Self-Employment and the Benefits Planning Process

Policy to Practice Brief #13

The authors are Mary Ridgely, JoAnne Malloy, and Connie Ferrell 

Ray Cebula, Senior Faculty, K. Lisa Yang and Hock E. Tan Employment and Disability Institute, updated this article in July, 2012

Table of Contents:

About Policy-to-Practice Briefs. 1

I.        Introduction.. 2

II.       Benefits Planning for the Self-Employed Recipient. 3

Is it Self-Employment?. 3

III.     Social Security Disability Insurance. 4

Test Two: Comparability of Work Activity. 7

Test Three: Worth of Work Activity. 7

IV.     Supplemental Security Income. 8

Verifying Net Earnings. 9

Work Expenses that Apply to Self-Employment for the SSI Recipient. 10

Plans to Achieve Self-Support (PASS) and Self-Employment. 10

Types of Self-employment. 11

V.       Farm Arrangements. 11

Life Insurance Salespeople. 11

Rental Income. 11

Ministers. 12

Directors, Fiduciaries, and Trustees. 12

Royalties and Honoraria.. 12

VI.     Conclusion.. 12

Contact Information.. 13

Partnering Organizations. 13

Alternate Formats. 13

About Policy-to-Practice Briefs

This document is one of a series of policy to practice briefs published as part of the New York Makes Work Pay initiative, a Comprehensive Employment Services Medicaid Infrastructure Grant funded by the U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services (CMS) to the New York State Office of Mental Health (OMH) and its management partners, the Burton Blatt Institute at Syracuse University and the K. Lisa Yang and Hock E. Tan Employment and Disability Institute (EDI) at Cornell University. The New York Makes Work Pay Initiative provides an array of services to employers and individuals with disabilities and the agencies and advocates that serve them, helping to remove obstacles to work and pave the way to self-supporting employment.[1]

The thoughts and opinions expressed in these materials are those of the authors and do not necessarily reflect the viewpoints or official policy positions of the Social Security Administration (SSA), CMS, or OMH. The information, materials and technical assistance are intended solely as information guidance and are neither a determination of legal rights or responsibilities, nor binding on any agency implementation and/or administrative responsibilities.

This publication is based on federal Internal Revenue Service (IRS) laws, regulations, and policy.  Although this is written for a New York audience, all of the IRS-related rules discussed are federally based and will play out the same in every state.  Therefore, this will be a good resource for readers throughout the country.

I.      Introduction

Many people with disabilities choose self-employment as their goal because it gives them the flexibility to set their own schedules.  They can work at home, and only work during their most productive time of the day.  They can save money on certain work-related expenses such as transportation.  Finally, they can pursue an occupation without worrying that an employer will see only their limitations and not their potential.

Some recipients of disability benefits are able to return to the type of  business activity they engaged in prior to becoming disabled and others are using the opportunity to use a particular skill or talent to develop a trade or business. 

It is possible to earn a substantial income from a successful trade or business. The Social Security Administration (SSA) defines disability as the “inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.”  Substantial gainful activity  (SGA) is defined using a monthly earnings limit that is determined using the National Average Wage Index. In 2012, that earnings limit is $1010.  When a recipient is an employee as defined by the Internal Revenue Code, the earnings that are taken into consideration are the gross wages earned in a month (for SSDI purposes) or received in a month (for SSI purposes), less all applicable deductions and exclusions.  To document the earnings SSA simply has to look at an individual’s paystub or access payroll records from the employer.  In the case of a self-employed person, the documentation must come in any number of different forms.

Both SSI and SSDI treat self-employment income the same way.  Rather than counting gross receipts received by the business, SSA only counts the net earnings, or profit.  This is known as NESE – Net Earnings from Self-Employment.  Net earnings are the result of gross income minus business expenses, work-related expenses. Some work incentives are unique to self-employment and may vary depending upon the program or benefit the person receives:  the impact on eligibility will also vary. 

Beginning after 1989, both programs allow as a business expense a 7.65 percent deduction that reflects part of the Social Security (FICA) taxes paid.  To apply the deduction, SSA multiplies the net profit by .9235 to determine NESE.  (100% - 7.65% = 92.35% or 0.9235) POMS SI 00820.210.

