Effective Date: February 1, 2023

Previous Policy

A. Definition

1. A self-employed individual actively earns income directly from his own business, trade or profession, rather than as salary or wages from an employer. A self-employed individual may be the sole owner of a business; a general partner in a partnership; a member of a Limited Liability Company being taxed as a partnership; or a shareholder in an S Corp who is actively engaged in the operation of the business. (See 419-2 for an explanation of these types of businesses).

2. A self-employed farmer actively earns income from operating a farm for profit either as owner or tenant. A farm includes stock, dairy, poultry, fish, bee, fruit, or truck farms. It also includes plantations, ranches, nurseries, or orchards.

3. An individual is not self-employed if the business is incorporated; if the individual is a limited partner in a Limited Partnership or in a Limited Liability Partnership; or if the individual is a member (owner) of a Limited Liability Company which files federal income taxes as a corporation. In these situations, any earned income actually received by the individual as an employee of the business is countable wages. Dividends or the share of profit from the company reported by the individual on his individual income tax is countable unearned income.

4. Generally a person is considered self-employed if the person:

o Carries on a trade or business as a sole proprietor or an independent contractor.

o Is a member (other than just a limited partner) of a partnership that carries on a trade or business.

o Is otherwise in business for himself or herself (including a part-time business)

5. Self-employment income may include income from rental properties if the person is in the business of renting property. See 415-4 for more information about rental income.

B. Countable Self-Employment Income

An individual’s countable self-employment income from a business depends on the type of business and the individual’s relationship to the business.

1. Sole Proprietor (See 419-2 ) If the individual is the sole owner of the business, the individual’s countable self-employment income is the profit from a business or farm. Profit is the total gross earnings minus allowable business expenses.

2. General Partner (See 419-2) If the individual is a general partner, the individual’s self-employment income is his share of the total profit from the partnership. Read the partnership agreement to determine their share of the profits and divide the profits according to the agreement. If no partnership agreement exists, divide the profits equally among all general partners.

3. Shareholder in an S Corporation (See 419-2): If the individual is a shareholder in an S Corporation and is actively engaged in the business, the individual’s self-employment income is his share of the profits. An individual who is a shareholder in an S Corporation but is not actively engaged in the business is not self-employed. Their share of the profits is countable unearned income.

4. Member of a Limited Liability Company (LLC) Filing Federal Taxes as a Partnership (See Section 419-2 ): If the individual is a member of a Limited Liability Company which files federal taxes as a partnership and the individual is a general partner, the individual’s self-employment income is his share of the profit.

If the individual is a limited partner, he is not self-employed. Any income he receives for services he performs are countable wages. Any dividends paid to him from the LLC are countable unearned income. (Follow the rules in 419-2 to determine countable income)

C. How to Determine Countable Self-Employment Income

In general, self-employment income must be annualized. This means that the total profit expected to be received for a full year must be averaged to determine monthly countable self-employment income.

1. Count the countable self-employment or business income reported by the individual. If tax information match data from the Internal Revenue Service is available, use that information to make the reasonable compatibility test. If the client's statement of income is reasonably compatible with the available electronic income match data, do not request verification from the individual. See section 440-5 for information regarding reasonable compatibility.

2. When the client's statement and the available electronic match data is not reasonably compatible, request further verification from the individual. The following methods can be used to determine self-employment income.

a. Tax returns and applicable schedules or related forms. The individual’s most recent income tax return can be used to determine the countable profit from self-employment or farming if the income on the tax return is representative of the current self-employment income and circumstances. (See 419 ).

b. Income and expense records. Records of gross income and business expenses can be used to determine countable self-employment income. Use records provided by the individual, which may include ledgers, checks, receipts, or another type of bookkeeping system to calculate countable self-employment income. Calculate the gross income (in cash or in-kind) received or available to the individual and then deduct the allowable business or farm expenses. Do not include money earned but not yet received. Do not count any income twice. Only request receipts if the individual has no other record keeping system for expenses.