821-3 UNIQUE SELF-EMPLOYMENT SITUATIONS

821-3 a. HOUSEHOLD MEMBERS AS EMPLOYEES

For some households, the self-employment enterprise involves more than one member. In some of these cases, household members may be paid wages, contract payments, or crew shares of the catch proceeds from the enterprise. In these situations, the payments are treated as follows:

1.  When a dependent child in the household receives payment of wages, contract payments, or crew shares for work in the self-employment enterprise, the amount paid to the child is not an allowable cost of doing business and the wages/shares do not count as income to the child. The amount paid to the child is not deducted from the gross self-employment income for the enterprise.

2.  When another adult in the household receives payment of wages, contract payments, or crew shares for work in the self-employment enterprise, the amount paid to the adult is an allowable cost of doing business when allowing actual deductions and the wages/shares do count as earned income to the adult receiving the payment. The amount paid to the adult is deducted from the gross self-employment income for the enterprise.

821-3 B. PARTNERSHIPS AND CORPORATIONS

Most self-employment enterprises are owned and operated by a single individual and all of the business income belongs to that individual. These are known as sole proprietorships and the individual’s countable income from these enterprises is determined by subtracting the total allowable costs of doing business from the total business receipts. Any salary or disbursement received by the individual from the business is not considered in the calculation of the gross self-employment income. These amounts are not allowable costs of doing business and are not deducted from the gross self-employment income for the enterprise.

Self-employment enterprises may also be formed as partnerships and corporations, which means that business income is shared.

Following are descriptions of these types of enterprises.

1.  Partnerships

Some enterprises involve a partnership, which means two or more individuals have agreed to manage the business together and share the business income. A written agreement is not required for a partnership to exist, but there may be one. An individual’s countable income from these enterprises is determined by subtracting the total allowable costs of doing business from the total business receipts, and dividing the amount by each partner’s share. The share of income from a partnership is countable even if it is not distributed. Any salary or disbursements received by the individual from the business is not considered in the calculation of the gross self-employment income. These amounts are not allowable costs of doing business and are not deducted from the gross self-employment income for the enterprise.

A partnership is required to file an income tax Form 1065 Partnership Return of Income including Schedule K-1 Partner’s Share of Income, which shows the income and expenses for the business. Unless the partnership is a new business, each partner should have a copy of these forms for reporting their share of the income.

Some partnerships involve a general partner, who is actively involved in operating the business, and a limited partner, who is an investor only, not an active participant. The general partner is considered self-employed and their portion of the income from the partnership counts as self-employment income. Any income received by the limited partner is treated as unearned income.

2.  Corporations

A business may be a corporation, which is a distinct legal entity with legal status separate from the individuals who form it. One type of corporation, the S-corporation, is considered a self-employment enterprise. It confers a special tax status to shareholders and operates like a partnership. Income from an S-corporation is taxed at the individual level and is treated like self-employment income from a partnership. The income is passed through to the shareholders based on each shareholder’s pro rata share.  

The S-corporation must file a Form 1120-S, Income Tax Return for an S-Corporation including Schedule K-1 Shareholder’s Share of Income. Unless the corporation is a new business, each shareholder should have a copy of these forms for reporting their share of the income.

Another type of corporation, the C-corporation, is not considered to be a self-employment enterprise. In the C-corporation, taxes are paid on business income by the corporation and not by the stockholders. If profits are distributed to the stockholders as dividends, the dividend is treated as unearned income to the stockholder.  

An individual may receive a salary from a C-corporation. The salary is counted as wages, not self-employment income, even if the individual is the primary stockholder in the corporation. Such wages may include in-kind compensation resulting from the business paying for personal and household bills. Stocks that individuals own in these corporations are counted as resources, even if they are not publicly traded on the stock market.