II.     Benefits Planning for the Self-Employed Recipient

It is important for the Work Incentive Practitioner to know that self-employment is the goal prior to conducting an analysis of earned income on disability benefits such as Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI).  Having a recipient with a self-employment goal means the benefits analysis will be more complicated, particularly if the individual is receiving both SSI and SSDI benefits.  The Programs Operation Manual System, Social Security Act and Code of Federal Regulations are important resources to assist you.[2]

Work Incentive Practitioners should be careful not to advise recipients on business development or taxes.  Instead, recommend that the individual seek help from a tax advisor or business consultant for assistance with writing a business plan or to learn about allowable business expenses.  Refer them to, “Tax Deductions for Small Businesses.”[3]  For information about self-employment and people with disabilities, a good reference is “Making Self-Employment Work for People with Disabilities.”[4]

Is it Self-Employment?

SSA must determine whether a recipient is engaging in a self-employment activity.  Generally, if the individual reports self-employment income on their Federal income tax return, SSA will not question the existence of a trade or business.  If there is a question, the POMS provide field office personnel with guidelines in RS 01802.002 – “Factors Indicating the Existence of a Trade or Business,” and RS 01802.010 – “Development of Questionable Trade or Business.”  The general policy is that a recipient is engaging in a trade or business if 1) they demonstrate “good faith intention of making a profit or producing income, 2) they engage in the activity on a regular basis, and 3) they present themselves to others as “being engaged in the selling of goods or services.”  If an individual derives her income from a trade or business, that is significant.  The length of time the recipient engages in the business is important, keeping in mind that certain activities are seasonal, e.g., landscaping.  It should be noted by the Work Incentive Practitioner that illegal activity may, according to SSA, constitute a trade or business.  If they are deriving an income from the activity, albeit illegal, they are required to report their income to the IRS and pay self-employment taxes. 

If the activity does not provide them with enough income to earn a living, it may be considered as a hobby by the Internal Revenue Service.  There is also a limit to the deductions available if there is no intent to make a profit through the business or investment activity. 

The Social Security Act references the Internal Revenue Code to define key terms associated with self-employment such as “trade or business,” “taxable year,” and “partnership or partner.”  Ultimately, however, SSA makes the final decision as to whether or not activity is employment or self-employment for SGA determinations and SSI payment calculations. 

An individual may have more than one trade or business, or they may have a business on the side while working for an employer.

III.     Social Security Disability Insurance

An SSDI recipient will use a Trial Work month if self-employment activity meets the definition of a “service” month: net earnings for the activity equals or exceeds the current year’s Trial Work Period limit (e.g., $720 in 2012), or, the recipient reports spending at least 80 hours engaged in the trade or business during the month.  SSA must rely on the individual’s own record of time spent.  Service hours are defined only by the period of time the recipient spends providing a service to a client or producing a product.  The time spent during the “startup” period is not included in the Trial Work Period, e.g., planning, purchasing or leasing space, equipment, applying for licenses or permits, etc. 

To determine the net profit for a particular month, SSA will compare the business records, such as profit and loss statements, with the individual’s income tax return.  Generally, SSA will look at each month individually; however, it may be necessary to average the earnings over a period of work if it is not possible to establish monthly net earnings. 

Once the Trial Work Period has been completed, SSA will review the self-employment activity to determine if the work meets the criteria established for SGA.  There are three tests that can be applied during the review:[5]

1.      Is the self-employed person performing “significant services” in the trade or business AND is he deriving “substantial income” from the trade or business?

2.      Is the work comparable to an unimpaired individual in the community?

3.      Is the work clearly worth more than the SGA level?

In the first test, the income is considered substantial when the net earnings from self-employment, or NESE, is equal to or exceeds the SGA level for the year the work was performed.  If the countable, or net, earnings do not average more than the SGA level but the income is comparable to what the recipient earned prior to their disability determination, or, the income if comparable to that of a non-disabled individual engaged in the same business, SSA may find that their income is substantial. 

