VIRGINIA COMMONWEALTH UNIVERSITY SELF-EMPLOYMENT FOR PERSONS WITH DISABILITIES WEBCAST Captioning Provided By: Caption First, Inc. JOANNE ELLIS: Thank you for participating in this webcast today on self-employment for persons with disabilities. I hope through this webcast you are able to learn some of the nuances related to self-employment and how it impacts individuals receiving Social Security or SSI benefits. And with that information, remove some of the barriers that faces individuals. We often refer to owning our own business or being your own boss as the American dream. This information will hopefully help individuals you come in contact with to achieve their dream. I will be covering the follow objectives through this course. Understanding the difference between self-employment versus wage employment, describe the difference between self-employment and hobbies and calculate net earnings from self-employment and how earnings of business owners impacts Social Security benefits., understand IRS rules, Schedule C and self-employment tax returns and define the role of the benefit specialist and PABSS in self-employment cases. Okay. Let's start with the first objective. Understand the difference between self-employment and wage employment. As a benefit specialist, you are probably very familiar with how Social Security looks at wages an individual earns in calculating their SSI or whether they should continue to receive a SSDI check. With self-employment it is different. My goal is to provide you with some general understanding of how wage employment and self-employment differ and how Social Security decides which situation applies to a beneficiary with earned income. Normally, Social Security considers individuals to be self-employed with an employer-employee relationship does not exist and there is no evidence that it exists. So as a benefit specialist, you want to ask the individual you are working with if they have received any tax reports documentation. If they received a W2, they are considered wage employment. If they received a 1099 form, that is often used to show payments of an independent contractor. That form is used as self-employment. There are many rules and regulations in the tax code, the Department of Labor regulations and the Social Security code as a benefits specialist, you cannot possibly be expected to know all the regulations, only to recognize the common indicators of wage employment, self-employment and hobbies. By recognizing the indicators, you will be able to help beneficiaries anticipate the impact of these activities on their benefits. Another different between wage and self-employment is if someone is self-employed, they are responsible for paying all the FICA tax. Wage employees pay only their share of FICA which is 7.65% of their gross wages. Their employer pays the other half. If you are self-employed, you pay both. So to recap, if someone comes to you for assistance and they are not sure exactly what their employment status is, you want to ask the individual who is paid for services, what type of earnings documentation they have received and do they have anything taken out of what money they do receive which would be an indication of wage employment. As a benefit specialist, you may find individuals unsure of the activity whether they are engaged in is considered a self-employment or a hobby. Here are some questions you can ask. Is there a good faith intention of making a profit or producing income? Or is the individual participating in an activity for fun? Are similar transactions repeated over time or is it an one-time deal? Is the beneficiary holding out herself as being engaged in selling goods and services or are they selling what excess product they may have? Social Security is looking for a pattern in activity that is ongoing. One yes to any of these questions isn't enough to make a determination. But they need not all be present if self-employment to be determined to exist. This is a Social Security decision. If you have any doubt with the individual you are working with, you want to seek clarification from your local Social Security field office. If the activity the individual is engaged in is a hobby, income from a hobby is considered unearned income. Unearned income from a hobby for someone receiving SSDI or a title 2 benefit has no impact on that benefit. But if the individual is receiving an SSI benefit, unearned income affects the monthly SSI calculation. A hobby is something that someone does for pleasure and not to derive a profit. Income from a hobby is usually to buy things to sustain that hobby. Transactions are infrequent and irregular and the person does not hold himself out as having a business. An example of a hobby is someone who makes beaded jewelry for pleasure. They may decide to sell their jewelry at a local craft fair due to the excess jewelry they have developed. The money made from those sales is then used to purchase additional supplies. This meets the criteria of a hobby because the individual is not deriving her living from the activity. She does not advertise and her sales are sporadic. Now, let's assume that the individual you are working with is self-employed. We need to determine the amount that the Social Security Administration will use to determine if the self-employed activity is substantial, gainful activity for Social Security disability benefits or determined how the income will affect the SSI cash benefit. You need to understand three terms. The three terms are gross receipts, net profit and net earnings from self-employment. The gross receipts are money the business takes in. Net profit is what is left after all applicable expenses are subtracted from the gross receipts. And net earnings from self-employment is what is left after the extra Social Security tax that business owners are required to pay have been deducted. This figure is .9235. Now, let's first talk about net earnings from self-employment and how it applies to SSI. Let me give you an example. Mike provides personal care services to the elderly. His gross receipts for a year are $15,000. His expenses equal $5,000 which leaves him with net profit of $10,000. You then multiply the net profit by the Social Security tax that he is required to pay of .9235 to get Mike's net earnings from self-employment or $9,235. Using that same example where Mike's net earnings from self-employment are $9,235 for the year, Social Security