Four Dos & Don'ts for Calculating Income from 'Gig Economy' Jobs
As U.S. unemployment reaches historic levels, you may see more applicants making ends meet with income from online “gig” platforms such as Instacart, Postmates, or Grubhub. These particular grocery and food delivery services have reported record demand during the pandemic and have announced increases in work opportunities through their platform. Applicants may be using freelance positions with these type of online services that match their freelance labor and local demand as a stopgap solution to paying bills during an economic downturn. These online services hire their workers as independent contractors rather than full employees.
These types of jobs come with a lot of flexibility. Workers can set their own schedules. And applicants or residents who earn money through these gig companies can make varying amounts of money from week to week and month to month. The rules for calculating income from irregular employment are different from those for calculating income from regular employment because these applicants or residents don’t have traditional jobs that pay them an annual salary that you can verify easily.
Here are four Dos & Don’ts that you can follow to avoid mistakes when calculating household income from irregular employment or “gig economy” jobs.
DON’T Automatically Exclude ‘Temporary, Nonrecurring, or Sporadic’ Income
HUD Handbook 4350.3 says that you must not count a household member’s income if it is “temporary, nonrecurring, or sporadic” [Handbook 4350.3, par. 5-6(G)(3)]. But before you exclude income for this reason, you should investigate.
For example, when a household member tells you about income from online platforms or other freelance jobs that appears to be temporary, nonrecurring, or sporadic, ask her questions to learn how much of this work she has done in the past and how much of it she expects to do this year. If you see a pattern and the household member says she expects to continue the work, it’s probably not temporary, nonrecurring, or sporadic—which means you must count it.
DO Use Tax Returns, Documents to Predict Self-Employment Income
A gig economy driver is considered an independent contractor and should be treated as self-employed. When a household member works for himself, even on a part-time basis, you must include his self-employment income in your calculations for the household [Handbook 4350.3, par. 5-6(H)]. But because a self-employed household member doesn’t earn a salary at a job, you cannot verify his income simply by contacting an employer.
The applicant or household member should be keeping track of all revenue and expenses because net income is used for certification purposes. In a food delivery gig economy model, acceptable expenses could be tolls, parking fees, maintenance, gas, and vehicle loan interest.
Be sure to ask for driving logs and other documentation to support the vehicle expenses especially when the household member’s vehicle is also being used for personal transportation. According to Appendix 3 of HUD Handbook 4350.3, you should also obtain a household member’s prior-year tax return and Schedule C as support for self-employment income. The Schedule C Profit or Loss from Business form details the gross income and the expenses associated with running the business to support the amount of net income or loss stated on Line 12 of Schedule 1 tax form.
In addition, you may request a summary of payments to the resident from the online gig company. Use this information, along with the household member’s own statements of his expectations, to make your reasonable judgment of how much income the member should expect to earn this year.
In cases where the household member is unable to provide a financial statement of the business and/or the prior-year tax return, the HUD Handbook says a notarized statement or affidavit showing the net income for a business may be accepted [HUD Handbook 4350.3, App. 3]. We’ve provided a Model Form: Use Self-Employment Affidavit to Verify Anticipated Net Income, below.
DON’T Allow Accelerated Depreciation of Assets
Residents must compute depreciation on a straight-line basis. Depreciation is the write-off of an asset’s cost over time to account for its diminishing value because of use, obsolescence, deterioration, or wear and tear. Straight-line depreciation allocates an equal amount of the asset’s cost to the write-off each year for the useful life of the asset. That amount is then deducted each year as an expense from gross income.
If a resident or applicant bought a car to be used for gig purposes, HUD’s income certification rules says the resident or applicant can’t use an accelerated method of depreciation that allocates the cost over a shorter period or allows higher deductions in earlier years than in later years. If an applicant or resident used an alternative method of depreciation rather than the straight-line method, HUD says you also must get from the household an accountant’s calculation of depreciation expense computed using straight-line depreciation rules. Then use this amount to recalculate the net income shown on the return.
DO Make ‘Reasonable Judgment’ Based on Income History
You must “use current circumstances to anticipate income” [HUD Handbook 4350.3, par. 5-5(A)(1)]. And because the handbook cannot predict every possible irregular employment situation, it instructs you “to make a reasonable judgment as to the most reliable approach to estimating what the [household member] will receive during the year” [Handbook 4350.3, par. 5-5(C)].
To make a reasonable judgment, look at the household member’s income history. You should ask questions and document assumptions in the household file. For example, you may ask how many hours a week the household member is working and average pay per week. You can also ask the resident about his income expectations for the year and make adjustments accordingly. For instance, if the resident tells you he’s scaling back the number of working weeks per month, and has a valid reason for doing so, count a proportional amount of what you were planning. If he tells you he can’t continue working as a driver, for medical reasons, count the income as zero.
See The Model Tools For This Article
|Use Self-Employment Affidavit to Verify Anticipated Net Income|