Since only net income is counted when making the SGA determination, the Work Incentive Practitioner must understand how NESE is calculated.  First, as with any other business, the individual will report to the IRS only that income left after deducting normal and allowable business expenses. For SSA purposes, however, additional deductions are allowed, including the tax deduction explained earlier, as well as some of the general (IRWEs) and special work incentive deductions specific to self-employment including:

·         Unpaid Help,

·         Impairment Related Work Expenses, and

·         Unincurred Business Expenses.

Unpaid Help is that which is provided by family members, friends, or others who work without pay.  SSA determines the value of the unpaid help using the prevailing wage rate in the person’s community for similar services.  To that end, they will need to know the name of the individual, their relationship to the recipient, the reason the unpaid help is needed, a description of the services provided as well as the time spent, and the length of time the arrangement has been in existence.  For example, the spouse of a self-employed individual with a disability provides 5 hours of bookkeeping services monthly at no charge.  The value of these services will equal the prevailing wage for a bookkeeper in that locale x 5 hours of service.

Impairment Related Work Expenses (IRWES) are necessary because of the impairment and because of the need for the recipient to work.  The expense must be paid by the recipient and not reimbursable by any source.  It must be deducted as an IRWE in the month in which it is paid, however, some large expenses can be prorated over several months.  For more information on IRWEs, consult the Red Book on Work Incentives or the POMS DI 10520.00.  For example, a self-employed individual with chronic pain syndrome may require pain relief medication in order to work.  The cost of these drugs actually paid by the recipient can be used as an IRWE.  Generally, for individuals with some prescription drug coverage, the co-pay may be the only portion of the cost that can be claimed.

Unincurred Business Expenses, unlike IRWEs, are contributed by someone other than the recipient.  The expense must be one that would be approved by the IRS as a business expense if the recipient, or the business, paid for it.  For example, the State Vocational Rehabilitation Agency (SVRA) may purchase necessary equipment or pay the initial rent for space if the recipient has an approved plan for employment. Both would be considered an approvable business expense by the IRS, but are not incurred by the recipient.  In some instances, there may be no expense incurred at all.  Use of space in a government building is an example of business expense for which there is no exchange of money, but SSA allows it as an unincurred business expense.  In-kind use of office space, telephone, office equipment, and perhaps some personnel time (e.g. receptionist) may also be deducted.  The method used to determine the value of the expense depends on the type of expense.  For example, space and utilities would be valued at the fair market value.  If items such as office equipment are involved, SSA will use a method comparable to the depreciation method used for income tax purposes – depreciate the cost of the item over their useful life and deduct the amount of depreciation attributable to the taxable year in question.[6]

Because of the manner in which self-employment income is often received, there may be wide fluctuations in gross receipts for the business.  Therefore, SSA will average the countable income by figuring the “total countable income” for a period of work and dividing that figure by the number of months in the period.  If there are distinct periods during which the individual’s net income is higher, SSA may only use the months in that period to figure the average countable income.  For this reason, a self-employed recipient may be found to be engaged in SGA even though her average annual is below the SGA level for that year. 

For example: Joe, an SSDI recipient, owns a bicycle sales and repair shop.  During the winter months business is slow, but beginning in April his sales and repair work increases significantly.  The SSA can average his income during the distinct periods and may find that he is engaging in SGA from April through September.

On the other hand, the self-employment income is averaged over the entire period of work even if the recipient doesn’t receive payment in each month of work, e.g., a farmer works his crop from March 1st until September 30th but is only paid after the crop is harvested. 

Substantial income is not the only measure for test number one.  The recipient must be performing significant services to the business as well.  In a “one-person” business, the services are presumed to be significant.  However, an individual may own a business but pay other people to do the work.  In that case, the income would be unearned.  If the business involves more than one person, e.g. employees, partners, assistants, SSA would consider the recipient contributing substantially to the operation of the business if she 1) spends more than forty-five hours per month managing the business and its employees, or 2) contributes more than one-half the time required to manage the business. 

In the instance that the SGA determination is being made prior to the self-employed recipient having been entitled to benefits for less than 24 months, there are two extra tests that the work activity is evaluated by. These are described below.

Two additional factors may be considered in determining if the income is substantial:

1.      If the recipient was self-employed prior to becoming disabled and it was her sole means of livelihood, SSA may compare the income derived from the business in the past with the current net earnings.  If the two are comparable, the person’s income will be considered substantial; and

2.      If the recipient’s earnings from self-employment are comparable to that of similar businesses in the person’s community, the income may be substantial.