would take that annual income and divide it by 12. This equals $769.58 a month. If he receives SSI, this amount would then be used in the SSI calculation as earned income for the entire calendar year. This is often hard to explain to individuals, but even if the work they are doing is seasonal or does not operate for the entire year or ceases operation prior to the SSI application, if it is within that calendar year, they will calculate it out over the entire year. Social Security also will adjust future SSI checks based upon estimates and projections. This can be estimates that the individual feels they will earn or based on past performance. If projections are not accurate, it could result in overpayments or underpayments of the SSI benefit. Communication with the benefits specialist to help ensure that this is completed in a timely fashion is very important. Once the averaging has been calculated, the calculation of the wage earner is the same. If no unearned income, you subtract the general exclusion and the earned income exclusion and then you divide by two. You subtract the accountable earned income from the person's base SSI rate. When working with individuals, you want to help them understand that 1619(b) rules apply to self-employment. This is important because it is often expensive to self-insure yourself if you are self-employed. This, as with wage employees, is often a barrier for individuals with disabilities. As a benefit specialist, helping the individual understand the opportunity they have of increasing their net earnings while continuing to receive Medicaid will help remove that barrier. After you have determined an individual's net earnings from self-employment, you can also determine if any SSI work incentives are applicable. The work incentives work in the calculation the same way they would work for wage earners. A work incentive that is specifically available for individuals who are self-employed is property essential for self-support or PESS. Utilizing PESS is a legitimate way for an individual to accumulate cash and other business capital resources without jeopardizing their SSI and Medicaid eligibility. This really is the only instance where an individual who is eligible for SSI could have a substantial amount of money accumulated in a business account. There is no upper limit to PESS but property must be in current use for self-support to qualify. Another criteria is the business structure must be a sole proprietorship, partnership or L.L.C. that is not operating as a corporation. This is an area that you as the benefit specialist may understand, but if an individual is working with a CPA firm determining what is the best business structure for tax purposes, they will most likely not be aware and this is where you can advise them in your role as the benefits specialist. Now, to look at net earnings from self-employment and how it relates to Title 2 benefits. Net earnings from self-employment is not averaged during the trial work period but assessed on a month by month basis by examining income and expenses. This also applies in the extended period of eligibility after cessation. Net earnings from self-employment is average over the periods of work when making SGA determinations. A lot of work incentives that you know and love are used just as you would expect. For example, the extended period of eligibility, the extended period of Medicare coverage, the extended period -- the expedited reinstatement are not changed at all when someone is self-employed. There are differences, however, with how the Social Security Administration determines that a trial work service month has been used or whether or not a person has performed substantial gainful activity. The evaluation of self-employment under the Social Security disability programs focuses on work effort performed rather than income received in a month. Whether beneficiary is employed or self-employed, the trial work period is used when nine trial work period service months occur within a 61-rolling-month per. Also, whether the person is employed or is self-employed, the earliest trial work month is even the first month of entitlement or the first a.m. of application which ever is later. Under both situations, Social Security looks back for the most recent trial work months to see if nine service months fall within that rolling 60-month period. So what is different The difference between employment and self-employment in the use of trial work period month is how a service month is defined. For an employee, the test is simple. Did the beneficiary work over the trial work period's month's amount? There are no deductions that apply during the work trial period. If gross wages exceed the service month's amount, you have used a trial work period month. The problem with self-employment from the perspective of assessing the value of work efforts is that earnings can fluctuate greatly. Earnings also are affected by cost. For example, a person might work a lot and may do work that should be very valuable but the business like the equipment, services or supplies at the same time that bring the net earnings from self-employment down to a very small amount. For self-employed people, Social Security looks at a number of hours the person spends in the business as well as the income the business brings in. This is an either/or kind of test. Either the person uses the trial work period month because the earnings are above the service month figure applicable at the time or the person uses the trial work period service month because the person works more than 80 hours in the business. It is important to help beneficiaries understand what working in the business means. When people are getting started, especially if there is a large support system in place, there is a lot of pressure on beneficiaries to show they are making progress, that they are working towards their goals. Sometimes because of this, the person will overestimate the number of hours by including time they thought about the business, did market research or tried to learn something that they would eventually use in the business. Social Security instead is looking for the count of the hours the person actually spends in the business activities that will generate profit. This kind of information is very hard to reconstruct later. Have beneficiaries keep track of when they worked, what they did so their true estimate isn't lost to memory. In