759-6          INCOME FROM SELF-EMPLOYMENT

Self-employment endeavors vary depending upon the nature of each self-employment enterprise.  Exact instructions fitting every situation are impossible to provide.  Therefore, caseworkers must use PPJPrudent Person Judgement in determining all factors related to budgeting self-employment income and must carefully and thoroughly document relevant information.

Relevant information includes the type of verification used to determine adjusted gross self-employment income and allowable costs of doing business (noting expenses which are not allowed), the budgeting method used, and for seasonal self-employment income, the period of self-employment.

759-6 A.     DEFINITIONS

1. Definition of Self-Employment 

Self-employment is the process of actively earning income directly from one's own business, trade, or profession.  Persons are considered self-employed if they:

• Are responsible for obtaining or providing a service or product; and
• Earn income directly from their own business; and
• Are not required to have federal income tax and FICAFederal Insurance Contributions Act payments withheld from their earnings; and
• Are not required to complete an IRSInternal Revenue Service W4 form for an employer; and
• Are not covered by worker's compensation.

Self-employment may include income from a trade or business, hobby, commercial boarding house, rental property, or other income producing property.  Examples of self-employed individuals include:

2. Self-Employed Fisherpersons

Owners of fishing boats and individuals holding fishing permits are considered self-employed fisherpersons if they are actively involved in the fishing operation.

Individuals who lease their boat or fishing permit and are not actively involved in the fishing operation are not considered self-employed fisherpersons. In these cases, the income obtained from the lease of the boat or permit is considered rental property income.

3. Rental Income

Rental income is treated as self-employment income when the owner of real or personal property performs the managerial responsibilities, earning the income by his or her own efforts.   When rental income is treated as self-employment income, allowable costs of doing business are deducted from gross rent receipts to determine adjusted gross self-employment income.

Rental income is treated as unearned income when the owner of real or personal property does not perform the managerial responsibilities for the rental property. When rental income is treated as unearned income, the countable unearned income is the amount of rent paid by the renter less any property management fees incurred.

Note:  

Real property that produces rental income must be evaluated as a resource first (ATAPAlaska Temporary Assistance Program MSManual Section 752-3).  If a family is resource eligible, rental income counts as explained in this section.

Rental income received in a lump sum shall be averaged over the months of intended use and counted as monthly income.

Income received from the lease of a limited entry fishing permit is considered unearned rental income.                                                                               

4. Monthly Self-Employment Income:

Monthly self-employment income is self-employment income that is, or could be, earned on a monthly basis during any or all months throughout the year.  Examples of individuals with monthly self-employment income include:

Follow the procedures in TATemporary Assistance MSManual Section 759-6 E for budgeting monthly self-employment income.

5. Seasonal Self-Employment Income

Seasonal self-employment income is self-employment income that is earned during a specified season or during part of a year.  Examples of individuals with seasonal self-employment income include:

Follow the procedures in ATAPAlaska Temporary Assistance Program MSManual Section 759-6 E for budgeting seasonal self-employment income.

6. Gross Self-Employment Income

Gross self-employment income means the total amount of money the trade or business produces.  Gross self-employment income is computed by totaling the gross business receipts (income) for the business enterprise.  Allowable costs of doing business are not deducted in determining gross self-employment income.

7. Adjusted Gross Self-Employment Income

Adjusted gross self-employment income means the gross self-employment income less allowable costs of doing business. Allowable costs of doing business can be determined by using the self-employment standard deduction or actual costs of doing business. To determine adjusted gross self-employment income, subtract the total amount of allowable costs of doing business from the gross self-employment income. The amount of self-employment earnings countable to a self-employed individual is the adjusted gross self-employment income.

8. Self-Employment Costs of Doing Business

Self-employment costs of doing business can be determined by allowing the self-employment standard deduction from gross income or actual expenses if the household believes their costs were more than 50% of their gross earnings. Self-employment costs of doing business are those declared non-personal expenses that are directly related to producing the self-employment income, and which are not specifically prohibited.  If an expense is determined to be an allowable cost of doing business, the expense is deducted in computing adjusted gross income whether it is paid or not.

