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Self‐Employment Income & Title II Disability Benefits
Self Employment: TWP Month CriteriaSelf‐Employment: TWP Month Criteria
If someone is self‐employed TWP months are used if:If someone is self employed, TWP months are used if:
1. NESE for a calendar month exceeds $700 (2009 ( 9figure), OR
– Beneficiary works more than 80 hours/month no matter how much income the business generates or matter how much income the business generates or loses
CWIC Tip to Beneficiary: CWIC Tip to Beneficiary:
Track and document all hours worked as well as net income each calendar month during the net income each calendar month during the
TWP!
Record Keeping During TWPRecord‐Keeping During TWP
• In order to calculate TWP month usage SSA needs:• In order to calculate TWP month usage, SSA needs:– Monthly P & L statements– Beneficiary statement of hours worked– Tax returns (only used when monthly statements are NOT
available and averaging is used to determine TWP months)
Self-Employment Hours Worked LogSelf Employment Hours Worked LogName: ______________________________ Month/Year: ________
Date Day Description of Activity Hours
Self Employment & SGA DeterminationSelf‐Employment & SGA Determination
• “Self‐employment income alone is not a reliable factor p yin determining SGA…
• since it is influenced not only by the individual's • … since it is influenced not only by the individual's services
• …but also by such things as market conditions, capital investments, the services of other people, and agreements on distribution of profits.”
DI 10510.001 SGA Evaluation and Development of Self‐Employment
Methods of Determining SGAMethods of Determining SGA
• Countable Income Test
– Applies to beneficiaries who have received benefits for 24
• Three‐Step Test
– Used at initial eligibility determinationhave received benefits for 24
months AND have not yet had a “cessation” decision.
determination,– When the beneficiary has
received benefits for LESS than 24 months,
– Always applies to title II beneficiaries who meet SSA’s definition of statutory
4 ,– After a “cessation” decision
has been made (all future SGA determinations), and
blindness. – During the initial reinstatement period (IRP) for EXR cases.
Co ntable Income TestCountable Income Test
• SSA will compare the self‐employed beneficiary’s countable income • SSA will compare the self employed beneficiary s countable income to the annual SGA guidelines to determine if the beneficiary has engaged in SGA.
• All applicable ork incenti es ill be applied • All applicable work incentives will be applied: – IRWE (if not deducted as business expense) – Unpaid HelpU i d B i E– Unincurred Business Expenses
– Unsuccessful Work Attempt• Averaging always applies
d l d h h h– Note: averaging does not include months that the business was not operational.
DI 10510.010 SGA Criteria in Self‐EmploymentDI 10515.005 Evaluation of Work of Blind Self‐Employed Persons (Title II)
Three Step TestThree‐Step Test
• The general criteria for evaluating work activity of self employed • The general criteria for evaluating work activity of self‐employed individuals for SGA purposes consist of three tests. SSA will consider all three tests before it can be established that the individual's work activity is not SGA. The three tests are not used if individual s work activity is not SGA. The three tests are not used if the countable income test applies.
– Test 1: Significant Services and Substantial Income– Test 1: Significant Services and Substantial Income
– Test 2: Comparability of Work Activity
– Test 3: Worth of Work
Test 1: Significant Services and Substantial gIncome
Si ifi S i *• Significant Services*– Sole‐proprietorships~ automatically considered significant– Businesses owned by more than one person, significant if:
• Beneficiary contributes more than half the total time for management, OR
• Renders 45 hours or more/month of management services45 / g
• Substantial Income*Countable income exceeds SGA **BOTH – Countable income exceeds SGA **BOTH
CONDITIONS MUST BE MET
DI 10510.010 SGA Criteria in Self‐EmploymentDI 10510.015 Test One of General Evaluation Criteria: Significant Services and Substantial Income
Test 2: Comparability of Work ActivityTest 2: Comparability of Work Activity
• Compares work effort of beneficiary to that of others without disabilities in the same community engaged in the same or similar businesses
• Considers factors such as:– Quantity: time (number of hours)– Quality: responsibilities duties skills efficiency etc– Quality: responsibilities, duties, skills, efficiency, etc.
