Self-employment is the act of engaging in a trade or business. A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. An individual does not have to make a profit to be in a trade or business as long as a profit motive exists. The individual may be a contractor, franchise holder, owner/operator, partner, etc. The individual must meet the following criteria to be considered self-employed:

1. They earn their income directly from their business or trade not from wages or salary from an employer.

2. They are responsible for the payment of their entire Social Security and Federal withholding taxes.

3. They do not have an employee/employer relationship with another individual, and the services performed cannot be controlled by an employer such as setting the job schedule, etc.; and,

4. They sometimes file self-employment tax forms (Schedule F, C, C-EZ, SE, Form 1065, etc.).

    

There are many types of self-employment structures. Eligibility staff should determine the structure based on how the income flows to and from the household People who buy and prepare food together. Spouses, parents, and children who live together are usually counted as the same household. member, rather than applying rules based on how the business is classified.

 

Unincorporated v. incorporated is the first important distinction. Again, even a business with a name ending in “Inc.” might not actually be incorporated, and some incorporated businesses might not use “Inc.” in their name. Eligibility staff determine the correct structure during the interview.

 

These guidelines apply when determining whether a business is self-employment:

 

The income and resources of an unincorporated business, whether a sole proprietorship or a partnership, are treated as self-employment income and resources of the owner(s).

 

Income earned as an employee of an incorporated business (typically a corporation) is treated as earned income Employee payments received in cash for wages, tips, commissions, or net profit from self-employment activities; the Gross Income is before deductions for personal or employment expenses or garnishments. Net Income is after deductions for personal or employment expenses or garnishments., and the value of stocks or dividends someone held as a shareholder is treated as a resource. Wages paid to corporate officers or employees are considered wages, but fees paid to corporate officers are considered self-employment earnings. Any corporate income reported on Schedule E as income received from a corporation must be annualized and used as countable unearned income even if the household did not receive the money. Any loss reported on Schedule E as loss received from a corporation is not used in any budget calculation.

 

These structures ARE self-employment and income and costs of producing income are entered as self- employment in the integrated eligibility system:

1. Sole Proprietorship: A self-employment business that is not incorporated and has one owner. The business income and liabilities are the responsibility of a single owner.

2. Partnership: A self-employment business set up with two or more partners. In addition to personal income tax forms, partnerships are also required to file 1065 and K-1 forms. The business income and liabilities are the responsibility of all the partners with the partnership defining shares of ownership and responsibility. Partnership income is determined in the same way as other self-employment.

3. Independent Contractor: An individual who pays their own employment taxes and does not have an employee/employer relationship is considered self-employed.

4. Sharecropper: If the sharecropper pays the costs of doing business and receives a portion of the net income in exchange for labor, the sharecropper is considered self-employed. The sharecropper is not considered self-employed if the sharecropper is not responsible for paying the costs of doing business.

5. Limited Liability Company: If an LLC has only one owner (sometimes called “member”), treat the LLC as a sole proprietor. Similarly, an LLC with multiple owners (members) is treated as a partnership.

Corporations

Corporations are legal entities and are responsible for their own debts and obligations.

 

An individual involved in an S corporation is considered self-employed. Individuals in all other corporation types are considered employees. If the person receives a salary from the corporation, they are considered an employee of the corporation.

 

An S corporation is a corporation with 100 shareholders or less that has the benefit of incorporation while being taxed as a partnership. This means that any profits earned by the corporation are not taxed at the corporate level, but rather at the level of the shareholders.

 

An S Corporation must file an annual information return (IRS Form1120 and 1120 K-1) to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Profits or losses are “passed through” to its shareholders.

 

Each shareholder includes his or her share of the partnership's income or loss on his or her tax return (IRS 1040).

 

Most income received by individuals from other incorporated businesses (non-S Corporations) are not self-employment income. Information about these corporations is only included in this section because some households report this as “self-employment” even though the type(s) of income they receive are not entered as self-employment. The following are types of income individuals/households might report receiving from a non-S Corp business:

1. If an individual is an employee of a corporation, income is wages and reported on the INDIVIDUAL’S 1040 form. This income is entered as earned income in the integrated eligibility system.

2. Fees paid to corporate officers are considered self-employment earnings – they are paid to corporate officers in exchange for work performed but taxes are not withheld. This income will usually be reported on the INDIVIDUAL’S 1040 form.