Refer to ATAPAlaska Temporary Assistance Program MSManual Section 759-6 B below for more information on costs of doing business.

9. Durable Goods

Durable goods are items of value purchased for use in the self-employment enterprise that are normally used for more than one year or season and can usually be sold once the self-employment business ends. Durable goods include items such as:

10. Period of Self-Employment

The period of self-employment is the number of months in which a seasonally self-employed individual is actively engaged in producing, or attempting to produce, self-employment income. The period of self-employment does not include months in which maintenance or preparation of tools or equipment is the only self-employment activity performed.

759-6 B.     COSTS OF DOING BUSINESS

Allowable costs of doing business are determined using either the self-employment standard deduction or actual allowable expenses.  The caseworker must give the household the choice of using actual expenses if they believe their expenses exceed the amount allowed using the standard deduction.  If the household chooses to use actual expenses, they must provide verification of the expenses.

See section c below for examples of when to use the standard deduction and when to use actuals.

1. 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:  Calculating the Standard Expense Deduction

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.

2. Using Actuals as Cost of Doing Business

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

a. Expenses Allowed as Costs of Doing Business

Allowable costs of doing business include but are not limited to:

• Labor including gross wages for an employee, employee life and health insurance premiums, and mandatory employer contributions to employee benefit plans such as Unemployment Insurance and Social Security.
• Payments made to a self-employed helper, such as costs for contracted work, shares paid to a self-employed crew member, etc.
• Stock and inventory, including the actual amount plus tax of a product purchased for resale.
• Raw materials.
• Interest paid on loans to purchase durable goods.
• Insurance premiums, taxes, assessments, and utilities for income-producing property.

If the family's home is used as the place of business, a percentage of the mortgage interest, insurance, taxes, and utilities can be allowed as costs of doing business. To be allowed these costs, the self-employed individual must provide a description of the portion of the home used in the business, proof of the gross amount of the expenses, and a reasonable method for estimating the proportion of expenses attributed to the business (such as percentage of use, amounts claimed under IRSInternal Revenue Service rules, etc.)

The portion of the costs allowed as business expenses is not allowed as shelter costs in the TATemporary Assistance budget.

• Service, maintenance, and repair of business property and equipment.
• Rental of business property and equipment.
• Business supplies.
• Advertisement.
• Licenses and permit fees.
• Legal or professional fees, such as fees paid to lawyers and accountants.
• Purchase of non-durable items.
• Vehicle expenses
• Business travel, including costs incurred by self-employed individuals to travel outside their community to work, sell goods or services, purchase business equipment, and seek repair of business equipment. Transportation to and from work is not an allowable cost of doing business.

If a vehicle is used more than 50% of the time for self-employment reasons, allowable business-related expenses include gas, oil, registration and licensing fees, insurance, interest (but not principal payments) on vehicle loans, necessary service and repairs, and replacement of worn items (such as tires). Do not allow vehicle depreciation as a business expense.

If a vehicle is used less than 50% of the time for self-employment, allow the business mileage rate permitted by the IRSInternal Revenue Service.  Refer to https://www.irs.gov/credits-deductions/individuals/standard-mileage-rates-at-a-glance for current standard mileage rates.

    The IRSInternal Revenue Service business mileage rate is the only deductible expense allowed for a vehicle used less than 50% of the time for self-employment. To receive the mileage allowance, the self-employed individual must provide reasonable documentation of their business-related mileage.

•    Year-round boat mortgage 
•    Utility costs to maintain the boat year-round
•    Crew food and crew transportation, if paid by the self-employed individual

If the cost of food for crew members is not identifiable, the allowable cost is determined by prorating the total cost of food by the number of individuals on the boat.  The result is the prorated cost for each individual. If food expense is deducted from the amount paid to a crew member, the amount deducted is not allowed as a cost of doing business.