• If work is comparable, work activity considered to be SGA… even if business is making little money or operating at a loss
DI 10510 010 SGA Criteria in Self EmploymentDI 10510.010 SGA Criteria in Self‐Employment
DI 10510.020 Tests Two and Three of General Evaluation Criteria: Comparability of Work and Worth
of Work Test
Test 3: Worth of WorkTest 3: Worth of Work
• Evaluates whether work activity is clearly worth more than SGA even if it is not comparable to others
• ConsiderationsCo s de at o s– Contribution to work– Salary/wages an employer would pay an employee in a similar
position (or with similar duties)position (or with similar duties)• If work activity is clearly worth more than SGA, then it is considered
substantial regardless of amount of countable income
DI 10510.010 SGA Criteria in Self‐Employment
DI 10510.020 Tests Two and Three of General Evaluation Criteria: Comparability of Work and Worth
of Work Test
SGA DeterminationsSGA Determinations
• The value of the work effort is what’s most important• SSA is looking for a consistent pattern of work behavior• SSA uses numerous “tools” to assess the value of work:
– Unsuccessful Work Attempt (UWA)I gi g– Income averaging
– IRWEs– Unincurred Business ExpensesUnincurred Business Expenses– Unpaid Help
SGA Consideration: Income AveragingSGA Consideration: Income Averaging
• During TWP, actual NESE assessed monthly if at all possible. If h b h d i il bl SSA ill i month by month data is not available, SSA will average income to
determine TWP months
• Following TWP, NESE averaged to account for fluctuations in SE income– Generally averaged on an annual basis (calendar year)
• May need to average over a shorter period if:– There is a regulatory change in SGA levelThere is a regulatory change in SGA level– There is a significant change in work patterns or earnings
Averaging can never occur across calendar years
DI 10510.012 Determining Countable Income
Averaging can never occur across calendar years
Self‐Employment & Impairment Related Work p y pExpenses (IRWEs)
• Criteria for self‐employment is same as for wage employment:Criteria for self employment is same as for wage employment:– Related to disability– Necessary for work
Paid for b indi id al and not reimb rsed b another so rce– Paid for by individual and not reimbursed by another source– Expense is paid in a month in which the person worked (some
exceptions) – Expense is reasonable
• Most IRWE’s are IRS allowable business deductions, and should be taken as such since it will lower the tax liability– Medical IRWE’s are generally the exception
If expense is deducted on the P&L, cannot also be claimed as IRWE
Business Expense or IRWE? Business Expense or IRWE?
• Kate runs a virtual secretarial company (KMC Secretarial) that generates $2000 in gross receipts in May 2008. She schedules an appointment with you because she is not sure where to track two of her monthly expenses:1. She pays $250/month to a driver to take her to appointments
with clients. Public transportation is available in her area, but her disability precludes her from using it.
2. She sees a physical therapist 3x/month to assist her with mobility issues. Her co‐pay for these appointments is $25.
• How would you advise Kate?
Business Expense or IRWE ( )Business Expense or IRWE, (cont.)
1. Transportation = Business Expense• Could qualify as either an IRWE or business expense• Claiming it as an business expense allows Kate to:• Claiming it as an business expense allows Kate to:
− Deduct it from income before net profit is calculated− Reduces tax base
f− Generally preferable to claim items as business expenses when possible
2. Physical Therapist = IRWE• Physical therapy most likely not IRS deductible (but always
check with accountant first!!)