your role, it is very appropriate to help the individual develop a strategy for tracking and documenting this information. Because using a trial work period service month is an either/or proposition, Social Security also looks at monthly income. It is a good practice for folks to keep monthly records of income and expenses. If they don't know how to do this or can't do it themselves, hiring a bookkeeper or taking a class in basic accounting is a good idea. The person will need to keep track of receipts for tax purposes anyway. So keeping track of income and expenses is essential. The person might be able to do something as simple as having a envelope for each month in which they put notes in of what was received in that month and receipts for what was paid out, again collecting the information in realtime is very valuable. It can be hard to reconstruct later. As soon as the person has completed the trial work period, the extended period of eligibility begins. The extended period of eligibility is 36 consecutive months during which Social Security disability beneficiaries are due payments for months when the person isn't working or the work is at a substantial gainful level. As with employment, the first time SGA occurs may be during the extended period of eligibility or may occur after the 36 months has lapsed. Performing SGA after the trial work period means that the person receiving benefits for the cessation month and two grace period months before benefits are either suspended or terminated. Termination only occurs due to work if the person performs SGA after the extended period of eligibility has elapsed or if Social Security decides the beneficiary has medically improved. As we discussed, the Social Security Administration assesses work performed by a Social Security beneficiary by determining the value of the work effort in a month. Is the amount paid representative of the work effort? Did the person receive extra help or were there expenses paid that a person without an impairment would not incur? Was the period of work effort cut short because of the person's impairment? If the beneficiary is an employee, the Social Security Administration makes this determination by looking at the person's gross wages and determining if things can be deducted. With individuals who are self-employed Social Security looks instead at the average net earnings from self-employment for the period worked. It is essential to remember that this is different from the way SSI looks at net earnings and self-employment. Under the Social Security disability programs, net earnings from self-employment are usually averaged over the months the business was in operation in a given period. Once the trial work period has been used. Now let's talk about an example. Let's say John starts his business in October of 2005. He used up his trial work period working a part-time job that ended in May, 2005. Since becoming eligible for Social Security disability, John has not performed SGA level work and, thus, has never used his cessation and grace months. He makes $3,600 in net earnings from self-employment and is in operation for all of October, November and December. And plans to continue into the next year. In this scenario, the Social Security disability claims representative would start John's SGA determination by averaging John's earnings for October through December. If averaging weren't available like during the trial work period, the claims rep could look at John's monthly profit and loss statements to determine monthly net earnings from self-employment. The next step of the determination would be to see if any of the work incentives used in SGA determinations apply to John's circumstances. Was this an unsuccessful work attempt? Let's see. John worked full-time for three months and hasn't stopped for any reason. He plans to continue to be self-employed indefinitely. For now, it is looking pretty successful. So the unsuccessful work attempt provision wouldn't apply. Remember, that unsuccessful work attempts are only available if John's work attempt is really brief, if it ends within three months, then it must end because of a disability. And if it ends between three and six months, it must end because of a disability and another factor, like removal of special support. Sometime in the future, Social Security could be open to this decision and might also work as an unsuccessful work attempt but right now, however, it doesn't apply. Also remember an unsuccessful work attempt isn't available once John's benefits have been ceased. Let's look at some other possible deductions. Impairment related work competences are always available for use when the Social Security Administration makes substantial gainful activity decisions. Out of pocket competences -- expenses related to the person's disability or an impairment being treated by a healthcare provider, the expense must be reasonable and must be paid in the month when the deductions are made except for some durable items that could be prorated over the year but most importantly the expense must be related to work. And for self-employed individuals, the expense must not have been deducted as a business expense on the personal tax return. An expense can be deducted either as a business expense or as an impairment-related work expense but meets the definition but not as both. If the IRS will allow the deduction, the business owner usually should take that deduction as a business expense. If the expense, however, is something like medications that the IRS would not allow as a business deduction, the amount of the may be deducted from the monthly earnings of self-employment. Let's go to John. He pays $125 a month for special medical supplies and has prescription that he pays out of pocket that total $330 a month. And as we look at that, we have determined that John has monthly net earnings from self-employment of $1,200. We can subtract his total estimated impairment related work expenses of $450. Leaving him with an estimated accountable earnings so far of $750. John is not performing SGA in the months of October, November and December. Now, keep in mind that if certain conditions existed and if there were fluctuation in John's deductions, Social Security could also average the countable earnings to see if they are SGA. This is only available after the work trial period and before the beneficiary has been ceased. After cessation, Social Security