A food deduction is not allowed for the self-employed individual or for any member of the TATemporary Assistance economic unit.

b. Expenses Not Allowed as Costs of Doing Business

Expenses not allowed as costs of doing business are:

• The purchase price of durable goods.
• Payments on the principle of loans to purchase durable goods.
• Depreciation.
• Net losses from previous periods.
• Federal, state, and local taxes.
• Monies set aside for retirement purposes, except when paid for an employee.
• Personal costs for the self-employed individual, such as life and medical insurance and entertainment.
• Normal living expenses for the self-employed individual and his or her family, such as shelter or food.
• Personal work-related expenses, such as transportation to and from work and child or dependent care.  Transportation to and from work is included in the earned income deduction. Child and dependent care costs are allowed under the dependent care deduction in the TATemporary Assistance budget.

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 should be allowed because it results in a higher benefit to the family.  A clear explanation of why the standard deduction was used should be included in the notice to the client and this action documented in the CANOCase Notes.

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 should 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.

Example:  Determining Shelter Deductions When Shelter Expenses Are Claimed as a Self-Employment Expense

Mary applies for assistance and states she earns income from babysitting in her home.  The caseworker asks her if she claims any portion of her shelter expenses as a business expense with the IRSInternal Revenue Service. She states she does claim part of her mortgage and utilities as a business expense.  If she does not want to use the self-employment standard deduction, the caseworker should determine the amount of the expense she claims with the IRSInternal Revenue Service and allow it as a self-employment expense.  The remainder of her shelter expenses would be applied toward her shelter deduction.

Mary pays rent of $700 and electricity of $100 per month. She claims 20% as a self-employment expense.  The caseworker allows $560 of her rent and $80 of her electricity as a shelter expense, regardless of whether she chooses the self-employment standard or actuals when determining her countable self-employment income.

759-6 C.     VERIFICATION OF SELF-EMPLOYMENT INCOME AND EXPENSES

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.   Administrative Procedures Manual section 105-1 C provides policy on when information is considered questionable.

The method by which an individual’s net self-employment income was determined should be fully documented in the case file so that anyone reviewing the information will be able to determine how the amount was calculated.

Following are possible means of verification:

1. Self-employment Business Records

The self-employed persons written business records are the best and preferred method of verification.  Self-employment has no employer verification.  The self-employed person is the employer, and thus, business records maintained by the individual are acceptable verification.  

The self-employed person has primary responsibility to tabulate the income and expense types and amounts in an organized manner.  Acceptable business records range from informal personal records, such as a listing of receipts for business income and costs of doing business, to professionally prepared documents such as financial statements.  If written business records are not maintained or readily available, such as during a telephone interview, the statement of the self-employed person or collateral contact may be used.

The verification used must include sufficient information to determine when income was received and costs incurred and if the costs are allowable. The caseworker should document the information including detail of the type of expense, the amount of the expense and whether it is allowable.  Individual receipts for income and costs may be requested if additional information is needed or any of the items listed are questionable.

2. Tax Forms

Income tax documents provide acceptable documentation of self-employment income and expenses.  Such forms include:  Form 1040 Individual Income Tax Return, Schedule C Profit or Loss from Business, Schedule E Supplemental Income and Loss, Schedule F Profit or Loss from Farming, Form 1065 Partnership Return of Income including Schedule K-1 Partners Share of Income, and Form 1120-S, Income Tax Return for an S-Corporation including Schedule K-1 Shareholders Share of Income.    

Some costs of doing business allowed by the IRSInternal Revenue Service, such as depreciation, are not allowable costs of doing business under ATAPAlaska Temporary Assistance Program policy.  When using tax forms as verification, review the claimed expenses, noting which are allowed under program rules.  

