The CAO must average profit to find out an individual’s profit from self-employment. The profit is considered gross income and is added to any other gross income that the applicant/recipient group gets.
The CAO must figure out the monthly average for profit that an individual gets from self-employment. The CAO can use earlier profit to estimate future profit if the individual expects to get the same amount. Income tax forms and other business records may be used as proof of past profit.
55 Pa. Code § 181.22 55 Pa. Code § 181.133 55 Pa. Code § 181.272
Example: Mark Powell is a self-employed mechanic. Mark's income tax return shows total gross receipts of $12,000 for the past 12 months. Mark's allowable deductions for expenses total $3,600. The CAO figures Mark's monthly profit to be $700 ($12,000 - $3,600 = $8,400 ÷ 12 = $700).
If an individual expects a large increase or decrease in business, the CAO must estimate the earnings the individual expects to get, instead of using the average of earlier earnings.
The CAO must figure out the monthly average for self-employment income that an individual gets under a twelve-month contract if the income is received throughout the year or is meant to cover the year. If the income from self-employment is received during only part of the year, the CAO must figure out the monthly average for the months it is meant to cover.
Examples:
Tammy Tarbreak is self-employed, selling ice cream and soft drinks at an outdoor pool. The pool is open from June through September. Tammy usually has a total profit of $900 for the four-month season. The CAO expects the self-employment income to be $225 for each of the four months.
Walter Williamson is self-employed and travels around the country showing an antique car at car shows. Walter is under an annual contract with the promotion company that runs the shows. The number of shows Walter must go to changes monthly. During the previous twelve months, Walter earned $14,100 in profit. The CAO counts a monthly profit of $1,175.
When estimating an individual’s self-employment income, the CAO must do the following:
Record why and how it came up with the amount.
Explain to the individual how the estimated amount was figured.
Tell the individual that they must report any change in income by the tenth day of the month after the change.
If an individual indicates an S-Corporation on Schedule E on their federal taxes, the income is considered to be S-Corporation (not self-employment). Self-employment deductions are not applicable to S-Corporations.
The most recent federal income tax return should be used to calculate income if it is consistent with the individual’s anticipated income.
The CAO should count the S-Corporation income the following way:
1. Wages paid to the individual from the S-Corporation should be entered as earned income.
2. Net profit found on line 32 of the Schedule E:
Should be divided by 12 and entered as unearned income for Modified Adjusted Gross Income (MAGI) MA.
Should be excluded for non-MAGI MA, unless distributed to the individual, in which case the distributions should be entered as unearned income.
NOTE: Rental income should also be counted.
If an individual indicates a partnership on the Schedule E of the Internal Revenue Service (IRS) form 1040, the CAO will consider partnership income to be self-employment.
The CAO will enter the net profit found on line 32 of the Schedule E as self-employment income in eCIS. No additional self-employment deductions should be entered on the Income screen as expenses are considered in the determination of the net profit. The CAO will enter a tax deduction for the deductible part of self-employment tax found on the Schedule 1 of the IRS form 1040.
If the household reports income inconsistent with information on the Schedule E, the CAO will review the IRS form 1065 and Schedule K-1 that shows a breakdown for each partnership member.
Updated July 16, 2024, Replacing September 4, 2018