3. Any corporate income reported on the households’ 1040, Schedule E as income received from a corporation must be annualized and used as countable unearned income even if the household did not receive the money. Any loss reported on Schedule E of the 1040 as loss received from a corporation is not used in any budget calculation.

4. The value of stocks or dividends someone held as a shareholder is treated as a resource. Resources are not considered for CE and ECE households.

    

Self-employment income is considered earned income (entered in the integrated eligibility system as Self-Employment). The income is considered unearned income if any of the following occur:

1. Rental income and rental partnership income, and the individual is not actively participating in the business at least 20 hours per week (SNAP 501);

2. Contract for deed income (SNAP 501); or

3. In some instances, boarder income (SNAP 201).

    

Property essential to self-employment is excluded as a resource. Possible exclusion of some resources are:

1. Property Essential for Self-employment.

2. Income Producing Property Property that is in and of itself, producing income. For example, rental property is considered income-producing.; and,

3. Business Checking Accounts.

    

   Note: Money in a business checking account is a countable resource, but the self-employment funds prorated as income are excluded as a resource. The self-employment funds prorated as income retain their exclusion for the time they are prorated as income even if the funds are commingled Countable and exempt funds in a bank or other account which are combined..

    

The following are income exclusions:

1. Federal gasoline tax credit.

2. State gas tax.

3. Disaster payments (SNAP 501-1).

4. Crop insurance payments; and,

    

   Note: If a Federal Insurance Corporation Payment or a private insurance payment is paid in a lump sum, it is excluded as income and counted as a resource. If the payment is from a private insurance company and pays the household in installments, it is countable unearned income.

    

5. Patronage dividends paid to a self-employment enterprise. Patronage dividends, paid by cooperatives in cash, are countable unearned self-employment income (SNAP 501-1). If the patronage dividends are paid in stock, they are counted as a resource (SNAP 402-1)

    

Cash payments are counted as earned self-employment income. These include but are not limited to: Commodity Credit Corporation, acreage reduction and conservation payments, and other one-time or installment payments made to farmers for crop or other losses unrelated to a presidentially declared disaster. If the payment is due to a presidentially declared disaster, it is excluded as both income and a resource due to the Disaster Relief Act.

 

If canceled debt appears on any of the tax forms, it should not be counted. Before disregarding canceled debt claimed by a household, the household is required to provide a statement from the lending institution A facility which provides an individual with the majority of their meals (over 50% of three meals daily) as part of the facility’s normal services. verifying the canceled debt.

 

Capital gains are increases in the value of property between the time purchased and the time sold. Capital losses are decreases in the value of property between the time purchased and the time sold. Depreciation is considered when determining whether capital gains/losses occur for self-employment businesses. Capital gains/losses are usually determined at the time property is sold. Capital gains from the sale of self-employment property must be annualized as part of the net earnings from self- employment whether paid in a lump sum or in installments. Capital gains are included in prospectively budgeting self-employment income if capital gains are received or are expecting to be received prospectively for next year.

 

Capital losses are not used in any self-employment income determination. They are not considered business expenses The cost directly related to the production of income. or deductions.

 

Allowable expenses of producing self-employment income are deducted from the gross self- employment income. Most costs of doing business are allowable expenses and may be accepted as listed on the income tax forms or other documentation with few exceptions. Self-employment income for SNAP purposes is not computed the same as it is for Internal Revenue Service (IRS) purposes. The IRS forms may only be used for verification Third-party information or documentation used to establish the accuracy of statements. purposes. Expenses must be current, not due from a previous fiscal period, and are allowed when they are billed or otherwise become due.

Note: Some self-employed individuals do not claim all expenses on their Schedule C in order to qualify for Earned Income Tax Credit An amount of money which has been either deducted from the taxes owed or paid as a refund resulting from filing a Form 1040 or 1040A Tax Return for a calendar year.. The allowable expenses not shown on the Schedule C can be verified by the household and used in determining accurate self-employment earnings. Allowable costs of producing self-employment income include, but are not limited to:

1. Payments on the principal of the purchase price of income producing real estate and capital assets Tangible property used in the operation of a business such as buildings, machinery, fixtures, furniture, equipment, livestock, and chattel., equipment, machinery, and other durable goods even if the capital asset or durable good is not set up on a depreciation schedule. Capital assets and durable goods are objects used in business expected to last a long time such as farm machinery, equipment, swing sets, buildings, computers, cribs, VCRs, DVDs, furniture, highchairs, tricycles, vehicles, hair dryers, etc.

