earnings. Twenty-five (25%) percent of the gross monthly earnings shall be disregarded to offset the cost of producing the income and will cover such things as additional food, utilities, supplies, etc. The remaining 75% of gross monthly earnings is the figure to which the appropriate earned income disregards are applied to arrive at monthly net income.
  2. Self-employed individuals whose business requires the purchase of goods for resale. Examples of this type of business enterprise include Avon, Tupperware, Amway, Mary Kay Cosmetics, etc. Such income may be accounted for on a monthly basis, or the income tax return from the previous year may be used if it reflects a full year’s operation. In these instances, subtract the cost of the goods from the gross monthly or annual receipts to arrive at the adjusted gross income. When the tax return is used, 1/12th of the annual adjusted gross income is monthly earnings. Twenty-five (25%) percent of the adjusted gross income shall be disregarded to offset the costs of producing the income and will cover such things as sample kits, demonstrations, supplies, etc. Seventy-five (75%) percent of the adjusted gross income will be the monthly income to which the appropriate earned income disregards are applied to arrive at monthly net income.
  3. Self-employment income from a room-and-board arrangement. The first $100 per month received from each individual will be disregarded to defray the associated expenses. The remaining amount(s) will be the monthly income to which the appropriate earned income disregards are applied to arrive at the monthly net income.
  4. Self-employed individuals in a service business requiring purchase of goods or parts for repair or replacement. These include mechanics, TV repairmen, beauty salons, restaurants, etc. Such income may be accounted for on a monthly basis, or the income tax return from the previous year may be used if it reflects a full year’s operation. In this instance, subtract the cost of goods or parts from the gross monthly or annual receipts to arrive at the adjusted gross income. When the tax return is used, 1/12th of the annual adjusted gross income is monthly earnings. Seventy-five (75%) percent of the adjusted gross monthly income shall be disregarded to offset the cost of expenses such as heat, lights, phone, rent, or building, etc.  Twenty-five (25%) percent of the adjusted gross income will be the monthly income to which the appropriate earned income disregards are applied to arrive at monthly net income.
  5. Income of self-employed individuals received other than monthly. In such cases, income must be established on the basis of the past year's total income to arrive at the amount of income to be anticipated for the current year and reduced to monthly increments. This is the preferred method of considering income arising from self-employment such as farming or other business enterprises.  It is first necessary to establish the amount of total annual gross income. For purposes of TANF, annual net income is normally defined as one-fourth of the annual gross income shown on Schedule F, Part I, of U.S. Form 1040, "Individual Income Tax Return," if the business is farming, or annual gross income shown on Schedule C, Part I, of Form 1040, if the business is other than farming.
  6. CRP payments and cooperative distributions, which are considered unearned income, should be deducted from the total income figure on Form 1040, Schedule F, and prorated over a 12-month period.
  7. After the appropriate percentage disregard is applied to self-employment, income, Capital gains and losses are considered.

Income resulting from the sale of capital items or ordinary gains may be offset by a loss from the sale of capital items. The net result, but not less than zero, must be added to the other annual net income to arrive at total net annual income.

 

The monthly income is the figure to which the appropriate earned income disregards are applied to arrive at monthly net income.

Note: Capital gains and losses are always counted when considering actual income for a prior period. When using the prior income to estimate income for a prospective period, however, use capital gains and losses that are reasonably expected to occur in the prospective period.

 

Capital gains, short term and long term, and ordinary gains are found on the federal tax form as follows:

  1. Short term capital gains-Schedule D, Part I;
  2. Long term capital gains-Schedule D, Part II; and
  3. Ordinary gains-Form 1040-Supplemental gains or losses.
  1. The pro-rata method of determining and deducting monthly income is not practical in instances where the business was only recently established and the federal income tax return for the previous year does not reflect a full year's operation. Similarly, termination or a severe change of the business, such as a decrease or increase in the size of the operation, or an uninsured loss, or other situations which may require special considerations. In these situations, the self-employed individual can report income and cost of goods on a monthly basis, or the TANF Eligibility Worker and self-employed individual can, using the best information available, estimate the affect of the change on the annual income. If the business is a type in which income is received other than monthly, the income must be prorated over a 12-month period.

No income from any other source may be used to offset a self-employment loss.

  1. When determining income based on income tax forms attention should be paid to other sources of income listed on page one of Form 1040. Other types of income that may be reflected on page one of Form 1040 are interest income, dividend income, rental income, royalty income, etc. Interest, dividend, rental and royalty income are to be considered separately from the self-employment income.