In other words, if the person was able to make a living for the business prior to becoming disabled, or, other people in the same community are able to support themselves on similar income, the standard for “substantial income” can be lower than the SGA amount.  The local office personnel may use their own knowledge of the community or obtain evidence from the local Chamber of Commerce in making their decision. 

SSA must also consider the nature of the work.  POMS[7] guides the local office with the following:  “Decide if the recipient’s services as a physician, dentist, lawyer, accountant, engineer, scientist, management consultant, writer and other highly skilled occupations are of such a nature and value that they are substantial even if 45 hours or less.”

Tests two and three are applied only if SSA cannot clearly establish SGA based on significant services and substantial income. 

Test Two: Comparability of Work Activity 

If the business is operating at a level comparable to a non-disabled individual in the recipient’s community engaged in the same or similar business, considering the hours of work involved, skills required, energy output, duties and responsibilities, the recipient may be found to be engaging in SGA.  If the local office cannot obtain conclusive evidence that the work is comparable using the required factors, the finding must be that the person is NOT engaging in SGA under the comparability test.

It is important that SSA carefully select the comparison group of non-disabled individuals. They must engage in the same type of business and maintain a standard of living that is adequate for their community.  For this reason, SSA typically chooses well-established businesses for comparison.  SSA must describe the businesses in detail, conducting an interview with the non-disabled business owner if necessary.  To compare the recipient’s work activity, it is necessary to have adequate description of their business as well, and the local office is directed to obtain this information first-hand through actual participation or observation.

I.                    Obviously, when local office personnel live and work in the same community as the recipient, as in smaller, rural communities for example, it is more likely that they will have the information required to do a fair comparison. 

Test Three: Worth of Work Activity

If SGA cannot be established using the comparability of work test, the third test may be applied.  POMS[8] provides the following guideline for SSA personnel:  self-employment activity is considered substantial if it is “reasonably worth over the [SGA] amount…when considered in terms of its effect on business or when compared to the salary an owner would pay to an employee for such duties in that business setting.”  For example, if a recipient is involved in self-employment activity in a normal employer-employee arrangement, the earnings would be above the SGA level but the individual is accepting payment at a lower level, SSA may find that the person is engaged in SGA.

For those individuals who are statutorily blind, the SGA level for the blind ($1690 in 2012) is used to determine if income is substantial.  As of 1978, self-employment activity of recipients with blindness is evaluated only in terms of SGA.  Tests two and three, comparability and worth of work, are never applied to individuals meeting SSA’s blindness standard.

Because many new businesses do not realize net profit in the startup years, many self-employed SSDI recipients find that their benefits continue for a period of time even if their business is successful because their net earnings do not exceed the SGA level.

IV.    Supplemental Security Income

When an SSI recipient reports income from self-employment to SSA, the field office must first determine whether or not the activity constitutes a trade or business.  Some activity may not be considered employment, and will be treated as unearned income. 

The occasional selling of crafts produced by the recipient is an example of activity that would not be considered earned income.  As with SSDI beneficiaries, the activity must be carried out with the intention of making a profit, be regular and ongoing, and meet the factors indicating the existence of a trade or business.[9]  In general, if the income meets the definition of wages for the SSDI annual earnings test even though no FICA taxes are being deducted, it would be considered earned income.

For guidance, the POMS provide several case examples to illustrate the difference between self-employment activity and unearned income:[10]

Example 1:  an SSI recipient reports that she is babysitting for her grandchild.  She receives $20 per week from her daughter.  She does not babysit for anyone else.  The SSA office determines that the activity is not self-employment, but instead is unearned income for the purpose of calculating the SSI payment.  In a similar case, however, an SSI recipient indicates that she babysits for several neighbors and friends, a service she has been providing for a number of years.  Although she does not advertise her service, is not licensed as a day care, and pays no taxes, this activity meets the criteria of a trade or business and the local office determines that she is self-employed.