Unincurred Business Expenses: 2 TypesUnincurred Business Expenses: 2 Types
1. Expenses paid for by another agency or individual 1. Expenses paid for by another agency or individual – e.g., VR purchases a computer for business
2 E penses not specificall inc rred b an entit2. Expenses not specifically incurred by any entity– Business operates out of local Community Center– Community Center does not charge individual for space or
utilities
• Contribution artificially inflates Net Profit• Unincurred expenses deducted from NESE when calculating
countable earned income
DI 10510.012 Determining Countable Income
Unincurred Business Expenses: Methods for pDeducting
1. Fair Value: – Actual expense amount deducted for the month it was paid
2. Depreciated: – “...When items…are provided…depreciate the items over
their useful life and deduct the share of depreciation their useful life and deduct the share of depreciation attributable to a given taxable year.“ • “Useful life”‐ determined by accountant!
Total amount / # mos. “useful life” = monthly depreciable amount
DI 10510.012 Determining Countable Income
Sample Unincurred Expense LogSample Unincurred Expense Log
UNINCURRED BUSINESS EXPENSES LOGUNINCURRED BUSINESS EXPENSES LOG
Name: ______________________________ Month/Year: ________
Date Description of Item/Service Paid for or Contributed
Reason Item/Service Provided at no cost
Name & contact info of Individual, Agency or Business who Provided the Item/Service
Value
$
KMC Secretarial KMC Secretarial
• Kate schedules another appointment with you in Jan. 2009 (month 12 month of her EPE). Her business is generating average monthly NESE of $1400. This month, VR purchased a new $6000 copier for her business. Kate’s accountant told her the “useful life” for the copier was 24 months. VR has also agreed to pay her monthly phone bill of $75 for 3 months (Jan‐Mar).– Could any of these VR purchases be applied as work incentives?– If so, which would be actual?– Which would be depreciable (and how would you calculate the p ( y
monthly depreciable amount)?
KMC’s Unincurred ExpensesKMC’s Unincurred Expenses
• Both VR purchases can be applied as unincurred work expenses• Phone bill:
– $75/month can be deducted for Jan‐Mar– $75/month can be deducted for Jan‐Mar• Copier:
– $250/month can be deducted for next 24 mos. (Jan 2009‐ Dec 2010) 2010) • $6000 (total expense) / 24 (useful life) = $250/month
KMC Secretarial contKMC Secretarial, cont.
• Kate is not sure whether she should include the copier expense in her P&L statement. She is also worried about her SSDI check now that her NESE is over SGA. She has been receiving benefits for 5 ears and has ne er earned o er SGA so she’s not s re hat ill years and has never earned over SGA, so she’s not sure what will
happen. She knows the VR purchases will help her business, but she’s concerned that if she loses her SSDI check she still won’t be making enough from her business to pay her personal bills. She is g g p y pwondering if she should drop a few customers to lower her monthly profits.– Would SSA use the 3‐step test to evaluate SGA in this case?
Wh h t?Why or why not?– Based on the information provided, would Kate be working at
SGA?
Kate's Title II Income Calculation
Jan-Mar Apr-Dec
2009
Kate s Title II Income Calculation
Avg. Monthly NESE 1400 1400
IRWEs (medical) 75 75Unincurred Expenses
Phone Bill 75 0Copier 250 250Copier 250 250
Total Work Incentives 400 325
Countable Earned Income 1000 1075
Over SGA ($980) ? YES YESOver SGA ($980) ? YES YES
Unpaid HelpUnpaid Help
• The reasonable monetary value of any significant amount of unpaid help for business activities furnished by a spouse, children, or others is deducted from net income.
• In estimating the value of unpaid help, SSA considers the prevailing wage rate in the community for similar services.– Accountant spouse offers services for free ‐ value is calculated
as his/her hourly charge x no. hours provided– Friend offers to assist with marketing‐ value is based on what g
other local companies would pay employees for similar duties
DI 10510.012 Determining Countable Income
Sample Unpaid Help LogSample Unpaid Help Log
UNPAID HELP LOG
Name: ______________________________ Month/Year: ________
Date Rate # of Hrs Description of Unpaid Help Provided Total$
KMC SecretarialKMC Secretarial
• In talking with Kate further, you discover that her mother is providing bookkeeping services to her company at no charge. Her mother is a professional bookkeeper and charges all of her other clients $17/ho r It t picall takes her mother abo t 15 ho rs/month clients $17/hour. It typically takes her mother about 15 hours/month to do Kate’s company books. – Based on these figures, how much in unpaid help could Kate be
deducting each month?deducting each month?– Does this have any impact on her SGA evaluation?– Could she include this expense in his P&L?– What kind of record‐keeping is necessary to track and report What kind of record keeping is necessary to track and report
this?
