1115.040.00 Self-Employment INCOME

Determine self-employment income by considering total income less the expense of producing that income. Self-employment income can be considered earned or unearned income. However, even if the income is considered unearned self-employment, the EU is entitled to the expenses of producing that income. FAMIS income type is EI for earned income and UI for unearned income.

If an EU member is actually working at a job, consider the income earned, therefore eligible for the 20 percent earned income deductions and losses offset from other self-employment enterprises regardless of the number of hours. For example, wood chopping, lawn work, and baby-sitting are considered earned income regardless of the number of hours worked per week.

Not all self-employment income can be considered as earned income. An example of self-employment income that is considered unearned is rental income when the person is not actively engaged in managing the property more than 20 hours per week.

Other examples of unearned self-employment income may include income from partnerships, estates, and trusts. The income is considered unearned if the person is not engaged in activities to earn this income. Consider these income types as earned only if activities consume 20 hours or more per week. Allow the expense of taxes, insurance, interest and principal on the mortgage, and the like.

The following table illustrates income types and income sources used in FAMIS.

Consider EUs with self-employment income as its primary source as self-employed EUs. However, EUs in which one or more members are engaged in an enterprise for gain (such as an independent contractor, owner-operator, or operator), may have self-employment income but will not necessarily be classified as a self-employed EU. A person who owns land and has sharecroppers working the land may be considered a self-employed farmer, if actively engaged in financial management of the farming operation. All EUs with self-employment income, nevertheless, require special attention to:

• work registration exemption;
• assignment of certification periods; and
• income computation and budgeting.

1115.040.01 Partnerships, S Corporations, and Corporations

A partnership is a type of business in which multiple individuals manage the business and are equally liable for its debts. Each partner shares equal responsibility for the company's profits and losses, and its debts and liabilities. The partnership does not pay income taxes. Each partner reports his/her share of the business's profits and losses on his/her individual tax return.

Common forms used to verify this income are:

• 1040 - U.S. Individual Income Tax Return;
• 1065 - U.S. Return of Partnership Income;
• Schedule K-1(Form 1065) - Partner's Share of Income, Deductions, Credits, etc. (summarizes each shareholder's separate shares);
• Schedule D (Form 1065) - Capital Gains and Losses; and
• 1099 - This is a form used by businesses to report certain business transactions to the IRS.

  EXAMPLE: 1099 B reports the sale of stocks, bonds, etc., 1099 DIV reports dividends paid, and 1099 G reports tax refunds.

S Corporations are set up to limit liability and allow owners to pay income tax as a sole proprietor or partner. Owners are considered employees and are not considered self-employed. They are not entitled to the costs of producing income.

Common forms used to verify this income are:

• 1040 - U.S. Individual Income Tax Return;
• 1120S - U.S. Income Tax Return for an S Corporation;
• Schedule K-1(Form 1120) - Shareholder's Share of Income, Deductions, Credits, etc. (summarizes each shareholder's separate shares);
• Schedule K (Form 1120S) - Shareholder's Share of Income, Deductions, Credits, etc. (summarizes the Corporation's income, credits, deductions, etc. reportable by the Shareholders); and
• Schedule D (Form 1120S) Capital Gains and Losses and Built-In Gains.

  NOTE: Schedule K is a section on the 1120S - U.S. Income Tax Return for an S Corporation.

In a Corporation, the owner is considered an employee of the corporation and receives a salary. The Corporation pays taxes on profits left after salaries, bonuses, overhead, and expenses are paid. Self-employment expenses are not allowed.

Common forms used to verify this income are:

• 1040 - U.S. Individual Income Tax Return;
• 1120 - U.S. Corporation Income Tax Return;
• 1120A - U.S. Corporation Short Form Income Tax Return;
• Schedule D (Form 1120) - Capital Gains and Losses; and
• Schedule M-3 (Form 1120) - Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More.

1115.040.05 Income to Self-Employed Households

Show the following items as income to self-employed EUs.

• Sales of merchandise services.
• Sales of child care services, including baby-sitting and day care.
• Sales of produce, including dairy products, eggs, wool, grain, cotton, tobacco, vegetables, fruits, nuts, etc.
• Sales of livestock. Consider any receipts from livestock sold whether held for draft, breeding, sporting, pets, dairy, or other purposes, as income when sold. Exclude sales from livestock owned by children under the provisions from income exclusions.

  NOTE: Review IRS Schedule F (Form 1040), Profit or Loss From Farming; Schedule C (Form 1040), Profit or Loss from Business; and Form 4797, Sales of Business Property, to locate all income sources.

• Receipts for work done for hire, such as custom baling, harvesting, etc.
• Sales of timber, including logs, firewood, cedar posts, lumber, pallets, staves, and pulpwood.
• Capital gains, which is the sale of equipment, livestock, machinery, buildings, or land connected with the self-employment enterprise. All proceeds from these sales are available to meet the food needs of the EU, therefore, count the full amount of the gains as income to the EU. There may be recurring capital gain of sale of land. The sale of livestock is a short time capital gain. For EUs whose self-employment income is calculated on an anticipated (rather than averaged) basis, count the amount of capital gains the household anticipates receiving.

  NOTE: IRS Schedule 4797, Sales of Business Property, and Schedule D (Form 1040), Capital Gains and Losses, are designed to reduce the taxable status of certain farm-related income; therefore, in order to determine the proceeds arising from sales of livestock, equipment, and land, carefully study the form to determine the proceeds derived from such sales. Lump-sum payments for the sale of property not connected with the self-employment enterprise are treated as provided in instructions for lump-sum payments, section 1115.015.60 Non-recurring Lump Sums.

• Payments received in cash by the EU from agricultural stabilization and conservation payments.
• Payments on interest on loans made to the self-employment enterprise or on accounts receivable.
• Income shown on IRS Schedule F from Commodity Credit Loans.
• Income shown on IRS Schedule F from patronage dividends from a cooperative.
• Income shown on IRS Schedule F from a per-unit retains allocation from a cooperative.

  NOTE: Do not consider non-recurring crop insurance payments and gasoline tax credits (federal or state) as income for FS purposes. Consider these payments a resource.

  When the Secretary of Agriculture declares a farm emergency due to a natural disaster, any payments made under P.L. 100-387 to farmers following such a determination are excluded from income and resources.

• Payments received from boarders in a commercial boarding house are considered income to the EU. Refer to section 1115.065.00 Income From Boarders, for income received by an EU from a boarder in a non-commercial boarding house.