Example 2: describes a common situation in which an SSI recipient reports that he earns extra money to help with food or rent by collecting aluminum cans off the street and redeems them at a recycling center for cash.  Because he is known to do this, sometimes members of his community contact him to pick up their cans.  He does not file income tax returns but makes about $200 a month from the activity.  This is viewed by the SSA as an ongoing, regular activity that was established with the intent of producing income.  He is determined to be self-employed.  Another and juxtaposed example is the man who occasionally mows lawn for his neighbors to earn extra money for a one-time expense such as car repair.  Because it is not regular and ongoing activity and there is no intent to make a profit, this is considered unearned income in the month in which it is received.

In some self-employment activities, payment is in the form of food, shelter, or other items such as a car received in lieu of cash.  There must be evidence that these were in-kind payments provided in the course of the recipient’s trade or business.  If not, then they are considered unearned income.  In-kind income is valued at its current market value.[11]

Once it is established that the SSI recipient is engaging in self-employment, SSA will determine the NESE for the purpose of determining continued eligibility and calculating the SSI payment. 

To reiterate, NESE is the gross income from a trade or business minus allowable deductions and exclusions.  NESE is determined on a taxable year basis, so that annual net earnings are divided equally among the months in the taxable year to get the monthly NESE. This figure is used to calculate the payment.  The entire taxable year is used even if the business is seasonal, starts during the year, and ends before the year is over.  The only time less than 12 months may be a taxable year is the basis for reporting income changes, for example from a fiscal to a calendar year, or, the taxpayer dies.  The taxable year is not ended if the recipient goes out of business before the year ends.

Verifying Net Earnings

SSA uses a variety of evidence to verify earnings from self-employment.  In order of priority, SSA will review the following:

·         The Detailed Earnings Query (DEQY) – a report generated by SSA computer that lists covered and non-covered earnings, employer names and addresses, and pension data for each year requested;

·         Federal Income Tax Return – Schedule SE, which shows the net earnings and any net loss; Schedule C which indicates net profit or loss; Schedule C-EZ for net profit; or, Schedule F for net profit or loss;

·         Business Records – kept by the individual detailing accounts receivable and accounts payable.  Deductions taken on business records are assumed allowable by the IRS; and

·         Individual’s Signed Allegation – if no other evidence is available the local office may accept a statement by the individual that indicates net earnings.

If an individual has been conducting the same trade or business for several years, and no change is anticipated, the local office may use net earnings from the prior year as an estimate for the current year in order to calculate the SSI payment.

If the individual engaged in the same business ONLY for one year prior, the local office may use a gross-net ratio method to calculate the current year’s net profit.  Using the individual’s tax returns or business records from the previous year, the ratio between net profit and gross receipts for that year is determined.  That ratio is applied to the actual gross receipts the individual reports receiving in the current year and is used for the remainder of the year.  For example, if John reported a net profit of $1000 for $5000 of gross income, his gross-net ratio is 20%.  The projected net earnings would be $1000 per month.  This method is not used for businesses that are seasonal or have unusually high income at certain times of the year.

If the individual is engaging in a new business, the verification of income received cannot occur until the taxes are filed.  In order to calculate the monthly SSI benefit until the taxes are filed, the income is projected or estimated, and adjusted when the net income is reported to the IRS on the Schedule SE.  The field office can use partial year net income from profit and loss statements, which should be kept by the business accountant or bookkeeper, or, if no records are available, a signed statement from the recipient that indicates the estimated net income will suffice. When tax records are available, the field office will adjust the SSI payment up or down, depending on the accuracy of the estimated income.

Any net loss from self-employment is deducted from other earned income, either the recipient’s or spouse, when calculating the monthly SSI payment.  The net loss must be verified, usually when the individual files the appropriate IRS forms, and is divided evenly over the months in the taxable year.  The monthly loss is used to offset the other earned income regardless of whether the recipients are an eligible couple, or an eligible individual with an ineligible spouse where deeming may occur. 

For example: Mary is an eligible individual who started a small business in her home.  Her husband, John, is not eligible for SSI, and is employed outside of the home.  In the past, some of John’s income has been deemed to Mary, resulting in a decrease in her SSI payment.  When Mary files her taxes at the end of the year, she reports a net loss in her business.  SSA will divide the loss by twelve and deduct that from the deemed income.  The result will be an increase in Mary’s SSI payment.

