Self-Employed Income

A self-employed person has direct control over their work and the services they provide. Generally, Social Security taxes and income taxes are paid by the self-employed person, and there is no Worker's Compensation coverage.

  • Typically, the following are indicators of self employment:
  • The person or entity paying the individual for his/her goods or services does not deduct Social Security taxes or federal withholding from the compensation payment.
  • The individual determines the scope and nature of his or her work and daily work activities, including work duration; and such activities are not supervised or determined by another person.
  • The individual or entity files an income tax return declaring that they are self-employed (i.e. files a Tax Form Schedule C).

Note: Self-employed individuals can have contractual agreements to complete work for other companies, but still be considered self-employed. Example: A landscaper holds contracts to complete work for several companies, but he is still considered self-employed because he is solely responsible for determining his own schedule and the companies do not deduct Social Security taxes or federal withholding.

Verification

Self-employment income can be verified using the following IRS Forms:

  • 1040, U.S. Individual Income Tax Return
  • Schedule C, Profit or Loss from Business or Profession
  • Schedule D, Capital Gain or Loss
  • 4797, Supplemental gains (or losses)
  • 1065, U.S. Partnership Return of Income
  • Reports of rents, royalties, estates, trust, etc.
  • Schedule F, Farm income

Follow these guidelines when using tax return forms in determining self-employment income:

Self Employment Income

If the business was...

Then...

Operating throughout the previous year,

The EW may use the previous year’s net self-employment income to estimate the current year anticipated income by dividing the previous year’s net self-employment amount by 12.

Not operating throughout the entire previous year but it is expected to be operational for the entire current year,

The EW must divide the previous year’s net self-employment income by the number of months the business was operating from the previous year to get the net monthly self-employment income for the current year.

Example:

The individual provided a tax return from the previous taxable year 2016. The EW determined that the previous net self-employment income is $12,000. The EW was informed that the business was operational for eight months in the year 2016.

To estimate monthly net business income for the current taxable year (assuming the business is expected to be operational for the entire year of 2017,) divide $12,000 by eight months. The resulting amount is $1,500 (12,000 divided by 8) which becomes the anticipated net monthly self-employment income for the current year (2017).

No Tax Information Available

Where there is no tax return for the previous year, or there is evidence that using the tax return would give an inaccurate estimation of income, compute the budget using:

  • Current business records,
  • Documents and forms,
  • Any other clear and accurate record-keeping statement provided by the client.

Note: A client must not be required by the EW to file a tax return and to provide copies of such.

If none of the above are available, or last year’s taxes do not accurately reflect the current year’s income, the client must provide verification of the previous three months worth of Income and Expenses. The EW must average the three months and use the resulting amount as Income and Expenses in CalSAWS.

Allowable Expenses

To determine net profit, subtract any allowable business expense from the gross business income. Allowable business expenses are as follows:

  • Federal and State Income Taxes Withheld for Employees—The actual amount paid is deductible as a mandatory business expense. Taxes are paid quarterly on the calendar quarter.
  • Social Security—A deduction is allowed for the amount actually paid.
  • State Disability Insurance—A deduction is allowed for the paid amount.
  • Union Dues/Association Fees—When membership in a labor union or association is a requirement for self-employment, the actual cost is allowed as a business expense.
  • The cost of all licenses required for business operation.
  • The cost of business advertising.
  • The cost of providing business-related surety and performance bonds is allowed as a deduction.
  • Equipment and supplies.
    • Principal and interest payments
    • Sales tax
    • Interest or finance charges

      • Note: If a capital-asset item is commonly used for both business and non-business purposes (for example, an automobile), the household must provide adequate information to determine what portion of the expense is allowable to the business.

  • The cost of business-related maintenance and repairs (i.e. janitorial supplies, janitorial services, mechanical repairs of equipment, periodic servicing of machinery, etc.).
  • The actual amount of all business-related taxes are allowed, including (but not limited to) sales taxes, property taxes, etc. Those taxes collected from customers (federal excise tax, sales tax) and forwarded to government agencies are a business expense.
  • The cost of insurance for business property, including fire, theft, public liability and workman's compensation.
  • The expense of operating motor vehicles for business-related transportation (not including transportation to and from work).

    • Note: Follow the IRS guidelines in determining the allowable per mileage cost. The client must own or be purchasing the motor vehicle. It cannot be leased or borrowed.

