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Self-Employment
[63-503.41]
Household Income Determination [63-503.411]
Semi-Annual Reporting
SAR households that receive self-employment income on a monthly basis shall report the actual amount of such income at the application or on the SAR 7 for the Data Month or at the time of the RC. The household’s benefit level for the SAR Payment Period is calculated based on the actual amount of self-employment income reported and anticipated income for each month of the certification period. The anticipated actual average cost of producing the self-employment income or a standard 40% deduction is allowed for business expenses.
Income received from other sources in addition to self-employment is treated as regular income.
The client owns a janitorial business and earns a $4,000 each month in gross income. In addition, he is also employed by the local hardware store and earns $1,000 per month. The client elects the standard 40% self-employment deduction.
The gross self-employment income of $4,000 is entitled to the 40% income deduction:
$4,000- 40% ($1,600)= $2,400
The regular employed income is not entitled to the 40% self-employment income deduction. Both the self-employment and regular employment income are entitled to the 20% earned income deduction:
$2,400 + $1,000= $3,400- 20% ($680)= $2,720 total nonexempt monthly gross income.
A household that derives its annual self-employment income in a period of time shorter than one year must have that income averaged over a 12-month period. The annualized monthly income figure is used as the monthly income in the CalFresh budget.
When a change in the amount of previously budgeted income is reported, the amount of averaged income must be revised for the remainder of the certification period.
The client is self-employed only during the summer (June -August) as a swim instructor. The rest of the year the client works as a teacher’s assistant for the local school district. The self-employment income the client earns as a swim instructor is to be averaged over the 12-month certification period.
If a household's self-employment enterprise has been in existence for less than a year the income from that self-employment enterprise shall be averaged over the period of time the business has been in operation, and the monthly amount projected over the certification period.
Example
The applicant has only been self-employed as a photographer since February. She applied for CalFresh in July and provided verification of her monthly income from February to June.
| Feb. | Mar. | Apr. | May | Jun. | Total | Averaged Monthly |
| $400+ | $600+ | $950+ | $2,500+ | $2,000 = | $6,450 | $6,450/5= $1,290 averaged per month |
For the period of time over which self-employment income is averaged, the EW shall add all gross self-employment income, excluding the actual estimated cost of producing the self-employment income or a standard 40% deduction, and divide the net self-employment income by the number of months over which the income will be averaged.
The monthly net self-employment income must be added to any other earned income received by the household, and the net monthly income shall be computed using these amounts.
Losses from self-employment as a farmer or fisherman must be offset against any other countable income in the household.
Averaged Income [63-503.412]
At the time of application, the income and expenses from a self-employment enterprise shall be verified for either the last year or the last period during which income was earned which was intended to cover either a year or a part of a year. The EW shall then use this verified information to average the household's income and/or expenses over the certification period.
If the household has experienced a substantial increase or decrease in business income, the household shall provide verification of the increase or decrease. The EW shall calculate the averaged self-employment income based on the anticipated earnings rather than on prior income.
Self-employment income averaged for the current certification period must be redetermined in the following instances:
- The household will likely experience or has experienced a substantial decline in income due to a change in circumstances such as crop failure or bankruptcy;
- The household reports increases or decreases in self-employment income that are outside what is normal for the particular season or trade.
- The household provides the EW with verification of self-employment expenses which the household incurred to produce the income, but had previously failed to give to the EW.
Note: In redetermining a household's averaged self-employment income the EW must only consider income and actual expenses which have been verified.
Capital Goods and Equipment [63-503.414]
Capital gains for CalFresh purposes are defined as the proceeds from the sale of capital goods or equipment and are calculated in the same manner as a capital gain for Federal income tax purposes. Even if only 50 percent of the proceeds from the sale of capital goods or equipment is taxed for federal income tax purposes, the EW must count the full amount of the capital gain as income for CalFresh purposes. For households whose self-employment income is calculated on an anticipated, rather than averaged basis, count the amount of capital gains the household anticipates receiving during the months over which the income is being averaged.
Allowable Costs [63-503.413]
To determine the net gross income of the applicant or recipient, the individual shall choose either:
- Actual costs of producing self-employment income, or
- A standard deduction of 40 percent (%) of gross self-employment earned income.
Recipients are allowed to change the method of deduction ONLY at Recertification, or every six months, whichever occurs first.
The amount of the actual costs of producing the self-employment income or the standard 40% of gross self-employment earned income is deducted from the total gross self-employment earned income to arrive at the net self-employment earned income amount.
Actual allowable costs of producing self-employment income include, but are not limited to:
- Identifiable labor costs
- Supplies
- Raw materials
- Seed and fertilizer
- Interest paid to purchase income-producing property
- Payments made on the principal of the purchase price of income producing real estate and capital assets, machinery and other durable goods
- Insurance premiums
- Taxes paid on income-producing property
- Rent and utility expenses
- When the household uses their home for business purposes, the share of the housing expenses to use as a business expense is determined based on the percentage of either square footage or number of rooms used for business purposes. Multiply the total housing costs by this percentage to determine the share of the actual housing and utility costs to allow as a business expense.
- Actual transportation costs (not a set mileage rate) to PRODUCE business (not to and from work).
For someone who sells flowers at a stand in the local flea market, allow transportation to the flower wholesale outlet. Do not allow daily transportation to the flower stand.
In determining actual business expenses, the following items are NOT ALLOWED as a cost of doing business:
- Net losses from previous periods;
- Federal, state and local income taxes, money set aside for retirement purposes, and other work-related personal expenses (such as transportation to and from work), as these expenses are included in the earned income deduction; and
- Depreciation.
Refer to Self-Employment [63-503.41] for detailed self-employment income policy.
Real Property [63-502.13 and 63-501.3d]
Self-employment income derived from rental property shall ONLY be considered earned income if a member of the household is actively engaged in the management of the property at least an average of 20 hours a week. This qualifies for the 20% earned income deduction.
Property that produces income consistent with its fair market value is exempt as a resource, and the income would be counted as self-employment unless it qualifies as earned income.
Use CalWORKs criteria or contact local realtors, tax assessors, the Small Business Administration, Farmer's Home Administration, or other similar sources to determine the prevailing rate of return, e.g., square foot rental, for similar usage of real property in the area. Newspaper classified ads may also be used as a resource. If the property is being leased for a return that is comparable to other property in the area leased for similar purposes, it shall be considered producing income consistent with its fair market value.
Note: All pertinent information regarding the budgeting of rental property income must be thoroughly documented in the Maintain Case Comments window in CalSAWS.
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