Calculating Annual Income Based on Year-to-Date Income
The recently issued Change 2 to HUD Handbook 4350.3 does not address how you, as an owner or manager, calculate annual income by using year-to-date (YTD) income.
To project a resident's annual income using the YTD method, you must start by verifying the amount of income the resident has earned since the beginning of the year. A standard method for making the calculation—known as the standard number of weeks method—is used for residents of Section 8 sites. But three other methods are also available: the “new number of weeks method,” the “number of days method,” and the “number of pay periods method.”
With the help of tax credit expert Elizabeth Moreland, we will examine all four methods, providing examples of how the methods are used, to show you the various alternatives that are open to your tax credit site.
Standard Number of Weeks Method
First, calculate the number of weeks in the year-to-date time period, as indicated on the resident's employment check. Divide the number of weeks by the amount of income earned during that time. Prorate the result by multiplying that number times 52 (for 52 weeks in the calendar year). The sum equals the resident's annualized income.
Example: Suppose that the resident was paid weekly from Jan. 1 to June 30, and the YTD income earned during that time was $15,000. To annualize the YTD income, count the number of weeks in the time period worked by the resident (that is, count every Saturday from the start of the year to the end of June). The total is 26 weeks. Divide the $15,000 YTD income by 26 weeks. Multiply that number by 52 weeks per year to arrive at an annualized income of $30,000 [(15,000 ÷ 26) × 52].
EDITOR'S NOTE: Remember that some of the resident's YTD income may include money earned in December of the prior year, which is the case for individuals who are paid every two weeks, rather than twice a month. The money earned during the last two weeks of December may not be paid until the first week of January. To correctly count the number of weeks of earning that make up the YTD amount, you must also count these two weeks in December.
New Number of Weeks Method
An alternative method is what Moreland calls the new number of weeks method. This method calculates the number of days during the earning period and converts this number to the number of weeks.
Example: Using the same facts from the example above, calculate the number of days from Jan. 1 to June 30 (31 + 28 + 31 + 30 + 31 + 30 = 181). Divide the number of days by 7 (the number of days in a week) to determine the number of weeks (181 ÷ 7 = 25.86 weeks). Divide the resident's income by 25.86 weeks, and multiply that number by 52 weeks in a year to arrive at the projected annual income of $30,162.41 [($15,000 ÷ 25.86) × 52].
Moreland cautions that when applying this method to real-life scenarios, you must determine how the resident is paid—for example, every two weeks or twice a month. This involves determining whether the resident's first paycheck of the year includes money earned during December of the prior year, and making sure that the number of days in the YTD time frame is reflected accurately.
Number of Days Method
A second alternative is the number of days method, which again requires you to count the number of days in the YTD time frame. It also requires you to divide the YTD income by that number of days and then multiply the sum by the total number of days in the year.
Example: The number of days from Jan. 1 to June 30 is 181 (as indicated in the example above). Earned income was $15,000, which, when divided by 181 and multiplied by 365 days in 2007, results in the resident's annualized income being $30,248.62 [($15,000 ÷ 181) × 365].
Number of Pay Periods Method
A third alternative is based on the number of pay periods during the YTD earnings period, says Moreland. This method involves prorating the income over the total number of pay periods in the year.
Example: From Jan. 1 to June 30, the resident receives two paychecks per month, for a total of 12 paychecks. Divide the resident's YTD earnings ($15,000) by 12, which will give you $1,250, the amount the resident earned each pay period. Multiply that amount by the number of pay periods in a year (two pay periods per month x 12 months = 24 pay periods per year) to get the resident's projected annual income, $30,000 ($1,250 × 24).
No Best Method
There is no best method for calculating income using year-to-date figures, says Moreland. But rather than performing all four calculations as explained above and choosing the highest number, the wisest course is to choose one method and use it consistently, she advises.
“Deviate from your method of choice only if, by using that particular method, the resident's income goes over the limit,” Moreland says. “But deviate only if you have sufficient proof to support an alternative calculation method,” she adds.
In her work, Moreland prefers the standard number of weeks method. “I find it the easiest method to use in training staff. And it's the one that causes the least amount of staff retention problems,” she notes. “Quite honestly, not all staff members know how many days are in each month, whether it is a leap year, or how to deal with all the different possible pay periods they will see,” she adds. “By using the standard number of weeks method, I can significantly reduce training time and calculation errors,” she explains.
Choose the method you feel most comfortable with, Moreland stresses. However, it's a good idea to ask your state monitoring agency which method it prefers, she notes. Working in accordance with the agency's preferred method will make your job easier in the long run, she adds.
Elizabeth Moreland: Elizabeth Moreland Consulting, Inc., Housing Credit College; Middleton, WI