Net loss cannot be estimated.  It must be verified using tax records.

Work Expenses that Apply to Self-Employment for the SSI Recipient

Once the monthly NESE is determined, the work incentives are applied in the same way they are applied to a person with wages from employment.  Just as with gross income received in a month, NESE is reduced by the General Income Exclusion if no unearned income, the Earned Income Exclusion, Blind Work Expenses (BWE) or Impairment Related Work Expenses (IRWE) applicable in a specific month.  Net earnings can be set aside in a Plan for Achieving Self Support (PASS).  An SSI Calculation Worksheet will ensure that all deductions and exclusions are used in the proper order.

Plans to Achieve Self-Support (PASS) and Self-Employment

Since only countable income is used in the PASS, the expense would be

1.      Deducted as a business expense and the resulting countable net income would be used to fund the PASS, or

2.      Deducted from other income (unearned) to get the countable unearned income. 

A PASS cannot be approved for an SSI-only recipient unless there is NESE.  For example, Mary, an SSI recipient, is self-employed as a tailor. She wants to purchase a vehicle in order to expand her business to include delivery of completed work to her customers.  This would result in increased business and decreased dependence on SSI.  Mary wants to submit a PASS, but her tax records reveal that she has more expenses than gross income from her business, so there is no net income to put aside in the PASS.  Mary will have to wait until she has net profit or get a business loan to pay for the vehicle.

The Social Security Act excludes from the resource test property that is essential to a recipient’s means of self-support.  This exclusion is called Property Essential for Self Support, or PESS.  Non-business property used to produce goods or services essential to daily activities, e.g. land to produce vegetables, is limited to a $6,000 exclusion.  Up to $6,000 of non-business income-producing property, e.g., rental property, is excluded if it produces a 6% net annual return.  But property used in a trade or business is excluded regardless of its value or rate of return.  SI 01130.500

Types of Self-employment

There are several types of self-employment that merit further discussion; farm arrangements, realtors, ministers, directors, and fiduciaries.

V.     Farm Arrangements

There are unique considerations when working with a farmer who is receiving disability benefits.  Two major categories exist: Farm Operators and Farm Landlords.  For Farm Operators, the same rules apply as for other self-employed individuals in determining whether substantial services are rendered.  Other than crop production and livestock management, some activities that may be considered are: repairing or constructing fences, equipment, buildings and machinery; insecticide spraying, weed control.

There are separate rules for Farm Landlords.  A Farm Landlord is one who rents farm land to another farmer.  SSA must first determine if the Farm Landlord is materially participating in the production or management of the crops or livestock on the land.  In some cases, there is a formal agreement between the landlord and the tenant that clearly delineates participation.  Income the landlord receives from the arrangement is included in the net earnings.  Other cases are not as clear.  The tests for material participation can be found in the POMS.[12]  A Farm Landlord can get earnings credits if she materially participates in the production of, or the management of the production of crops or livestock. If so, they may also be determined providing significant services.  If they also receive substantial income, they may be considered at SGA.

Material participation reflects activity performed over the entire crop season, while substantial services relate to services provided in each separate month.  Services may be substantial in a month in which there is no income received.  There are various federal agricultural programs in which payments are made to Farm Operators and materially participating Farm Landlords.  These payments may be in the form of cash, materials, or other services and are included in the net earnings from self-employment.[13]

Life Insurance Salespeople

Life insurance salespeople typically operate on commission.  The income is counted in the year it is actually received.

Rental Income

Rental income from real estate is not considered earned income UNLESS the individual is engaged “in the business of renting property” and intends to make a living doing so. 

Ministers

The earnings from services performed by a duly ordained, commissioned, or licensed minister are considered net earnings from self-employment, and all ordinary and necessary expenses incurred in carrying out the duties of his ministry are deductible.  It is possible for a minister to be exempted from taxation by the IRS, and the minister of a bona fide religious order that requires a vow of poverty and has not filed a certificate of election of social security coverage will not have the income received from the order included as earnings.

