Income Determination

[44-113.212]

Monthly Net Income

AUs that receive self-employment income on a monthly basis must report the actual amount of such income on the “Semi-Annual Eligibility/Status Report” (SAR 7) for the Data Month. The AU’s benefit level for the SAR Payment Period is calculated based on the actual amount of self-employment income reported on the SAR 7 and anticipated income for each month of the following SAR Payment Period. Determine the net self-employment income reasonably anticipated to be earned from self-employment during each month of the SAR Payment Period by offsetting the reasonably anticipated monthly business expenses against the reasonably anticipated monthly gross income from self-employment.

The applicant or recipient who is self-employed can choose a standard 40 percent deduction or the anticipated actual averaged cost of producing the self-employment income as business expenses.

Note: Verification of payment, from Rideshare companies, must be provided to determine the gross income for independent contractors employed as drivers, EWs shall determine the gross self-employment income by adding back the fees deducted from the final amount paid to the client. The client must then choose either the standard or actual deduction. If a client chooses actual expenses, the EW will deducted the fees, which were added back to the total payout, in addition to all other verified expenses to determine the net self-employment income.

Example Example A self-employed Uber driver provides a bank statement that reflects earnings deposited into the driver’s bank account in the amount of $3,036. The driver provides a payment statement, from the Rideshare company, that shows that the total payout of $3,036 does not include a $75 Toll fee and a $686.91 Uber fee (these fees are deducted from the total payout amount). The EW must add $3,036 + $75 + 686.91 to determine the gross self-employment income to be budgeted. The $3,797.91 is used to calculate the gross self-employment income followed by a 40% deduction or actual expenses to calculate the net self-employment income. If the client chooses the actual expense deduction, the Toll and Uber fee, along with all other verifiable expenses, are deducted from the $3,797.91.

Averaging Income

AUs which receive self-employment income on a monthly basis must report the actual amount of such income on the Semi-Annual report (SAR 7). All anticipated gross self-employment income (including capital gains) expected for each month of the payment period is added and than averaged over the SAR Payment Period, and exclude the averaged anticipated cost of doing business or the 40% standard deduction for business expenses.

Self-employment income received less often than monthly which represents an AU’s annual income must be averaged over a 12-month period even if the AU receives income from other sources in addition to self-employment. The annualized monthly income figure is used as the averaged income for the SAR Payment Period.

Self-employment income which is intended to meet the AU’s needs for only part of the year must be averaged over the period of time the income is intended to cover. Individuals who are self-employed only part of the year and supplement their income from other sources during the balance of the year must have their self-employment income averaged over the period of time they are self-employed rather than a 12-month period.

If an AU’s self-employment enterprise has been in existence for less than a year the income from that self-employment enterprise must be averaged over the period of time the business has been in operation, and that amount budgeted monthly.

If the income is from a family member’s self-employment in farming or a fishing operation, and irregular expenses are incurred to produce that income, the family must have the option to average the expenses and related income over a 12-month period.

Annualized

At the time of application, the income and expenses from a self-employment enterprise must be verified for either the last year or the last period during which income was earned and which was intended to cover either a year or a part of a year. This verified information is used to average the client’s income over the next year or period of time the income is intended to cover.

If the client has experienced a substantial increase or decrease in business income, and the client can provide verification of the increase or decrease; then the averaged self-employment income must be calculated based on the anticipated earnings rather than on prior income.

Self-employment income that has been annualized for the current budgeting period must be redetermined in the following instances:

The client will likely experience or has experienced a substantial decline in income due to a change in circumstances such as crop failure or bankruptcy
The client reports increases or decreases in self-employment income that are outside what is normal for the particular season or trade
The client provides verification of self-employment expenses which the client incurred to produce the income, but had previously failed to report.

Note: In determining a client’s averaged self-employment income only consider income and expenses which have been verified.

At the time of redetermination, the actual self-employment income and expense information reported and verified with the family’s SAR 7 is used to average and project the family’s circumstances for the next year. The annualized method is not used often.

Migrant Farmworkers

Migrant farmworker’s self-employment income is calculated on an anticipated basis. Add any capital gains the client anticipates it will receive in the next 12 months, starting with the date the application is filed, and divide this amount by 12. This amount is used in the successive 12 months, except that a new average monthly amount is calculated over this 12 month period if the anticipated amount of capital gains changes. Then add the anticipated monthly amount of capital gains to the anticipated monthly self-employment income. Either the 40% deduction is allowed or the actual cost of producing the self-employment income is calculated by anticipating the monthly allowable cost of producing the self-employment income.

