DPSS ePolicy

This release provides clarification regarding the treatment of self-employment income earned specifically in the “gig-economy” for purposes of CalFresh budgeting and determining the household’s (HH) monthly benefits allotment. This release does not change how self-employment income is calculated for CalFresh. This release will also cover policies, procedures, and requirements of self-employment income under the CalFresh Program. The following sections are discussed:

• General overview
  
  
• Self-Employment Deduction Methods
  
  
• Expense Types of Producing Self-Employment Income
  
  
  • Allowable Expenses
    
    
  • Non-Allowable Expenses
     
• Capital Gain
  
  
• Corporation
  
  
• Averaging Self-Employment Income
  
  
  • Self-Employment Income Received Less Than Monthly
    
    
  • Business in Existence for Less Than A Year
     
• Rental Property Income
  
  
  • When Rental Property Income is Verified
     
• Roomer Income
   
• Boarder Income
  
  
  • Cost of Doing Business
    
    
  • Deductible Expenses
    
    
  • Foster Care Payments
     
• Gig-Income
  
  
• Reporting Self-Employment Income Report on Eligibility Status Report (SAR 7)

Note: Changes are shown highlighted in grey throughout the document.

Self-employment income is a type of Earned Income that is produced by an individual who has a business or does not have an employer who deducts taxes, instead, a gross income is received for the service provided. Generally, it is the gross income from a self-employment enterprise that includes total gain from the sale of any capital goods, service, or equipment related to the business, excluding the cost of operating the business. 

If a HH files their income tax as "self-employed", the individual is considered self-employed for CalFresh eligibility. Criteria such as tax returns, employer reports to the  Internal Revenue Service (IRS), Social Security tax withholding, etc., are used to determine self-employment status. However, each individual's earned income type is to be determined on a case-by-case basis. 

Generally, an individual is considered to be self-employed if they:

• Is not employed by another person;
  
  
• Carries on a trade or business as a sole proprietor or as an independent contractor;
  
  
• Has provided a copy of their income tax return indicating they are self-employed and are engaged in the same occupation at the time of application or renewal;
  
  
• Commonly offers their services or merchandise to anyone who may be in the market for them;
  
  
• Generally, provides their tools, supplies, materials, or merchandise; and
  
  
• Usually incurs a cost to produce self-employment income.

Example: An applicant/participant who claims to be a self-employed newspaper carrier and provides a 1099 or Schedule C and files their taxes as self-employed is considered as self-employed for CalFresh Program. 

Examples of self-employed individuals include, but are not limited to the following:

• Housekeeper;
  
  
• Babysitter;
  
  
• House Painter;
  
  
• Gardeners (lawn service);
  
  
• Hairdressers;
  
  
• Salespersons (such as Avon, Amway, etc.);
  
  
• Self-employed Farmers (must receive or anticipate receiving $1,000 gross annually from growing agricultural products or raising livestock;
  
  
• Ride-sharing drivers (Uber, Lyft); or
  
  
• Food delivery drivers (PostMates, DoorDash, etc.).

The following are examples of employment that are considered self-employment and employment that are not. The examples are not all-inclusive.

Self-Employment

• Individuals who take care of children (non-CalFresh HH members) or the elderly (non-CalFresh HH members), working in their own homes or someone else’s home and receive payment directly from the individuals who they provide care for.
  
  
• Housekeepers who solicit their services and typically work for a variety of private individuals or businesses.
  
  
• Salespersons who purchase products for resale (e.g., Mary Kay, Avon, Amway, etc.) or materials for the manufacturing of products for sale, such as a crafter. 
  
  
• Individuals such as day laborers, who do odd jobs on an irregular basis, and incur costs, such as purchasing tools or materials to produce self-employment income. 
  
  
• Individuals who use their tools or materials for recycling (such as using their own plastic bags to collect cans and a pick-up truck to transport). 
  
  
• Individuals who earn money by panhandling (if the amount could be reasonably anticipated with certainty for the certification period). 
  
  
• Gig contractors such as Uber, Lyft, PostMates, DoorDash, drivers, etc.

Not Self-Employment

• A care provider who works in a facility owned and operated by another individual or business; Home care providers for whom FICA taxes are paid by the individuals providing the care (e.g., In-Home Supportive Service or IHSS providers). 
  
  
• A housekeeper who is employed by: 
  • Hotels; 
  • Motels; 
  • Maid Services; or 
  • Institutions.
• Salespersons employed by businesses, such as department stores or automobile dealerships. 
  
  
• Individuals employed by temporary agencies or another party regularly and are paid “under the table.”
  Day laborers who do odd jobs on an irregular basis and receive a check with a deduction to perform the labor, but do not incur any costs to produce this income.
  