3. Third Party Contacts

A written or verbal statement from a third party verifying the self-employed persons income or expenses is acceptable.  This may include verification from city or borough offices, taxicab stand owners, parent companies, fish processors/canneries, and Department of Fish and Game.

759-6 D.     ESTIMATING SELF-EMPLOYMENT INCOME

Self-employment income is estimated the same way as other income, using the policy in ATAPAlaska Temporary Assistance Program MSManual Section 756-1.  Working with the self-employed person, the caseworker reviews the self-employment earnings history and considers what is likely to change in the future. The estimate is made using information about the source of income, the amount of income expected to be received from that source, and when and how often the income will be received.  A correct estimate of self-employment income and expenses must be reasonable, based on all available information, and include contact with the self-employed individual.

Self-employment income is different from other earned income in several ways:

• Self-employed individuals are the primary source of information used in the estimate of income.  An estimate of self-employment income cannot be made without talking to the self-employed person.
• The estimate of income includes consideration of the individual's history of self-employment earnings, but only as a starting point. The estimate of future self-employment income must include documentation of what changes are expected to occur and how these changes have been factored into the estimate.
• Changes in expenses, as well as changes in income, are considered. For example, an increase in the price of gasoline may affect both monthly self-employment (taxi drivers) and seasonal self-employment (fisherperson).
• The types of changes and the number of factors that may affect self-employment income is greater than for regular employment situations.
• The caseworker will need to develop familiarity with a variety of local conditions that impact different types of self-employment. For example, the expected volume of tourism in a community might influence the estimate of income for taxi drivers, tour operators, and charter boat businesses.
• Particularly for seasonal self-employment such as fishing, information from other sources, such as the Department of Fish & Game and processors, is necessary to understand what is likely to occur. The predicted strength of a run, the expected prices that will be paid, and the length and timing of openings all affect the estimate of income. Information about when the self-employment income will be available determines the budgeting of the income.  

When all the necessary information has been gathered, subtract the expected allowable costs of doing business from the expected income for the period of self-employment being estimated. The result is the individual's adjusted gross self-employment income.

Note:

If the self-employment enterprise is new, use the estimate provided by the self-employed person. In some cases they may not anticipate receiving any countable income during the start-up period.  Caseworkers should review the situation with the self-employed individual at the time it is anticipated the enterprise will begin producing income.

759-6 E.     BUDGETING SELF-EMPLOYMENT INCOME

After an estimate has been made of a persons expected adjusted gross self-employment income, the income is budgeted based on whether it is or can be received every month (monthly self-employment income) or is only received during certain times of the year (seasonal self-employment income).

1. Budgeting Monthly Self-Employment Income

Count the estimated monthly adjusted gross self-employment income in each month the income is expected to be received.

2. Budgeting Seasonal Self-employment Income

To budget seasonal self-employment income, divide each individual's estimated adjusted gross seasonal self-employment income by the number of months in the period of self-employment.  The result is the person's prorated self-employment income. This prorated amount is counted for the same number of months as the period of self-employment.  

If the income is available during the season, this prorated amount counts in each month of the season.

If the income is not available during the season, no seasonal self-employment income is counted during that time.

• For recipient households, the prorated self-employment income counts beginning with the month following receipt of the income and notice of adverse action.
• For applicant households, the prorated self-employment income counts beginning with the month the income is received.

Determine the season’s income by subtracting the self-employment standard deduction or actual allowable costs of doing business from the end-of-season payment. Divide this by the number of months in the self-employment period and count the prorated amount for the appropriate months.

Example:  

Ms. Jones, an ongoing ATAPAlaska Temporary Assistance Program recipient is a self-employed fisherperson. She fishes for salmon in June, July and part of August.  She cannot receive draws or advances on her fishing earnings and will not be paid for the fish until the end of the season. No fishing income is counted for June, July or August.