uses exact monthly countable income. In the example with John, did you notice something missing? Subsidy is another tool that Social Security Administration can use when determining if substantial gainful activity is occurring. Subsidy occurs when someone receives extra help, was hired by a special program or has lower productivity than someone else doing the same job for the same pay. There are additional work incentives for Social Security claims rep when is they look at work after self-employed individuals to determine if it is substantial. These are similar to subsidy for employees but instead have to do with goods or services that have been given to the business instead of being purchased by the business. Social Security refers to these provisions as unincurred business expenses or unpaid help. In determining countable income from Social Security -- self-employment, the reasonable monetary value of any significant amount of unpaid health furnished by a spouse, children or others is deducted from net income. In estimating the value of unpaid help, Social Security considers the prevailing wage rate in the community for similar services but only the pro rata value attributed to the services actually performed should be deducted. Now, in determining countable income from self-employment, Social Security deducts from the individual's net income any business expenses which were incurred and paid by another person or agency. This deduction is made even though no actual expense was incurred by the beneficiary. Item or service must meet the IRS definition of legitimate business expense. Essentially, the Social Security Administration recognizes that having someone else pay for goods and services that are needed by a business artificially inflates the net earnings from self-employment and thus means that the net earnings from self-employment may not accurately reflect the person's true earning ability. There are many kinds of unincurred expenses. One example would be a local organization pay are for start-up equipment. Another more common example would be the state VR agency buying equipment or paying operating costs for a period of time. A family member or friend could purchase equipment or provide rentfree to the beneficiary and so on. Social Security finds the value of these items and deducts the value from net earnings for self-employment when determining if someone is performing substantial gainful activity. When expecting unpaid business expenses or unpaid help, it is valuable to think through what the person needs, what the business has purchased and what is given through family connections and services such as VR. It is very valuable once again to keep records of who did what, when and where because once again, reconstructing this at later dates is very difficult. Now, as we've discussed some of the deductions that small business owners may access when Social Security is determining the person is performing SGA, there are also considerations that Social Security makes that do not apply to employees in a wage situation. People who are self-employed have a lot more control over what is reported as net earnings from self-employment. Social Security has extra tests they apply to make sure that someone is not performing SGA. These tests, the first test is called significant services and substantial income. Substantial income means exactly what it sounds like, the Social Security claims rep will inspect the average earnings from self-employment to see if it exceeds the current SGA level. The next test, significant services, means that the beneficiary earned money by work effort. Work in a sole proprietorship is considered to be significant as a result of an individual needing to do everything themselves. There are two other tests that Social Security applies if work is determined not to be both substantial and significant. These tests are often called comparability of work and worth of work. The comparability of work tests go like this. If net earnings from self-employment is under the SGA limit, it may still be significant if income is comparable to that of non-disabled persons doing the same type of work in the community. Thus, even though countable earnings are below SGA, work activity is SGA when all relevant factors such as hours, skills, energy, output, efficiency, duties and responsibilities are comparable to that of non-disabled persons engaged in that type of work in the community. If after looking at the second test, Social Security determines that the work is not comparable to others doing the same job, the earnings could still be considered SGA if work activity is worth more than SGA. The test goes like this. Although not comparable to that of non-disabled persons, work activity is SGA if it is clearly worth more than SGA earnings guidelines when considered in terms of its effect on the business or when compared to the salary a business owner would pay to an individual in performing those duties. This certainly can be very complicated. So my advice to you is to advise individuals to keep good records, make sure those records reflect what really happen to avoid the comparability of work and worth of work tests. Now, your head is probably starting to hurt with all of this, so we'll move on to objective boards to make it easier. As a benefit specialist, you already have a pretty complex job. I don't want you to think we also want you to understand the IRS tax code to help your customer with their tax return. But what we do want you to understand is how Social Security will use those tax returns in their analysis of net earnings from self-employment, trial work period and substantial gainful activity and pass that understanding on to your customers and any bookkeeping or accounting firm that they may work with. The person who is interested in going into business and also is receiving SSI needs to notify Social Security of their business and estimate their net earnings from self-employment. The bookkeeping function will be critical to verify the accuracy of the estimate that the individual initially identified to Social Security. Under the SSI or Title 2 program, the person must submit the self-employment tax returns when they are available. For individuals receiving SSI, it is best to use the cash accounting basis. This will identify when revenue is received and when expenses are paid. This method will help an individual document the net earnings from