• is cash – or dollar value of in-kind benefits –received by an individual, which is earned directly from the individual’s own business, trade, or profession;
• includes the total gain from the sale of any capital goods or equipment related to an individual’s business, trade, or profession; and
• is not subject to Federal Income Tax (FIT) or Medicare Tax (FICA) withholding.
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.
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 costs of doing business from the average gross monthly self-employment income. If the total 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.
Allowable costs of doing business:
• identifiable costs of labor, stock, and raw materials needed to perform the job such as lumber and demonstration products;
• tools and equipment;
• work-related clothing;
• business-related vehicle expenses and transportation costs incurred while on the job, including cost of maintaining the vehicle, mileage, tokens or tolls, gasoline, insurance, but not transportation expenses incurred going to and from work;
• payments on the principal and interest of the purchase price of income-producing real estate and capital assets, equipment, machinery and other durable goods;
• advertising expenses;
• cost of maintaining a job site, including a room in one’s home;
• telephone expenses;
• electricity for the job site;
• bookkeeping and payroll expenses;
• lodging away from the home while on a job;
• rentals related to being able to complete a job, whether it is equipment or another type of rental;
• insurance premiums on equipment and real estate used in producing income;
• insurance premiums including disability, workers compensation, job site insurance, and bonding;
• employee taxes;
• taxes on income-producing property, business profits taxes, and other mandatory business-related taxes (but not federal, state, or local income taxes); and
• any other identifiable cost unique to a particular self-employment business.
The following expenses are not allowable as a cost of doing business:
• net losses from previous periods;
• money set aside for retirement purposes;
• personal business and entertainment expenses;
• personal transportation;
• purchase price of capital assets (such as real estate, machinery, and equipment);
• personal (not business-related) taxes, such as income taxes; and
• any amount that exceeds the payment a household receives from a boarder for lodging and meals.
See Boarder, Child Care , Roomer, and Rental Income for the treatment of these types of self-employment income.