Income Guide

Use the following chart to determine how to calculate self-employment income:

If income is received...	Then the self-employment income...
Monthly,	Is calculated monthly (even if it fluctuates from month to month).
Less often than monthly which represents annual income,	Must be averaged over a 12 month period.
Less often than monthly and intended to meet the needs for only part of the year,	Must be averaged for only the part of the year it is intended to cover.

Deductions

The client will have a choice when determining net self-employment income as to whether they claim:

The 40% deduction from gross self-employment income, OR
Actual verified expenses to be deducted from gross self-employment income.

Once the self-employed client chooses a method of determining their self-employed net income, the client cannot alter that methodology until the next reinvestigation or every six months, whichever occurs sooner.

Capital Gains

The proceeds from the sale of capital goods or equipment must be calculated in the same manner as a capital gain for Federal Income tax purposes. Even if only 50% of the proceeds from the sale of capital goods or equipment is taxed for federal income tax purposes, the full amount of the capital gain is counted as income.

Forms

When the EW does the self-employed determination, use the following forms:

“Preliminary Self-Employment Questionnaire,” (SC 1250) to obtain basic information about the client's business, and the choice the client made in the method of income deductions, AND
“Self-Employment Sworn Statement” (CSF 35) to provide specific information about the client's income and expenses.

Note: The CSF 35 may be used to make the initial income determination. A supply of this form CSF 35 must be given to the client to be provided with the SAR 7 with appropriate verification.

Reporting Responsibility

40%

Self-employed clients must complete the CSF 35 monthly if they have chosen the 40% deduction and provide verification of income.

Actual

If the client has chosen to declare actual expenses they must complete both the SAR 7 and the CSF 35 each payment period.

Both forms must be completed in detail and are used to determine ongoing eligibility and the CalWORKs grant amount

Note: If the client chooses actual expenses, but does not provide verification of their expenses, allow only the verified expenses (even if less than 40%, or nothing). If they provide expenses later, we would allow.

The client must provide adequate verification of income and expenses:

This includes receipts, vouchers, canceled checks or a signed statement from the person or firm from which an item or service was purchased. A BUSINESS EXPENSE MAY NOT BE ALLOWED WITHOUT VERIFICATION that the expense was actually incurred.
The CSF 35 or the client's record is not in itself sufficient proof.
Verification for each allowed expense must be documented in the case record (retain a photocopy).
The only exception is the transportation expense, which will be based on the signed statement of the client of the number of business-related miles driven.

The gross income of self-employment is adjusted for expenses directly related to production of goods and services before it is included in the recipient net income test.

Taxes collected from clients must be included in the gross income.

Self-employment income is considered available during the month received.

Work Participation Requirements

All mandatory self-employed clients must have weekly net earnings that equal at least the federal minimum wage multiplied by the number of hours required (32 hours for a single-parent AU or 35 hours for a two-parent AU) in order to meet the CWES participation requirements.

Example Example The Principle Earner, in a 2-parent AU, is a self-employed mortgage broker. The client must have net earnings (after the 40% expense deduction or actual) of at least $229.25/week (35hrs x $6.55), in order for the client to meet the work participation requirements.

Exempt Clients

Clients who are self-employed but exempt from the work participation requirements are not required to meet the minimum earnings requirement; however, effective 10/1/09, once the exemption is removed the client must then meet the new requirements.

Timeline

Currently self-employed clients will be allowed one year from October 2008.
Continuing clients who become self-employed will be allowed one year from the date they become self-employed to meet the work participation requirements.
Intake clients who are self-employed will be allowed one year from the date of application to meet the work participation requirements.

Note: Failure to meet the CWES participation requirements will result in the client being required to participate in other WTW activities.

Informing Notice

The informing notice “Self-Employment Work Participation Requirements” (SC 2169) must be given to all self-employed clients:

when the client reports a change to self-employed, and
at intake.

Refer to CalWORKs Employment Services Program, Employment Services Referrals and CalWORKs Employment Services (CWES) Sanctions for further information regarding the Employment Services Program.