Directors, Fiduciaries, and Trustees

Services performed by directors of a corporation generally do not extend beyond attendance at meetings, which are usually held no more than once a month.  Therefore, the services of a director are not substantial.  In some cases, however, the services may total more than 15 hours a month and the local office would investigate further the possibility of substantial services.  Fiduciaries, such as administrators, executors, or trustees of an estate, may be self-employed and the income they receive for the services provided is NESE.  One of the following conditions would be evidence that the fiduciary is engaged in a trade or business:

1.      She is an attorney and the service is part of the law practice, or

2.      There is a trade or business among the assets of the estate, and the fiduciary actively participates in the operation of this trade or business, and the fees of the fiduciary are related to the operation of the trade or business, or;

3.      The estate is extremely and requires extensive time and effort to manage.[14]

Royalties and Honoraria

Royalties are generally paid to an owner for use of property, copyrighted material (books, music, or art) or natural resources (minerals, oil, timber).  Royalties are earned income when they are received as part of a trade or business, or received in connection with any publication of work such as a manuscript, magazine article, or artwork.  If one of those conditions cannot be verified, then the local office must treat the royalty income as unearned for purposes of determining eligibility for SSI and calculating the payment.

Note:  Writers and artists typically receive payment for their work after the work is completed, and in some cases the income can be significant.  The income is counted in the taxable year in which the services are received, rather than in the year paid. 

An honorarium is a gift, reward or donation given in exchange for services rendered, such as that provided by a guest speaker at a convention.  The honorarium may be in the form of lodging or payment of expenses necessary to get to the convention.  For SSI purposes, an honorarium of this type is considered earned income. 

VI.    Conclusion

The primary purpose of this brief is to familiarize the Work Incentive Practitioner and other support providers with the rules regarding self-employment and its impact on Social Security benefits.  While it will be necessary to consult with the Work Incentives Liaison, the Claims Representative handling the case, or the Area Work Incentives Coordinator, the material in this brief should provide a baseline of information with which to formulate your questions.  The real challenge will be to communicate the information to the recipient. 

Contact Information

K. Lisa Yang and Hock E. Tan Employment and Disability Institute

ILR School / Cornell University

201 Dolgen Hall

Ithaca, New York 14853-3901

607.255.7727 (voice)

607.255.2891 (tty)

607.255.2763 (fax)

ilr_edi@cornell.edu

www.edi.cornell.edu

Partnering Organizations

New York State Office of Mental Health

K. Lisa Yang and Hock E. Tan Employment and Disability Institute (Cornell University)

Burton Blatt Institute (Syracuse University)

Alternate Formats

This publication is available in alternate formats. To request an alternate format, please contact us using the information provided above. This series of briefs are also available online in both html and pdf formats. They are located at ilr-edi-r1.ilr.cornell.edu/nymakesworkpay/.



[1]     A detailed description of the New York Makes Work Pay Project and its services can be found at  http://ilr-edi-r1.ilr.cornell.edu/nymakesworkpay/.

 

[2]     The Programs Operation Manual System (POMS) Sections RS 015, DI 105 and SI 00820.200 – SI 00820.230; the Social Security Act, Title II-Federal Old-Age, Survivors, and Disability Insurance Benefits, Sec. 211 and Title XVI-Supplemental Security Income for the Aged, Blind and Disabled, Sec. 1612; the Code of Federal Regulations, Title 20, Chapter III, Part 404-Federal old-age, survivors and disability insurance, Subpart K, Sec. 404.1065 through 404.1096, and Part 416 – Supplemental Security Income for the Aged, Blind and Disabled, Subpart I – Determining Disability and Blindness, Sec. 416-975.

 

[3]     IRS Publication No. 334.

 

[4]     Cary Griffin and David Hammis; Paul Brookes, 2003.

 

[5]     Section 404.1575, C.F.R.

 

[6]     [DI 10510.015 (2)(a)(3)]

 

[7]     Section RS 02505.080.

 

[8]     Section 24001.025 D.1.c.

 

[9]     RS 01802.002 Factors Indicating the Existence of a Trade or Business.

 

[10]    SI 0082.200 Net Earnings from Self-Employment (NESE).

 

[11]    SI 00835.020.

 

[12]    Sections RS 001803.700-716.

 

[13]    RS 01803.210.

 

[14]    POMS section RS 01802.034.