  
• Individuals who earn money by recycling but do not claim as self-employed on their income tax return. 

Note: Self-employed individuals receive either cash or gross check for their services. No taxes are deducted from their checks. 

Self-Employment Deduction Methods

A CalFresh applicant/participant has the option of choosing one of the self-employment deduction methods below to determine the net gross earned income amount:

Option #1 (Standard Deduction) - Deduct 40% from the HH’s gross self-employment income. The remaining balance will be used as earned income for budgeting purposes (40% deduction may be allowed even when the applicant/participant has claimed no self-employment expenses but is determined or claims to be self-employed and files taxes as self-employed). The standard deduction is intended to cover the costs of producing self-employment income. Verification is not required to allow the 40% deduction.

Option #2 (Actual Deduction) - Gross self-employment income minus the allowable expenses. The remaining balance will be used as earned income in the CalFresh budget. Verification is required when the HH chooses the actual business expenses as a deduction.

Note: Only one overall deduction type may be chosen (as opposed to one per source of income). The CalFresh applicant/participant can change the self-employment deduction method only at Renewal (RE) or every six months, whichever occurs first. It is used to budget income over the next Semi-Annual Report (SAR) payment period (six months).

If the applicant/participant does not verify the actual expenses during the specified timeframe, the 40% standard deduction will not be allowed even if there is self-employment income.

Net Gross Self-Employment Income

It is the total profit earned from self-employment by offsetting the business expenses against the gross income from self-employment business.

Roomer

Roomers are individuals to whom a HH provides lodging only for compensation.

Boarder

Boarders are individuals or groups residing with a CalFresh HH and paying reasonable compensation to the HH for lodging and meals.

Rental Property

Rental property is property owned by the CalFresh HH in which the HH member(s) does not reside in.

Capital Gain

The proceeds obtained from the sale of capital goods or equipment.

Corporation

A privately held company that has a limited number of shareholders. The corporation is responsible for its debts and obligations.

Gig Contractor

An individual who earns income working as an independent contractor whose work is coordinated by a third-party.

Gigs

Short-term jobs coordinated in conjunction with an online or application-based tool provided by a third-party.

Allowable Expenses

1. Costs of labor; 
   
   
2. Stocks/Inventory/Raw Materials; 
   
   
3. Tools and equipment; 
   
   
4. Work-related clothing; 
   
   
5. Seed and fertilizer for farming; 
   
   
6. The actual cost of mileage for business usage of selling, delivering orders, attending meetings, etc. (verifiable by receipts or the HH’s reasonable determination of a cost per mile); 
   
   
7. Business-related vehicle and transportation costs (such as maintenance, mileage spent- except transportation to and from work- tokens, tolls, gasoline, etc.); 
   
   
8. Business interest, insurance, taxes; 
   
   
9. Payments on the principal and interest of the purchase price of income-producing real estate and capital assets, equipment, machinery, and other durable goods; 
   
   
10. Insurance premiums on the income-producing property; 
    
    
11. Advertising expenses; 
    
    
12. Special permits, licenses, fees; 
    
    
13. Postage;
    
    
14. Telephone expenses; 
    
    
15. Utility fee for the job site; 
    
    
16. Bookkeeping and payroll expenses;
     
17. Employee wages and taxes; 
    
    
18. Taxes on income-producing property, business profit taxes, and other mandatory business-related taxes; 
    
    
19. Space/booth rentals, including the percentage of costs for portions of HH residence used for self-employment; and
    
    
20. In the gig economy, the actual allowable cost may include but is not limited to, commissions, application fees, gasoline, car washes, toll fees, uniforms, and cell phone costs. 

Example:  An individual has a typing service and has an office set up in their home. In this case, determine the fraction of rooms used or percentage of square footage and reduce the shelter deduction by the amount allowed as self-employment deduction. 

Non-Allowable Expenses

1. Depreciation; 
   
   
2. Federal, State, and local income taxes;
    
3. Transportation expenses related to commuting to and from work site; 
   
   
4. Money set aside for retirement purposes; 
   
   
5. Personal business and entertainment purposes; 
   
   
6. Personal transportation; 
   
   
7. Net loss from previous periods; 
   
   
8. Home-based self-employment expenses where living, and business expenses are shared but undefined (for example, a HH has an electric bill used for both personal and business uses); and 
   
   Note: If part of the expense is for personal use, the HH must identify the percentage used for the self-employment business. Only the portion used for business is allowed as a deduction.
   
   
9. Any amount that exceeds the payment a HH receives from a boarder for lodging and meals.

Capital Gain

Capital gain is calculated by subtracting the purchase price from the sale price and added to any amounts depreciated. For self-employment, the capital gain amounts the HH anticipates receiving during the months the income is being averaged is counted.