2. Interest paid to purchase income producing property, insurance premiums, and taxes paid on income producing property.

3. Labor paid to non-household members (individuals not included in the filing unit Required household members whose income and resources must be considered in eligibility determination. All members of the filing unit may not be included in the assistance unit and may not receive benefits.), materials, seeds, supplies, plants and fertilizer, interest payments on business loans and operating loans, business portion of home property or expense, repairs, etc.

    

   Note: Supplies include small tools, paper, pencils, scissors, oil, gas, envelopes, shampoo, hairbrushes, crayons/color books, etc. Supplies are generally described as objects usually used up or consumed in service.

    

   Note: Transportation costs for doing business may be allowed; however, the cost of commuting to the business from home is not allowed. Mileage expense is allowed at the Federal business expense rate. The current rate can be found by searching for the current year standard mileage rate on the Internal Revenue Service website.

    

Household's income from dependent A person who relies on another for support. care, such as a providing day care for children, elderly, or disabled A member of a household who meets one of the following criteria: 1.Eligible to receive SSI benefits, including presumptive SSI payments, or is eligible as a 1619B under SSI criteria. 2.Is determined disabled by SSA and in receipt of disability payments. 3.Is a recipient of disability related medical assistance under Medicaid (Title XIX of the Social Security Act). Eligibility to receive these benefits must be based on disability or blindness criteria, which is at least as stringent as SSI regulations. 4.Is in receipt of disability retirement benefits from a government agency because of a disability considered permanent under Social Security disability criteria. 5.Is a veteran with a service connected or non-service connected disability. 6.Is a veteran considered by the VA in need of regular aid and attendance or permanently house bound under Title 38 of the United States Code. 7.Is a surviving spouse of a veteran and considered by the VA in need of regular aid and attendance or permanently house bound or a surviving child of a veteran and considered by the VA as permanently incapable of self-support under Title 38 of the United States Code. 8.Is a surviving spouse or surviving child of a veteran and considered by the VA entitled to compensation for a service-connected death or pension benefits for a non-service-connected death under Title 38 of the United States Code and has a disability considered permanent. Entitled refers to a surviving spouse and surviving children who are receiving the compensation or pension benefits stated or have been approved for such payments but are not yet receiving them. 9.Is in receipt of a Railroad Retirement disability annuity and has been determined to qualify for Medicare. 10.Is in receipt of SSI optional or mandatory supplementation. (North Dakota does not have SSI optional or mandatory supplementation. However, someone moving to North Dakota may have received this benefit from another state.) 11. Is in receipt of disability-based State general assistance benefits, provided that the eligibility to receive any of these benefits is based upon disability or blindness criteria established by the state they receive the benefit from, which are at least as stringent as those used under SSI regulations. (North Dakota does not have disability-based State general assistance benefits. However, someone moving to North Dakota may have received this benefit from another state.) individuals may elect one of the following methods to determine the cost of meals provided to the individuals:

1. Actual documented meals.

2. A standard per day amount based on estimated meal costs; or

3. Current reimbursement amounts in the Child and Adult Care Food Program.

    

Non-allowable expenses must be added back into the self-employment income if income tax forms are used or not allowed as a deduction in the monthly calculation of self-employment income. Expenses not allowable include:

1. Net losses from previous periods.

2. Personal federal, state, and local income taxes; money set aside for retirement purposes; and other work-related expenses such as transportation to and from work.

3. Depreciation is added back into income when used as a deduction from self-employment income.

4. Any amount that exceeds the payment a household receives from a border for lodging and meals.

5. Social Security taxes.

6. Meal and entertainment costs for the household.

7. Charitable contributions.

8. Clothing not specific to any one job; and,

9. Penalties and fines.

    

When a household's home is on property connected to the property used for farming or another self- employment business enterprise, the eligibility staff member must determine if the shelter costs (e.g., rent or mortgage) and the self-employment costs can be separately identified. If necessary, the eligibility staff member is required to determine a breakdown of business expenses from personal home shelter expenses by using:

1. Household's calculation of breakdown.

2. Income tax form breakdown; OR NOTE: If the household presents self-employment tax records (Schedule F, C, etc.); do not question the shelter deductions (utilities, insurance, interest, etc.) included on those documents.

