441-1        EARNED INCOME

Earned income includes the following types of payments:

441-1 A.   WAGES

Wages are what an individual receives (before any deductions) for working as someone else's employee.  Wages include salaries, commissions, bonuses, severance pay, and other special payments received because of employment.  Wages are counted in the month of receipt.

441-1 B.  FLEXIBLE HEALTH BENEFITS

If the employer pays flexible health benefits on behalf of the employee and the employee must use this money to purchase health insurance, only the amount that goes directly to the employee (benefit contribution excess) is counted when determining a household’s gross income. Any amount that the employer pays for mandatory health insurance benefits that the employee does not receive in addition to their regular pay is not counted as income to the employee.

441-1 C.   SICK LEAVE

Sick leave is a payment made in place of wages to or for an employee by an employer or a private third party because of sickness or an accident.  Sick leave is earned income if the individual receives it within six months after work stopped because of sickness or disability.

Sick leave received more than six months after work stopped are considered to be unearned income.

441-1 D.   GARNISHMENTS AGAINST EARNED INCOME

Wages withheld from earned income to satisfy a debt or legal obligation count as earned income.  Refer to section 443-1 for the treatment of garnishments against unearned income.

441-1 E.   NET EARNINGS FROM SELF-EMPLOYMENT

1. Definition of net self-employment income

Net self-employment income is the gross income from a trade or business less allowable deductions for that trade or business.  Allowable deductions are any deductions that are allowed by the Internal Revenue Service, including depreciation.  Net self-employment income also includes any profit or loss in a partnership.  Self-employment income also includes income received by crew members who are involved in a commercial fishing venture and are paid a share of the profits instead of wages.

2. Determining monthly net self-employment income

Net self-employment income, whether received monthly or less often than monthly, is counted on a taxable year basis.  A taxable year is the fiscal year used by the trade or business for IRS  purposes.   

Net self-employment income is calculated by using the previous tax year's gross self-employment income less allowable deductions to calculate the current tax year's monthly net self-employment income.  Allowable deductions can be determined by using a self-employment standard deduction of 50% or actual costs of doing business.  Once self-employment income or loss is determined for the entire tax year, the total of these earnings is divided equally by 12 to get the monthly net income.

If, based on subsequent evidence, the case worker decides that the estimate of net self-employment income is inappropriate; he or she will redetermine the net self-employment income for the current tax year.

Allowable costs of doing business are determined using the self-employment standard deduction unless the household chooses to use actual allowable expenses instead.  If actual expenses are used, the household must provide verification of the expenses.  The caseworker must give the household the choice of using the standard deduction or actual amount of expenses.

a. Using The Self-Employment Standard Deduction as Cost of Doing Business

The self-employment standard deduction is 50% of the estimated gross self-employment income.

Example:

Joe is self-employed as a carpenter.  His gross self-employment income is $2,000 per month.  The allowable costs of doing business is $1,000 ($2,000 x 50%).  Joe’s adjusted gross self-employment income is $1,000.

b. Using Actuals as Cost of Doing Business

If the household believes their self-employment expenses are higher than the 50% of their gross self-employment income, they may claim actual expenses as their cost of doing business.

Examples of allowable deductions:

• Materials used to produce goods

• Maintenance of business property

• Space rent

• Payroll or wages

• Chemicals, fertilizers and supplies used to produce goods or service

• Vehicle expenses for business purposes with documentation

• Business loans (interest and principal)

• Business phone

• Banking fees

Examples of deductions not allowed:

• Health insurance for the individual and their family

• Personal Utilities (no separate meter from home)

• Personal phone

• Rent or mortgage of our home

• Depreciation

• Vehicle expenses without documentation

• Guaranteed payments

c. Examples Clarifying the use of the Standard Expense Deduction

Below are examples of actions taken using the standard expense deduction.

Example:  Actual Expenses Total Less than the Standard Deduction

Maria applies for assistance and states she wants to claim actual expenses because she believes they are greater than 50% of her gross income. After receiving verification of her expenses, the caseworker determines her actual expenses are less than the standard deduction. The standard 50% deduction is allowed because it results in a higher benefit to the household. A clear explanation of why the standard deduction was used must be included in the notice to the client and this action documented in the CANOCasenote.  

Example:  Requested Verification Not Provided

Brian submitted an application on October 2.  He states he wants to claim actual expenses so the caseworker pends the application for verification of these expenses.  Brian did not provide proof of his expenses by the requested date.  Instead of denying the application, the caseworker works the case and allows the 50% standard deduction.  The notice to Brian must explain that the 50% standard deduction was used because he did not provide proof of his expenses by the requested date.

Example:  Lack of Business Expenses

Carolyn reports she is self-employed as a dog walker.  She has no expenses for her business.  Since she has no expenses, the self-employment standard deduction is not allowed.

3. Offsetting net loss

If there are net losses from self-employment, these losses are used to offset other earned income only.  Net losses from self-employment may not be deducted from unearned income.

Net losses from self-employment are calculated the same way as net self-employment income.  The net loss is averaged over the taxable year to get the net loss for each month.

Each month's net loss is then deducted only from other earned income in that month.

4. Verification

Written or verbal verification of self-employment income and expenses is required.  Verification may include records showing the history of income and expenses, or documentation for what is expected to be received and spent in the future.  Written verification is preferred and includes tax returns or business records.  If written verification of self-employment income and expenses is not readily available, verbal verification is acceptable. Verbal verification can be received from collateral contacts or the self-employed individual.  Verification of expenses, whether verbal or in writing, must contain enough information for the caseworker to determine allowable expenses.  If an expense is not identifiable, the expense is not allowed as a cost of doing business. If the information received is questionable, additional clarification and verification must be sought.  See Administrative Procedures Manual section 105-1 C provides policy on when information is considered questionable.

441-1 F.   EARNINGS FROM SHELTERED WORKSHOP OR WORK ACTIVITIES CENTER

Payments for services performed in a sheltered workshop or work activities center are what an individual receives for participating in a program designed to help him or her become self-supporting.  Payments for such services are earned income.