On August 15, Ms. Jones reports she received $6,500 from the processor.  She provides verification of this income. Ms. Jones’ allowable cost of doing business using the standard deduction is $3,250 ($6,500 x 50%).  Because Ms. Jones expenses were $4,000 this season, she tells her caseworker to use her actual expenses.  She provides verification of her expenses and the caseworker allows actual deductions on the case.  The family’s countable self-employment income is $2,500 ($6,500 - $4,000). On August 23, the caseworker subtracts the allowable expenses from the gross fishing income to arrive at an adjusted gross income of $2,500.  The caseworker divides this income by three months (the length of the period of self-employment), and $833 is counted in each month - October, November and December - following notice of adverse action.

If an individual earns seasonal self-employment income during more than one season, the income is counted based on when the income for each season is paid.

Example:

Mr. Harper, an ongoing ATAPAlaska Temporary Assistance Program recipient, is a self-employed fisherperson.  He fishes for herring in February, halibut in June, and salmon in July, August, and September. He is paid during the period of self-employment for his herring and halibut seasons but does not receive income for salmon fishing until the end of that season.  Mr. Harper's self-employment income is counted during the months of February (herring), June (halibut), and for three months following receipt of his salmon income and notice of adverse action.

3. Fish Price Adjustments

Some seasonally self-employed fisherpersons receive retroactive price adjustment payments after the season is over. These payments are counted only if:

• The month the payment will be received is known; and
• The amount of the payment can be reasonably anticipated.

These payments are not included in the amount of anticipated income that is prorated over the self-employment period. Count these payments in the month they are expected to be received. See the Estimating Income policy in ATAPAlaska Temporary Assistance Program MSManual Section 756-1.

4. Annualization Determination

If a family's total estimated yearly income from all seasonal self-employment is more than the self-employment annualization standard for the family size, the income is considered sufficient to meet the family's needs for the entire calendar year. In these cases, the seasonal self-employment income is annualized (prorated and counted over 12 months).  

If the household's total estimated seasonal self-employment income is equal to or less than their annualization standard, each individual's seasonal self-employment income is budgeted using the policy in this section.

• The annualization determination includes the total adjusted gross seasonal self-employment income that all seasonally self-employed family members expect to receive during the current calendar year.
• Do not include any monthly self-employment income or other income in this total.
• All family members are included in the family size to determine the appropriate annualization standard from the chart below.

                                       Self-Employment Annualization Standards

                      (Effective April 2024)

If the family's seasonal self-employment income is annualized, the family is almost always ineligible for ATAPAlaska Temporary Assistance Program.  They may reapply at any time and have the annualization of their seasonal self-employment income reevaluated.

759-6 F.      BUDGETING SELF-EMPLOYMENT INCOME CHANGES

Changes in self-employment income are made when a report of change indicates that there is a substantial change in self-employment income (such as fisheries closure or additional openings, breakdown or loss of equipment, or prolonged illness).

Adjustments to self-employment income are made only when more current information and supporting verification becomes available.

If an adjustment is made, the caseworker must document the reason for the adjustment, how the adjustment was calculated, and the new anticipated self-employment income amount.

The effective date of the adjustment is determined following effective date of change policy at ATAPAlaska Temporary Assistance Program MSManual Section 790-4.  The adjustment continues through the period of self-employment.

If a new seasonally self-employed individual later becomes part of the family's economic unit, his/her income counts during the period of self-employment.  A new annualization test is not done.

759-6 G.     UNIQUE SELF-EMPLOYMENT SITUATIONS

`1. Family Members as Employees

For some families, the self-employment enterprise involves more than one member.  In some of these cases, family 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:

• When a dependent child in the family 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.
• When another adult in the family 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 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.

In other situations, the self-employment enterprise may be established as a partnership or S-corporation and more than one family/household member may share in the total business income. In these situations, the income received is counted as income as described in the following section.

2. 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.

•                   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 partners 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 Partners 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.

• 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 shareholders pro rata share.

The S-corporation must file a Form 1120-S, Income Tax Return for an S-Corporation including Schedule K-1 Shareholders 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.