3. Verifications submitted by the household such as: tax verifications (Ag/Nag); loan papers indicating costs of farm land, buildings, equipment, etc. versus costs for house/garage/personal equipment; insurance policy breakdowns of cost of premiums for farm and personal home costs.

If utilities are measured and billed separately, the household is entitled to the appropriate mandatory utility allowance for its residence, and to the separately billed utility costs as a self-employment cost of doing business.

 

If utility costs cannot be separately identified, the household is entitled to the appropriate mandatory utility allowance for its residence and does not receive a self-employment expense.

Note: In most instances a separate amount of utilities should be identifiable. A means of identifying costs separately is to subtract the appropriate mandatory utility allowance for the residence from the total utility costs. The remainder is allowed as a cost of doing business.

 

If the household uses part of the house such as a separate room or a separate apartment solely for the self-employment business and there is a central meter, the household is entitled to the appropriate mandatory utility allowance for its residence and no deduction of utilities for the cost of doing business.

 

When the self-employment business is conducted in the household's home, and the household wants to claim a portion of its shelter expenses as a business deduction, the eligibility staff member must separate business expenses from personal shelter expenses. The portion of the home used on an exclusive basis for a business is allowed as a business expense. However, the household is not required to use the business portion as a business deduction. The household is entitled to the mandatory utility allowance for its residence and no deduction of utilities for the cost of doing business.

 

Note: If the expense is not used as a self-employment expense, it can be used as a shelter expense.

 

A substantial amount of time must be spent doing business in the home (not occasionally) to use home shelter costs as a business expense. If the in-home business is NOT related to dependent care, the business must also meet one of the following two conditions.

1. An allowance for space regularly used for inventory storage may be allowed if the space is identifiable and only used for self-employment; or,

2. The portion of the home must be used on an exclusive basis. The space allocated to the business must be used only for the business.

The eligibility staff member determines the usage of home, with the agreement of the household, for business purposes by:

• The household's calculation of use.

• Form 8829 percentage (only if the business and personal home costs are separated on this form); or,

• The ratio of business square footage to square footage of the entire home.

The business share of home expenses is allowed as a deduction from the self-employment income as long as it is not also used as a shelter deduction. The household is not required to deduct the business share even if it can be separated from other expenses.

 

Most self-employment budgets are annualized (SNAP 601-1). Self-employment income intended to support the household on an annual basis is annualized. Temporary or seasonal self-employment income or when a business is not in operation for an entire year is income not representing annual support and is averaged over the period it is intended to cover.

 

The following self-employment incomes are always annualized regardless of whether the income is intended to support the household on an annual basis:

 

1. Farm Income; and,

2. Self-employment income received less often than monthly (e.g., income received quarterly, bi-monthly, annually, etc.)

When self-employment income is annualized, the expenses must also be annualized. Expenses are counted when paid not when billed.

 

If the self-employment income is annualized, income tax forms (when available) should be used to determine income. The most current tax forms are used unless there is a substantial change Information that is different from what is currently used to determine eligibility and/or benefits. in business or income. Income must be annualized whether tax forms reflect current income and whether or not they are available. Other documentation must be used to determine annualized income. Tax forms may not always be available and cannot be required of SNAP applicants. If tax forms aren’t used as verifications, eligibility staff need to request other types of verifications and determine what type of income is being received based on the definitions of earned, unearned, and self-employment income.

 

Other documentation examples are profit/loss statements prepared by the business, business account bank statements, or HCS 542 Self-Employment Record.

 

'Substantial increase or decrease in business' may include:

• Termination or starting a new self-employment enterprise such as changing from a grain and cattle operation to a cattle operation;

• Significant increase or reduction of operation such as adding or reducing a quarter of crop land or significantly increasing or decreasing a dairy or beef operation; and,

• Natural disasters like hail or drought. Normal year-to-year fluctuating market prices are not considered to be substantial increases or decreases.

   

If a new business has income, it is averaged using the income and expenses from the months the business has been in operation if the household anticipates the same for the next prospectively budgeted period. When the business has reached 12 months either at the Simplified Report or recertification, the income must be annualized if the household anticipates the same for the next prospectively budgeted period. If there is no reliable history of income or expenses to average, the eligibility staff member must negotiate a projection of the anticipated monthly income and expenses with the household.

