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Definition
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 401-4 for an explanation of these types of businesses). An independent contractor is considered self-employed.
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.
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.
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)
Self-employment income may include income from rental properties if the person is in the business of renting property. See Sec. 403-5 and 405-1 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.
Sole Proprietor: (See Section 401-4, 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.
General Partner: (See Section 401-4, 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.
Shareholder in an S Corporation: (See Section 401-4). 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 Section 401-4, 4A)
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 Section 401-4)
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.
Count the net self-employment or business income reported by the client. 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 client.
When the client's statement and the available electronic match data is not reasonably compatible, request further verification from the client. The following methods can be used to determine self-employment income.
Tax returns and applicable schedules or related forms. t 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).
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 client, which may include ledgers, checks, or receipts, etc., to determine the countable self-employment income by calculating the gross income received or available, in cash or in-kind, to the client and then deducting allowable business or farm expenses. Do NOT include money earned but not yet received.
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.
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.
If the self-employment income not intended to be the household's annual support, and the household anticipates income from another source to be their support for the other part of the year, 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.
Business Expense Deductions
MAGI-based Medicaid Coverage Groups
Deduct the actual business expenses reported by the client from the gross self-employment income. See section 405-3 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 choose to verify actual business expenses. If the household chooses this option, allow any business expenses that are allowed by the IRS. See section 405-3 for a list of allowable business expenses.