If the capital gain amounts are obtained from the federal income tax forms, the entire proceeds of the sale must be counted, even if only 50% of the proceeds are taxed for federal income tax purposes. The total amount of the capital gain is counted in full as income for CalFresh purposes.

Corporation

The income and resources of a corporation belong to the corporation, and therefore, an owner who works and receives a salary from the corporation is not a self-employed person. They are an employee of the corporation.

For CalFresh, salary received by the shareholder of a corporation is counted as earned income, and stock dividends as unearned income. The value of the stock is excluded when the stock is essential to employment but is counted as a resource if the stock is not essential to employment.

Averaging Self-Employment Income

Self-employment income is averaged over the period the income is intended to cover (except for migrant or seasonal farmworker HHs).

To calculate the annual self-employment income, the HH’s most current federal or state income tax return is used. If a tax return is not available, then the HH must provide records with an accurate and reliable summary of their income and expenses.

Two factors are used in calculating self-employment income for CalFresh:

• Income received in the past year; and 
  
  
• Income that can be anticipated for the certification period. 

The HH must provide verification of the income change if it has experienced a substantial increase or decrease in self-employment business income that was previously averaged for the current certification period.

Self-Employment Income Received Less Ofthen Than Monthly

At the time of application, the income and expenses from self-employment must be verified for either the last year or the last period during which income was earned and was intended to cover either a year or part of a year. HHs by contract or self-employment who earn their annual income in a period shorter than one year will have that income averaged over the certification period (prorated over the period the income is intended to cover), provided the income is not received on an hourly or piecework basis. The annualized monthly income figure is used as the monthly income in the CalFresh budget.

HHs with this type of income may include (but not limited to):

• School employees; 
  
  
• Sharecroppers; 
  
  
• Farmers (excluding migrant or seasonal farmworkers); and 
  
  
• Other self-employment HHs.

Business in Existence for Less Than a Year

If a HH’s self-employment business has been in existence for less than a year, the income is to be averaged over the period the business has been in active operation. The annualized monthly income amount is used as the monthly gross income in the CalFresh budget.

Rental Property Income

Rental property is a property owned by the CalFresh HH, in which the HH does not reside in. Ownership of rental property is considered a self-employment enterprise. Net rental income is income the HH receives from renting the property and it is:

• Located on the same parcel of land (separate dwelling duplex, triplex, etc.); or 
  
  
• Other real property located on a separate parcel of land.

Note: Renting a room in one's home or owning a duplex and living in one of the two units and renting the other does not constitute as a "rental" property.

If the HH is actively engaged in the management of the property for at least an average of 20 hours per week, the net income, after self-employment deductions, is considered earned income (and eligible for the 20% earned income deduction). If the HH works less than 20 hours per week managing the property, the income is considered unearned income (and is not eligible for the 20% earned income deduction).

Below is the treatment of income based on the time of active management of the property:

If the management time is less than an average of 20 hours per week, Then...

The income is considered as Unearned.

If the management time is an average of 20 or more hours per week, Then...

The income is considered as Earned.

The HH has the option of choosing the actual cost of producing self-employment income, or a standard deduction of 40% of the gross earned income. The HH must also be informed that they may change their deduction method at RE or every six months, whichever occurs first.

When Rental Property Income is Verified

When there is a roomer, boarder, or net rental income situation, all income and self-employment-related expenses are verified at:

• Initial Application;
  
  
• SAR 7, when changes occur; and 
  
  
• RE.

Note: The CalFresh HH is not required to provide verification again unless the income and/or business expense amounts change.

Roomer Income

Roomers are individuals to whom an HH furnishes lodging, but not meals, for compensation. Roomer income is income received by a CalFresh HH for renting a room in their home to another individual or HH.

This is self-employment income, and the HH has the option of choosing either the actual deduction or standard deduction of 40% of gross earned income as an expense.

Roomer income has the following conditions:

• Applicable when the HH is the owner of the property or acts as a landlord by making decisions regarding the other individual's living arrangement, such as the amount of rent the other individual pays;
  
  
• Not applicable for non-owner landlord HH (this is shared housing); and 
  
  
• Not considered as new rental income.
  
  Note: In a shared housing situation where a HH receives a rent payment from their roommate which is more than the actual rent, the excess income (amount above shelter cost) is treated as unearned income, and the HH’s rent deduction is not allowed.
  
  Example: A non-owner HH member rents out a room to his friend and receives $1,000 a month. The total rent is $800 a month. The extra $200 is counted as unearned income to the non-owner HH member, and no shelter deduction is allowed since the rent money from his friend covers the total rent expense.

Boarder Income

Boarders are individuals or groups of individuals residing with a HH (non-commercial) and paying reasonable compensation to the HH for lodging and meals.