self-employment for SSI purposes and help them have the information that will be needed for their annual tax returns. Under the SSI program, the claims rep will enter the corrected net earnings into the record. Accurate estimates are essential. We can't say that enough. As we've already mentioned, when someone goes into business, you want to advise them to estimate the amount of net earnings from self-employment for that entire calendar year. SSI and the IRS will look at the year-end business revenue and business expenses. It is important to inform individuals you're working with that SSI and the IRS also look for constructive receipt of income in a cash accounting system. This is to ensure that business owners are not stalling the receipt of revenue to lower their tax burden or net earnings from self-employment. In most states, the individual is -- the individuals receiving assistance from Medicaid, section 8 housing, food stamps and energy assistance, these programs will also rely on the end of the year tax return. All these entitlement programs will divide the annual net earnings by 12 to get the monthly amount to be used in determining what services for monetary support a person may be eligible for during the year. When working with individuals who are receiving SSDI, you will want to advise them of the need to keep two sets of books. This may be considered illegal by most accounting firms, but you can help them understand that this is not only legal but it is a required practice for people who receive SSDI. The individual would have one set of books for SSDI purposes which would document reductions in income for SGA that are allowed by Social Security and not allowed by the IRS. An accrual method of accounting is the most appropriate for business owners who receive SSDI. This is where your knowledge of Social Security will come into play and can assist the individual and their accountant or CPA firm because you understand how their accrual method works with their Title 2 benefit. Oftentimes an accountant or CPA firm may suggest a cash accounting basis because it is easier. But for SSDI, the accrual method takes into account the earned income when it was billed and when it is due which may be different from when it is actually received. For instance, if the individual bills for services, provided in the month of March, utilizing the cash accounting system would have you documenting that when they actually receive that revenue which could be 30 days later. Using an accrual, you are documenting it when you are actually billing for those services. You will also need to advise the individual who is receiving SSDI that they should also keep track of their time they devote to their work activity as we've already discussed. This is required to accurately document when an individual is actually working at the SGA level by assessing the time they devote to the work activity or if they are not receiving SGA earnings from self-employment. Some other special considerations that you want to pay attention to, as an experienced benefits specialist, you already know, you never get the easy cases. You may have someone who is working as an employee but who also is starting a business. You must advise that individual on how their earnings from their employer and their net earnings from self-employment are calculated to affect their SSI monthly cash benefit. You also want to take into consideration as you do with wage earners who are dual beneficiary recipients, you want to look at net earnings from self-employment and determine how it impacts the Social Security benefit before you figure out how it impacts their SSI. You want to know if they should continue to calculate the unearned income in that SSI calculate to give the individual a better picture of their financial situation. Onto the last learning objective. I think we touched on a lot of this throughout the webcast but what's really important to remember, you are not a business advisor and you are not an accountant. You can't give an individual advice on whether their business venture will be a success. You can, however, research local resources in order to act as a referral agent, research local -- excuse me. You can know who to call in the community such as the Small Business Administration, SCORE or any other business assistance in your area. You can supply the name, their roles, the telephone number to the individual you are working with. You also will not be able to advise the individual you're working with whether they have the skills and abilities to move forward with their business venture. You can, though, refer that individual to the Voc Rehab in your state. You should also understand the requirements of past plans and the criteria for people who are self-employed to write a business plan. You are not required to write that business plan but to direct the individual to someone in the who may be able to help them with that business plan. While you won't be able to be your customer's bookkeeper, you can act as a resource or advisory to any accounting support services the individual may receive. This is really a critical area because as we have discussed, you are the expert with SSI and SSDI and the accountant is the expert with the IRS tax code. You will need to communicate to ensure that all the information that Social Security requires is kept up with in a timely fashion. You can also advise the individual with which accounting method, either accrual or cash basis, is more effective with what type of Social Security benefit they are receiving. Conducting a projected benefit analysis and the use of any work incentive is also one of your primary responsibilities as a benefits specialist. But your number one role as a benefits specialist is to give them all the information about their benefits and help remove the barrier fear that may keep them from pursuing their dream of self-employment. Now, in closing, I recognize that this is a lot of complex information that we talked about in a very short amount of time but I want to thank you for your attention and I want to welcome you to ask any questions during the live chatroom after this broadcast. Thank you. *** This text is being provided in a rough draft format. Communication Access Realtime Translation (CART) is provided in order to facilitate communication accessibility and may not be a totally verbatim record of the proceedings. *** (Webcast ended at 1:42 PM CST)