  • The actual cost of business-related legal or professional services (i.e. attorney's fees, tax preparation or consultant fees, etc.)
  • The cost of merchandise, stock, or raw materials, plus interest or finance charges (if any).
  • The cost of renting or leasing land, office, shop or warehouse space, equipment, automobiles/trucks, furniture, etc., used exclusively for the business is allowed. The lease, rental agreement or mortgage payment for space for the business must be reviewed. In order for this expense to be allowed this space must have been initially rented or purchased for the business.
  • The prorated share of rent/mortgage payment for a room in the recipient's home specifically intended to be used for self-employment. ExampleExampleThe client owns a 4 bedroom house and has a $1600 mortgage payment. One of the bedrooms is used specifically for manufacturing items related to their self-employment. The client is allowed a $400 deduction.
  • Rental property expenses (see below for exceptions and rules)

Rental Income Expenses

If the income is from the rental of real property, subtract the following expenses:

  • Taxes and assessments
  • Interest on encumbrances (the principal portion is not an allowable deduction)
  • Insurance
  • Utilities
  • Upkeep and repairs, using the greater of:
    • The actual amount expended during the month (not a yearly average), or
    • Fifteen percent of the gross monthly rental plus $4.17 per month.

If the income is from a deed of trust or a mortgage:

  • The principal portion must be treated as property, and
  • The interest portion must be unearned income.

If the income is from the rental of a multiple unit dwelling or other dwellings on property that is exempt as the principal residence and the applicant or recipient is living in a portion of the property, the expenses must be prorated as follows:

  1. Determine the number of rooms in the building. If more than one building, determine the total number of rooms. Include any room other than bathrooms, hallways, closets, unfinished basements, lofts, or attics.
  2. Determine the number of rooms producing the rental income.Based upon the number of rooms, determine the percentage of the property which is producing the rental income.
  3. Apply the percentage determined in step 2 to the expenses which are common to the property as a whole. This is the amount which must be subtracted from the gross income.

Income received for rental of rooms, room and board, or board and care must be determined by one of the following methods.

Ten Percent of Gross

This method is used when:

  • A business license is not required, and
  • The individual who receives the income routinely provides lodging, board, etc. to non-family members for additional income. 

ExampleExample

Mr. and Mrs. A are Medi-Cal applicants. They live near a college and routinely rent their spare room to students. They do not have a business license and do not report the income as self-employment. At time of application, however, their adult daughter (considered to be not a family member under the Medi-Cal eligibility determinations) is using the room and is paying them $80 per month. The A's state that if the daughter were to leave, they would try to find someone else to rent the room.

The net monthly income in this instance is $8.00 (10 percent of $80).

Net Profit from Self-Employment

This method is used when:

  • The individual who receives the income has a business license, or
  • The individual reports the income for tax purposes as self-employed, or considers the income as income from self-employment. 

ExampleExample

Mrs. B has converted her house into a boarding home. She has a business license, but her yearly total income is so low that she has never bothered completing an income tax return. Her annual gross receipt from the boarding home is $7,000; her annual allowable expenditures are $5,800.

The net monthly income in this instance is $100 ($7,000 - $5,800 = $1,200/12).

Income in Excess of Contributor's Share of Actual Costs

This method is used when:

  • A business license is not required, and
  • The individual who receives the income does not routinely provide lodging, board, etc., to non-family members for additional income.

ExampleExample

Mr. and Mrs. C apply for Medi-Cal on behalf of themselves and their one minor child. Mr. C's mother lives with them and gives Mr. C $100 per month to use toward meeting those household costs which directly benefit her. If the mother were not in the home, the C's would not seek another person to move into the home. The C's monthly costs are as follows:

Rent     $250
Utilities     50
Food     200
Total     $500

Since there are four individuals in the home, the mother's share of the actual costs is $125 ($500/4). Since her $100 contribution is less than her share of the actual costs, there is no net income to the C's.

If she instead were contributing $130 per month, then the net income to the C's would be $5.

If the mother lived in a room with its own kitchen, and bought and prepared all her own food, then the mother's share of actual costs would be 1/4 of $300 (rent and utilities) or $75. If the mother were contributing $100/month to the C's, the C's net income would be $25.

Non-Allowable Expenses

Certain expenses, although connected to business activities, are not considered to be directly related to the production of goods or services, and cannot be subtracted from business income for purposes of determining net business income. These non-allowable expenses include:

  • Entertainment costs
  • Depreciation
  • Personal expenses such as income tax payments, meals and transportation to and from work.

Related Topics

Income Definitions

Non-MAGI MC Income