Boarder income (except foster care payment) is income received for renting a room and providing meals to another individual or HH. This is considered self-employment income.

The following conditions apply to a boarder income situation:

• A boarder is not eligible as a separate HH but may be included as a member of the HH at the HH’s request; 
  
  
• An individual paying less than reasonable compensation must be included in the HH, regardless of the HH’s request; 
  
  
• The CalFresh HH is not necessarily the owner of the property; or 
  
  
• A HH cannot have boarder-arrangement expenses exceeding boarder income.The income from boarders may also include contributions to the HH’s shelter expenses. However, shelter expenses paid directly by boarders to any individual outside of the CalFresh HH (such as a landlord or utility company) are not counted as income to the HH.

The following describes what is considered “reasonable compensation” for lodging and meals made by a boarder to the CalFresh HH.

If the board arrangement is for more than two meals a day, Then...

The boarder must pay an amount that equals or exceeds the full monthly CalFresh benefit allotment at zero net income for the appropriate number of boarders.

If the board arrangement is for two meals or less per day, Then...

The boarder must pay an amount that equals or exceeds two-thirds of the monthly CalFresh benefit allotment at zero net income for the appropriate number of boarders.

Cost of Doing Business

After determining the income received from the boarders, the portion of the boarder payment that is the cost of doing business must be excluded.

The cost of doing business is equal to any of the following procedures, provided that the amount allowed as the cost of doing business does not exceed the payment the HH receives from the boarder for lodging and meals:

• An amount that equals the maximum CalFresh benefit allotment for the appropriate number of boarders; or 
  
  
• The actual verifiable cost of providing lodging and meals, if the actual cost exceeds the maximum CalFresh allotment for the appropriate number of boarders.

If the actual costs are used, then only the separate and identifiable costs of providing lodging and meals to boarders are excluded.

Note: Payment for meals only is to be treated as income to the extent the payment exceeds the actual cost.

Deductible Expenses

The income from self-employment minus the business expense is to be added to other earned income and the earned income deduction must be applied to the total.

Shelter expenses the CalFresh HH incurs, even if the boarder contributes part of the expense to the HH, is to be calculated to determine if the HH may receive a shelter deduction. However, the shelter expenses will not include any shelter expenses paid directly by the boarder to a third-party.

Foster Care Payments

Foster children placed in the home of relatives or other individuals or families are to be considered as boarders. The payments received by a foster care boarder must not be considered income to the CalFresh HH.

However, if the HH boarder chooses to have the foster care boarders participate in the CalFresh Program, then the foster care payments received by the HH are to be considered as unearned income.

Gig Income

Gig-income individuals must provide verification of the gross amount of their self-employment earnings. These earnings are subject to the self-employment deduction. For the purposes of eligibility evaluation, all gig income is to be considered, evaluated, and processed as self-employment income.

They can verify their income in several ways, as long as the gross income is verified. Individuals working in the gig economy often receive payment via direct deposit. The total payment amount may not reflect the gross income amount earned before deductions, including various fees charged by the gig contractor. If the individual is working for more than one gig contractor, income verification must be provided for each gig contractor.

Reporting Self-Employment Income on SAR 7

SAR HHs who receive self-employment income monthly must report the actual gross amount for the Data Month on the SAR 7.

A CalFresh HH whose self-employment income was determined based on the prior full year’s basis will be budgeted with the same amount without verification unless the HH reports substantial changes in business income on the SAR 7.

Verification is required for any report of a substantial change in business income increase or decrease, such as bankruptcy or crop failure. In this situation, the tax return may not provide a good projection of income. Therefore, the county agency must work with the CalFresh HH to obtain the best estimate of future anticipated income.

• PA167, Monthly Earnings Report; 
  
  
• Income Tax Returns; 
  
  
• Copy of the gross check; or 
  
  
• An affidavit, if the source of the verification refuses to cooperate or is no longer in existence.

The following documents are acceptable forms of verification for gig-economy contractors:

• Paystub; 
  
  
• Physical or electronic earnings statement; and 
  
  
• Notification of per-gig gross payment via payment application or attestation (declaration).

PA 167 Monthly Earnings Report

The PA 167 Monthly Earnings Report form is used to document the earnings and hours worked of an applicant/participant who is self-employed and is paid in cash when no other verification of earnings and hours worked is available. The PA 167 must be completed and signed by the applicant/participant, under penalty of perjury documenting in the form the gross self-employment income received in cash for the work or services provided.

Actual Expense Verification Requirement

All actual expense claims are subject to verification. Verification includes, but is not limited to:

• Receipts; 
  
  
• Invoices; 
  
  
• Check ledger/canceled checks; or 
  
  
• Other reliable verification showing the expense amount.