KMC’s Unpaid HelpKMC’s Unpaid Help
• Kate could be deducting approximately $255/month in unpaid help– $17 (hourly rate) x 15 (# hours/month) = $255
• This amount could not be included on P&L– Business is not actually paying for the expense, so it is not an IRS
allowable deduction
• Kate’s mother would need to keep a monthly log of the number of p y ghours worked and brief description of services
• It is imperative that Kate understand she must calculate the actual monthly deduction each month based on the number of hours her ymother worked (not just approximate 15 hours/month)
J M A D
2009
Kate's Title II Countable Earned Income Calculation
Jan-Mar Apr-DecAvg. Monthly NESE 1400 1400
IRWEs (medical) 75 75IRWEs (medical) 75 75Unincurred Expenses 325 250Unpaid Help 210 210
Total Deductible Incentives 610 535
Countable Earned Income 790 865
Over SGA ($980)? NO NO
Self‐Employment Income and SSISelf Employment Income and SSI
How NESE affect SSI cash checks
– With Wage Employment:• The amount of gross g
wages RECEIVED in the month is used in the calculation
– With Self‐Employment:• The average monthly Net The average monthly Net
Earnings from Self Employment (NESE) is used in the calculation
SSI: Calculating NESESSI: Calculating NESE
• SSI program requires an annual NESE projection (not monthly)• SSI program requires an annual NESE projection (not monthly)• Annual NESE is then divided by 12 to calculate the monthly NESE
– Starting point for the countable income calculation• NESE is always divided by 12 months even if the business:
– Did not operate for the entire year– Is seasonal– Ceased operation prior to the SSI application
• Critical to understand the potential impact of this policy• Allows beneficiary steady/predictable SSI cash benefit despite • Allows beneficiary steady/predictable SSI cash benefit despite
business income fluctuations
(fli h t l )(flip chart example)
Annual ProjectsAnnual Projects
• Annual projections are always required and always the method for determining average monthly incomedetermining average monthly income.
• Benefit of the averaging policy are SSI beneficiaries will have a di t bl & t d SSI i th h t thpredictable & steady SSI income throughout the year.
• CWICs need to– stress the importance of developing accurate projections to
beneficiaries and – keep a close eye on actual profit throughout the year to see how p y p g y
closely it is following projected amounts. – Projections can be updated (changed) during the year if necessary to
prevent overpayment or underpayment situations.p p y p y
Web Design on a DimeWeb‐Design on a Dime
• Ellen comes to see you in June 2009. She has recently opened web‐Ellen comes to see you in June 2009. She has recently opened webdesign company and projects $8000 in net profit for 2009. She knows that she needs to report her income to SSI, but she is unsure of what to tell them since the actual profit will vary significantly gfrom month to month. Up to this point, Ellen has been drawing the full FBR of $674/month. She wants to know what will happen to her SSI check now that she is running the business. She is also very
fconcerned about her Medicaid eligibility what happens if her business resources go over $2000.– How do you calculate Ellen’s countable monthly income for SSI?– Could the starting of the business result in a overpayment
situation?
Self Employment: Calculating Countable Income
Step 1: Identify annual NESE
$8000 (annual net profit)x .9235 (deduction)9 35 ( )$7388 (annual NESE)
Step 2: Calculate monthly NESEStep 2: Calculate monthly NESE
$7388 (annual NESE)/ 12$616 (monthly NESE)
- What the next step would be for calculating countable income?
Calculating Countable Income contCalculating Countable Income, cont.
