SELF-EMPLOYMENT SR 94-04, 04/94 (FSM-A)

Cash—or the dollar value of in-kind benefits—received by an individual as compensation for a self-employment enterprise such as farming, sales, etc. Self-employment income also includes the total gain from the sale of any capital goods or equipment related to the business.

Example

An insurance company hires a salesperson. The insurance company reports the salesperson’s income on IRS Form 1099 instead of a W-2 Form. Treat the salesperson as a self-employed subcontractor.

Treatment: Earned Income

Compute the average self-employment over the period of time the income is intended to cover.

Example

A woman owns a hot dog stand at Hampton Beach that she operates during the summer. If this is her only income for the year, her income is averaged over 12 months. However, if she supplements this income by waitressing during the winter, then her earnings from the hot dog stand are not averaged, but are treated as income during the period it is earned.

Subtract the monthly cost of doing business from the average gross monthly self-employment income. If the cost of doing business equals or exceeds the gross self-employment income, there is no countable earned income. The cost of doing business includes only those expenses directly related to producing the goods or services without which the goods or services could not be produced.

The following expenses are allowable costs of doing business:

• identifiable costs of labor, stock, raw materials,

• interest (but not principal) on loans for equipment and real estate used in producing income,

• insurance premiums on equipment and real estate used in producing income,

• taxes on income-producing property, business profits taxes, and other mandatory business-related taxes (but not federal, state, or local income taxes),

• transportation costs while on the job, not going to work,

• any other identifiable cost unique to a particular self-employment business,

• excess costs of doing business for self-employed farmers. However, actual or anticipated gross farm income must be at least $1,000 a year prior to deductions.

The following expenses are not allowable as a cost of doing business:

• depreciation,

• personal business and entertainment expenses,

• personal transportation,

• payments on the principal of business loans,

• purchase price of capital assets (such as real estate, machinery, and equipment).

• payments on the principle of the purchase price of capital assets,

• personal (not business-related) taxes, such as income taxes.

See Boarder, Child Care, Roomer and Rental Income for the treatment of these types of self-employment income.