 

Depending on how active an individual is in managing rental property, the income is considered earned self-employment or unearned income. The cost of doing business is deducted from the gross income to determine net countable income The total of earned and unearned income not excluded by policy, expected to be received by the household for the budget/benefit month. for benefit calculation regardless of whether it is earned self- employment or unearned income.

 

A property owner/landlord is allowed the full amount of shelter costs (such as mortgage, taxes, insurance) that the household is required to pay to live there. The gross income minus the cost of doing business received from rental property, if a household member is not involved in management of the property 20 hours/week or more, is countable unearned income to the owner/landlord's household.

 

Note: No portion of expenses can be used as both a shelter cost and a self-employment cost.

 

Separate households residing in the same residence are allowed the actual amount of rent they are billed as a shelter deduction. When households reside together and neither household owns the residence, a rent payment made from one household to another is exempt as pass-through shelter payment up to the full amount of rent billed. If the payment is more than the full rent charged for the residence, the excess payment is unearned income to the household receiving the payment.

 

A roomer An individual to whom a household furnishes lodging, but no meals, for compensation. is an individual living with a household and paying for lodging but not meals. Refer to 'Earned vs. Unearned' in this section of the manual to determine whether the contribution is considered earned or unearned income. Payments received from roomers are usually considered unearned contributions to the household.

 

Do not allow expenses against the contributions unless the roomer situation meets the definition of earned income and the case is treated as self-employment.

 

Treat commercial boarding houses (businesses established as commercial enterprises offering meals and lodging for compensation with the intent to make a profit) according to the general provisions of regular self-employment rather than using the information provided below.

 

Boarders are individuals that a household furnishes lodging and meals. Foster children are not boarders An individual to whom a household furnishes meals and/or lodging for compensation. This compensation must be at a monthly rate at least equal to the SNAP allotment for a one-person household. If the household furnishes two meals a day, the compensation rate must equal two-thirds of a one-person allotment. Boarders are ineligible to participate in the Supplemental Nutrition Assistance Program (SNAP) separate from the household providing the board. Residents of a commercial boarding house are not eligible for SNAP benefits.. When a boarding situation is not related to a commercial boarding house, the income from boarders includes all direct payments to the household including contributions for meals and shelter. In determining the amount of countable income received from the boarder, exclude the household’s costs of providing room and meals to the boarder (allowable expenses).

 

Households may choose one of the following methods to determine the cost of doing business (expenses):

1. The cost of the SNAP's thrifty food plan Diet required to feed a family in accordance with guidelines established by the U.S. Department of Agriculture. The cost of that diet is the basis for uniform allotments for all households. The thrifty food plan is based on 100% of the federal poverty level. for the number of boarders in the household.

2. If the actual costs exceed the appropriate thrifty food plan, the actual documented allowable expenses of providing room and meals. If actual costs are used, only separate and identifiable costs of providing room and meals to the boarders are excluded; or,

3. A flat amount of $100 per boarder.

Expenses may not exceed the payment received by the household from the boarder. Boarder income is always earned self-employment income. Boarders may not claim separate household status to receive SNAP benefits on their own case.

 

Losses from corporations are not used to offset any other income. Farm losses are allowed only if the farm grossed or anticipated grossing at least $1,000 during the year. Farm losses may offset any other household income in the following order:

1. Other self-employment gains; and,

2. Any remainder from any other household income. If there are other wages, the 20% deduction is calculated on the gross wage prior to the farm loss being deducted.

    

If bankruptcy is filed, the projected monthly self-employment income continues to be used unless the household states the business will have substantial change in income and expenses. The bankruptcy could verify this statement. If the household reports the self-employment enterprise has ended, the monthly self-employment income is no longer prospectively budgeted.

 

The self-employment income continues to count even if diverted to a bank or other source. If the self- employment income goes to a trustee The person(s) given authority, by a written contract, to manage money set up in a trust. and the household receives a living allowance, the entire self- employment income continues to be budgeted and no deduction is allowed for the trustee or conservator's fees.

 

Note: The living allowance is not counted as income because the self-employment income is already being counted.

 

If the equipment/land is repossessed or the title is given to the lender, the property is the legal property of the lender and sale of the property is not considered income. However, if the title remains in the household’s name and the lender arranges the sale, the property belongs to the household and the amount is counted as income if received as periodic payments or as a resource if received in a lump sum. If the lender forgives or writes off a loan, the amount forgiven or written off is not considered income.