Step 3: Calculate Countable Earned Income
SSI SE Basic AnnualNet Profit 8000
Income CalculationAnnual Net 8000Annual Net 8000
x .9235 7388 / 12 616 NESE
- General Exclusion 20Earned Exclusion 65 - Earned Exclusion 65
531
One-half Disregard 265 Countable Earned
**No changes to countable income calculation except monthly NESE is starting point** ‐ QUESTION‐‐‐‐‐‐‐‐‐‐
Since Ellen’s b siness didn’t start ntil J neSince Ellen’s business didn’t start until June
1 Will SSI attribute the countable monthly income of $265 33 to her for1. Will SSI attribute the countable monthly income of $265.33 to her for each month of 2008?
2 C ld th di id th l j t d NESE b 7 i t d t t2. Could they divide the annual projected NESE by 7 instead to account for the fact that the business was only in operation for 7 months of 2008??
Calculate SSI Cash BenefitCalculate SSI Cash Benefit
Step 4: Calculate SSI Cash Benefit
$674 (maximum SSI cash benefit)$674 (maximum SSI cash benefit)‐ $265 (monthly countable earned)= $409 (Adjusted SSI cash benefit)
Any SSI work incentives could apply/be calculated exactly the sameas with wage employment, e.g.,– SEIE or IRWE: subtract before dividing by 2– PASS or BWE: subtract after dividing by 2
Self Employment & MedicaidSelf‐Employment & Medicaid
Eli ibili li i h f lf l • Eligibility policies are the same for self‐employment as wage employment
• Once eligibility established, continues for any month where SSI h k i i dcheck is received
• Section 1619(b): continued Medicaid eligibility after reaching the break‐even point if cash benefit lost due to earnings if:– Annual countable NESE below state threshold (work incentives
apply to reduce countable income during 1619(b) determinations)
– Individual still has disabling condition & meets other SSI eligibility requirements other than earnings
• Individual thresholds may be established that exceed the state figure
Projecting NESEProjecting NESE
• Annual NESE projections reported to SSA at the start of each calendar year (or before business starts) to calculate:– Monthly NESEo t y S– Countable income– Adjusted SSI cash benefit rate
Medicaid eligibility– Medicaid eligibility• Critical to project accurately… and to watch actual net profit/loss
closelyl h l– Projections lower than actual overpayment
– Projections higher than actual underpayment– Adjust through the year as necessary with SSA
Use of PASS in Self Employment SituationsUse of PASS in Self‐Employment Situations
• Anyone interested in pursuing self employment is a potential PASS y p g p y pcandidate – including title II beneficiaries. Explore this option every time self‐employment is the goal!!
• Essentially the same for self‐ and wage‐employment– Identify income to be contributed (countable income from source
other than SSI)– Complete PASS application– Detail specifically how funds will be used (work goal!)– Establish milestones & timelines for PASS completion– Submit regular reports of progress and tracking of PASS fund
usage to PASS cadre– Keep PASS funds separate from personal funds
Benefits of PASS: GeneralBenefits of PASS: General
• For both self‐ and wage employment:– PASS funds do not count as income SSI cash benefit can – PASS funds do not count as income… SSI cash benefit can
increase (or stay the same)
PASS funds do not count against resource limit– PASS funds do not count against resource limit
– Beneficiaries have opportunity to save funds while still being bl lable to cover personal expenses
Benefits of PASS: Self EmploymentBenefits of PASS: Self‐Employment
• Increases the business operating capital while stabilizing cash‐flow– PASS puts cash into business account (one of only sources of
government funding to do so)go e e t u d g to do so)– Can reduce or eliminate need for businesses to take on debt
• Can be used to cover virtually any business expense (or expense related to running the business)related to running the business)
• Can be spent on monthly expenses, saved for larger business purchases, or both
CWIC PASS Tip to Beneficiary:
Comprehensive Business Plan Required!!
