Medicaid Policy
Medicaid 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 partner in a Limited Liability 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 section 419-2 for an explanation of these types of businesses). An independent contractor is considered self-employed.
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 income reported by the individual on his individual income tax is countable unearned income.
4. Generally a person is considered self-employed if the person:
· Carries on a trade or business as a sole proprietor or an independent contractor.
· Is a member (other than just a limited partner) of a partnership that carries on a trade or business.
· 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 and 419-1 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, 1) If the individual is the sole owner of the business, the individuals countable self-employment income is the total profit from a business or farm. Profit is the total gross earnings minus allowable business expenses.
2. General Partner: (See 419-2, 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 the 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. His share of the profits is countable unearned income. (See 419-2, 4A)
4. Member of a Limited Liability Company (LLC) Filing Federal Taxes as a Partnership: 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 profits.
If the individual is a limited partner, he is not self-employed. Any income he receives for services he performs is countable wages. Any dividends paid to him from the LLC are countable unearned income. (See 419-2)
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 net 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.
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 tax return can be used to determine the countable profits from self-employment or farming, if the income information on the tax return is representative of the current self-employment income and circumstances. (See Procedure).
b. Income and expense records. Records of gross income and business expenses can be used to determine net self-employment income. Use records provided by the individual, which may include ledgers, checks, receipts, or another type of bookkeeping system, to determine the countable self-employment income. Calculate the gross income received or available, in cash or in-kind, to the individual and then deduct the allowable business or farm expenses. Do not include money earned but not yet received. Only request receipts if the individual has no other record keeping system for expenses.
i. If a 12-month period of self-employment income history is available and it is representative of the current circumstances, you may use that information to determine the monthly countable self-employment income.
ii. If a 12-month period of self-employment income history is not available or if the self-employment history is not representative of the current circumstances, use whatever current information is available to establish a best estimate of the countable self-employment income. You may need to set shorter review periods at first until you have gathered enough information to establish an accurate best estimate for longer periods.
iii. If the self-employment income is not intended to be the household's total annual support, and the household anticipates income from another source to be their support for the other part of the year, the method for calculating the income will depend on the coverage group.
· For the MAGI-based Medicaid coverage groups, calculate the total amount of income to be earned during the self-employment activity and divide by 12. 1/12 will be counted in each month of the 12-month certification period. Treat the other source of income according to section 815-5.
· For the Non-MAGI based coverage groups, pro-rate the self-employment income over the number of months it is intended to cover and use that amount as the monthly countable income from self-employment in those months.
3. Business Expense Deductions
MAGI-based Medicaid Coverage Groups
Deduct the actual business expenses reported by the individual from the gross self-employment income. Refer to paragraph C.2. of this section to determine self-employment income and expenses. See 419-4 for a list of allowable business expenses.
The 40% of income deduction for business expenses cannot be used for the MAGI-based coverage groups.
Non-MAGI-based coverage groups.
A household with self-employment income may elect to have 40% of the gross self-employment income deducted for business expenses. If the household chooses this option, it is not necessary to verify actual expenses.
If business expenses are more than 40%, the household may use actual business expenses. If the household chooses this option, allow any business expenses that are allowed by the IRS. Refer to paragraph C.2. of this section to determine self-employment income and expenses. See 419-4 for a list of allowable business expenses.
D. Deducting Losses from a Self-Employment Business
1. For all Programs
When an individual is self-employed, they can deduct a current year loss from other earned income.
a. First determine the amount of the loss from the self-employment business. (Refer to 419-2 to determine self-employment income.)
b. If the information about income and expenses of the self-employment business shows that the business is losing money in the current year, and this is expected to continue into future months, calculate the monthly amount of the loss.
c. When using the prior year's tax forms to determine the loss, document why the loss is expected to continue in the current year.
d. The individual may need to provide more current verification of business income and expenses to justify that the loss is expected to continue.
e. Deduct this anticipated loss from the other earned income such as wages, income from another self-employment business, or from the spouse's earned income.
f. The deduction of a loss from self-employment can only be deducted from other earned income. It cannot be deducted from unearned income.
2. For ABD, QM, SLMB, QI programs:
a. Steps in paragraph D1 apply to these programs. The following steps are required for the ABD and Cost Sharing programs.
b. The deduction must be made before the deduction of $65 and ½ of the remainder (See 431-2).
c. Set a shorter review period to reevaluate whether the income and expenses of the self-employment business have changed.
3. For Waiver and LTC programs:
a. Steps in paragraph D1 apply to these programs. The following steps are required for the Waiver and LTC programs.
b. If the self-employment income was being received before the individual entered the institution, decide if this income will continue and whether the individual is still actively engaged in self-employment.
c. If a spouse or a business partner will continue the business, the individual may still receive some countable income from the business, depending on the circumstances. However, the individual may not be actively engaged in self-employment, in which case, the income is not earned.
d. If the individual's spouse is running the business and claiming the earned income, a loss could be deducted from other earned income of the spouse when deciding the spouse's income for the spousal needs allowance.
e. The deduction must be made before the deduction of the institutional earned income deduction.
f. Set a shorter review period to reevaluate whether the income and expenses of the self-employment business have changed.