Earned Income 510-05-85-20

(Revised 7/1/14 ML #3406)

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(N.D.A.C. Section 75-02-02.1-38)

Earned income is income which is currently received as wages, salaries, commissions, or profits from activities in which an individual or family is engaged through either employment or self-employment. There must be an appreciable amount of personal involvement and effort, on the part of the individual or family, for income to be considered "earned." Earned income will be applied in the month in which it is normally received.

1. If earnings from more than one month are received in a lump sum payment, the payment must be divided by the number of months in which the income was earned, and the resulting monthly amounts are attributed to each of the months with respect to which the earnings were received.

Similarly, earnings paid under a contract must be prorated over the period the contract covers.

Example: A teacher receives paychecks in August through May, however the contract covers 12 months and the contracted salary is $30,000.  The annual salary is prorated over 12 months for $2500 per month.  The paystubs show that from the August through May monthly checks, $350 per month is withheld.  To annualize the withholdings, take the 10 months of withholdings, (10 X $350 = $3500) and divide by 12 ($3500/12) = $291.67 to establish the monthly allowable withholdings.

Occasionally, migrants may receive an advance lump sum payment to reimburse or cover travel expenses. Such reimbursement is normally received prior to their arrival and is not considered earned income. An advance for wages, however, is counted as earned income and is prorated over the months it is intended to cover.  

Example: Don is a migrant worker who received a reimbursement from his grower for traveling to North Dakota to work. This reimbursement is disregarded from income as a reimbursement.  Don’s grower also gave him a wage advance of $900 in May for the months of June, July and August. The wage advance would be prorated over the months of June, July, and August as earned income.  

Bonuses, profit sharing, and other similar payments are not considered lump sum earnings or wages received other than monthly, but an extra payment of earned income based on a productive period, and are considered income in the month received.

2. Income only becomes an asset in the month following the month it is counted as income.

For Example: A recipient has countable self employment income of $12,000 for the year. The income is prorated at $1000 per month. In January, none of the $12,000 is considered an asset. In February, if any portion of the $1000 of January income is retained, it becomes an asset, but the remaining $11,000 does not. In March, only $10,000 is not an asset, and so on.

3. Types of earned income include:

1. Wages, salaries, commissions, bonuses, severance pay, or profit received as a result of holding a job or being self-employed.

Bonuses, profit sharing, and other similar payments are not considered lump sum earnings or wages received other than monthly, but an extra payment of earned income based on a productive period, and are considered income in the month received.

2. Earnings from on-the-job training as provided by Title II Young and Adult Programs;
3. Wages received as the result of participation in the Mainstream and Experience Works (formerly Green Thumb) Programs, both funded by the U.S. Department of Labor, or the Senior Community Service Employment Program (SCSEP);
4. Earnings of recipients employed by school as teachers' aides, etc., under Title I of the Elementary and Secondary Education Act;
5. Wages received from sheltered workshop employment;
6. Sick leave pay or loss of time private insurance paid for the loss of employment due to illness (but does not include public or private disability payments);
7. Compensation for jury duty;
8. Wages from the Economic Opportunity Act programs under Title I and Title II;
9. Tips. Recipient's statement as to average amount of tips received each month is adequate if consistent with place and kind of employment and number of hours worked;
10. Income in-kind in lieu of wages;
11. Wages received for on-the-job training placement under the Workforce Investment Act (WIA);
12. Stipends and the "living allowance" portion of earnings from AmeriCorps (not to be confused with AmeriCorps*VISTA); and
13. The Family Subsistence Supplemental Allowance (FSSA) paid to members of the Armed Services.

4. Calculating "self-employment" income:

1. Self-employed individuals whose business does not require the purchase of goods for resale. Examples of this type of business include persons who provide childcare services in their own home, or qualified service providers (QSP's) (who are not employees of a home health agency) who provide HCBS. For example, those QSP's who receive payments from the Department. 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, one-twelfth of the annual gross income is monthly earnings. The first 25% 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 deductions are applied to arrive at monthly net income.

QSP rates change each July, and per policy at 510-05-85-05(1), all income which is available to a unit must be considered. The annual increase in the rate paid is a known increase, so must be taken into consideration when determining income. The daily rate the QSP is paid should be used.  It is important also to note that income tax returns filed by QSPs who are providing services to a family member may only include the income they are paid by the Department, and not the client share (recipient liability) amount that is applied toward the QSP bill (because they did not collect the client share from their family member). The client share due the QSP is income they are paid in addition to that from the Department. The available income to the QSP must include the higher rate and any client share amounts due them. The self-employment percentage disregard and earned income deductions can then be allowed from this total amount. As a result, all available income will be correctly counted. Following is an example:

Example:  Mr. Brown receives HCBS services. Mrs. Brown is the QSP and she is entitled to receive the current rate of $36.51 per day. Prior to July she was paid only $26.84 per day. Instead of using last year’s tax return, the current rate should be used beginning in July. $36.51 x 365 divided by 12 provides a monthly estimate of earnings, to which the 25% self-employment disregard can be applied. This amount can be used until there is a rate change, at which time a new calculation is needed.

New rate increase information can be obtained from the QSP, or from the HCBS case manager, as rates will vary by case, depending on the type and amount of services received.

2. Self-employed persons 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 (if cost of goods sold includes any labor or wage amounts, those amounts must be deducted from the cost of goods sold amount before subtracting the cost of goods sold from the gross receipts) from the gross monthly or annual receipts to arrive at the adjusted gross income. When the tax return is used, one twelfth of the annual adjusted gross income is monthly earnings. The first 25% 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 percent of the adjusted gross income will be the monthly income to which the appropriate earned income deductions 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 deductions are applied to arrive at the monthly net income.
4. Self-employed persons 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 (if cost of goods sold includes any labor or wage amounts, those amounts must be deducted from the cost of goods sold amount before subtracting the cost of goods sold from the gross receipts) from the gross monthly or annual receipts to arrive at the adjusted gross income. When the tax return is used, one-twelfth of the annual adjusted gross income is monthly earnings. The first 75% of the adjusted gross monthly income shall be disregarded to offset the cost of expenses such as heat, lights, phone, rent, or building, etc. The remaining 25% of the adjusted gross income will be the monthly income to which the appropriate earned income deductions 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 Medicaid, annual net income is normally defined as one-fourth of the annual gross income shown on Schedule F, Part I, of IRS 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 twelve month period.
7. Disaster agricultural payments and other disaster payments made to a self-employment entity due to a disaster must be deducted from the gross income on the tax schedules as this is disregarded income.
8. 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 following example demonstrates this process:

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

Capital and other 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 other gains are found on the federal tax form as follows:

1. Capital gains - Schedule D; and
2. Other gains - form 4797.

9. The pro-rata method of determining and deducting monthly income is not practical in instances where the business has been recently established, because the business has been terminated or subject to a severe change, such as a decrease or increase in the size of the operation, or an uninsured loss.  In these situations, net income from self-employment is an amount determined by the county agency to represent the best estimate of monthly net income from self-employment.  A self-employed individual may be required to provide, on a monthly basis, the best information available on income and cost of goods. The county agency and self-employed individual may use the best information available to estimate the effect 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 twelve-month period.

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

10. 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.
11. Once self-employment income is calculated, it is divided by the number of individuals listed on the self-employment schedules.