Effective Date: November 1, 2021

No Previous Policy

Income received by an individual from a business may be considered as self-employment income, wages as an employee, or unearned income depending upon the form of business and the individual’s relationship to the business. The following policy explains the different forms of business:

A. Sole Proprietorship

A sole proprietorship is an unincorporated business owned by one individual. The owner has sole control and responsibility of the business; receives all the profits; and is legally liable for all the debts of the business. The owner of a sole proprietorship is self-employed. See 419-3 for information about how to determine countable income.

B. Partnerships

A partnership is an association of two or more people. A partnership can be created by a verbal or written contract between the individuals. There are three types of partnerships, a General Partnership, a Limited Partnership, and a Limited Liability Partnership. The income received from a partnership is either self-employment or unearned income depending on whether the individual is a general partner or a limited partner. The income tax form, Schedule K-1 (Partner’s Share of Income, Credits, Deductions, etc.) which the partner receives from the partnership will show whether the individual is a general partner or a limited partner.

1. General Partnership : Each partner jointly owns the business, shares in the profits and losses, and is personally liable for all the debts of the business. There may or may not be a written partnership agreement. The income a general partner receives from the partnership is self-employment income. See 419-3 for information about how to determine countable income.

2. Limited Partnership: A business owned by at least one or more general partners who manage the business and one or more limited partners. The general partner or partners are responsible for the management of the company and are personally liable for all the debts of the business. The income a general partner receives from the partnership is self-employment income. See 419-3 for information about how to determine countable income.

a. The income a limited partner receives from a partnership is unearned income and must be reported on his or her individual income tax return.

b. To determine the countable unearned income, request a copy of the Schedule K-1 (Partner’s Share of Income, Credits, Deductions, etc.) from the partnership and the individual’s Schedule E (Supplemental Income and Loss), which they file with their personal income tax return. Count the amount from line 32 of the Schedule E as unearned income.

Note : If the Schedule E includes income from more than one business and there is a loss, do not deduct a loss from one source from any others.

3. Limited Liability Partnership (LLP): A business set up like a general partnership except that the partners are granted limited liability. Usually, a Limited Liability Partnership is set up by individuals who are in professions such as law, medicine and accounting. The partners aren’t personally liable for the malpractice or debts of the other partners or for the debts of the LLP. An LLP is formed by filing an application for Limited Liability Partnership with the Utah Division of Corporations and Commercial Code. The income a general partner in an LLP receives from the partnership is self-employment income. See 419-3 for information about how to determine countable income. The income a limited partner receives from a partnership is unearned income and must be reported on his or her individual income tax return. Follow the policy in 401-2 #2B to determine countable income.

C. Limited Liability Company (LLC)

A Limited Liability Company is formed by filing articles of organization with the Utah Division of Corporations and Commercial Code. The individual members of a Limited Liability Company are not personally liable for the debts of the company.

Profits of a Limited Liability Company are either taxed to each member similar to those of a partnership or are taxed as a corporation. The Articles of Organization, the Operating Agreement, or their income tax forms will give you this information. If the LLC is being taxed as a partnership, follow the policy for partnership income. If the company is being taxed as a corporation, the income is received in the form of dividends and is countable unearned income.

D. Corporations

A corporation is formed by a transfer of money, property, or both by prospective shareholders in exchange for capital stock in the corporation. If money is exchanged for stock, no gain or loss is realized by the shareholder or corporation. The stock received by the shareholder has a basis equal to the money transferred to the corporation by the shareholder. All corporations are divided into two groups: S Corporations which have elected Subchapter S treatment, and C Corporations, which encompass all other corporations.

1. S Corporation : A small business corporation formed and operated under a state’s general corporation law. It is like any other corporation, except that it is treated like a sole proprietorship or a partnership for federal income tax purposes. The S corporation files an “information” tax return to report its income and expenses, but it is not separately taxed. Instead the income and expenses of the corporation are divided among it’s shareholders, based upon the percentage of stock of the corporation that they own, who then report them on their own income tax returns (Schedule E, Supplemental Income & Loss.)

If the individual is actively engaged in the business, the income is self-employment income. See 419-3 for information about how to determine countable income.

Note : Check the information reported on their Schedule E, Supplemental Income & Loss to determine whether or not the individual is actively engaged in the business. If the income is listed as Non-passive Income (#28 h), the individual is actively engaged in the business. If it is listed as Passive Income (#28 g), they are not actively engaged in the business.

If the individual is not actively engaged in the business, the income received is countable unearned income. The individual will receive a Schedule K-1 from the S Corp which they then use to complete Schedule E to file with their personal income tax return. Count the amount from line 31 on the form Schedule E, as unearned income.

Note : If the Schedule E includes income from more than one business, do not deduct a loss from one source from any other source.

2. C Corporation: A C corporation is treated by law as a legal entity. The owners of a corporation are the stockholders or shareholders. The C Corporation reports its income and expenses on a corporation income tax return and is taxed on its profits at corporation income tax rates. Dividends when paid, are taxed to stockholders who report them as income. Dividends paid to a stockholder are countable unearned income when they are received.

A stockholder of a corporation may also be an employee of the corporation. If the stockholder is an employee, count the wages as earned income when they are received.

E. Independent Contractors