Self Employment ANDWage EmploymentSelf‐Employment ANDWage Employment• For title II beneficiaries, SSA determines countable income for the
wage employment and the countable income for the self employment wage employment and the countable income for the self‐employment separately and adds the two forms of income together when making SGA determinations. – Losses from self‐employment cannot be used to offset SGA level osses o se e p oy e t ca ot be used to o set SG e e
earnings in wage employment. (See DI 10505.015 Averaging Countable Earnings)
• In the SSI program, any verified net losses from self‐employment are divided over the taxable year in the same way as net earnings. The average monthly net loss is deducted only from other earned incomeof the individual or spouse in that month to determine gross income of the individual or spouse in that month to determine gross income. – Work incentives would then be deducted from that amount when
determining how much the SSA payment should be. (See SI 00820.210 How to Determine Net Earnings from Self‐Employment)g f f p y )
Reporting Self‐Employment Income to SSA: Reporting Self Employment Income to SSA:
Tips for SuccessTips for Success
General Reporting RemindersGeneral Reporting Reminders
• It is NESE that SSA cares about – not gross income or even gross profit from the tax returns – certainly NOT “owner’s draw”. – Countable NESE may be further reduced by applying work
incentives.
• The biggest problem people cause for themselves is not keeping th i b k l b i If d ’t k h t their books on a regular basis. If you don’t know what your business is making, you don’t know what to report to SSA. Keeping good business accounts is critical!
• Reporting too diligently and frequently can cause almost as many problems as not reporting at all. The best thing to do is to report at the end of the tax year using well prepared tax returns. y g p p
Reporting Tips for Title II Disability p g p yBeneficiaries
Practical TIP #1 – Beneficiaries must keep business financials on a calendar Practical TIP #1 – Beneficiaries must keep business financials on a calendar month basis during the TWP.
• Report each month in which NESE is over the current TWP amount orwhen more than 80 hours of work is performed. p
• Sending in month‐by‐month P&L states will work for this reporting.
Practical TIP #2 – After the TWP ends, monthly financial statements are no , ylonger necessary. From that point forward, annual tax returns will be used to make SGA determinations. Prompt preparation and submission of tax returns is essential!
Practical TIP #3 – NEVER report gross income to SSA! Beneficiaries must retain all documentation of work incentives and should submit the Work Activity Report for self‐employment (SSA Form 820) with the returns each yearReport for self employment (SSA Form 820) with the returns each year.
Reporting Tips for SSI RecipientsReporting Tips for SSI Recipients
Practical TIP #1 – If the business is not expected to make a profit initially and in Practical TIP #1 – If the business is not expected to make a profit initially and in fact does not generate a profit, there is no point in reporting anything to SSA in the first year of operations. – In most cases, the best thing to do is to simply wait until the tax year ends g p y y
and report your income using tax returns. – If the business loses money, no earned income is attributable.
Practical TIP #2 – After the initial year of operations, watch out for using projected NESE! SSA will estimate annual income based on these projections and will adjust the SSI payment accordingly. If the projections are inaccurate, overpayments or underpayments will occuroverpayments or underpayments will occur.
Practical TIP #3 ‐ When estimates are used to adjust the SSI cash payment, the beneficiary must diligently and carefully track actual NESE and adjust the beneficiary must diligently and carefully track actual NESE and adjust the projections quarterly as needed.
Common Problems in Reporting NESE Common Problems in Reporting NESE
• PASS funds are NOT counted as income to the business. They are d i d bl h IRS counted as owner investment and are not reportable to the IRS or
SSA. • Claiming personal expenses as business expenses is not permitted.
Th t b l iti t b i f th t b There must be a legitimate business purpose for the expense to be deducted legally. When in doubt, beneficiaries should get the advice of a qualified tax professionalGROSS i i NOT h t SSA t it i t bl NESE • GROSS income is NOTwhat SSA counts – it is countable NESE. Beneficiaries should never report gross income to SSA when they are self‐employed.Mi i b i d l f d i VERY bl • Mixing business and personal funds is a VERY common problem. Funds must be kept separate to meet both SSA and IRS requirements.
