Four Tips for Estimating Freelance Income Correctly

With the rise of gig economy companies such as Uber, Lyft, and Instacart, you may have noticed more applicants earning money from these companies as independent freelancing contractors. When you’re calculating household income, a “freelancer” presents special challenges. Freelancers are self-employed, and their income often can be sporadic.

Paragraph 5-5 of the HUD Occupancy Handbook 4350.3 considers such income to be “irregular” and provides some examples, such as a roofer who works seasonally and a typist who gets jobs through a temp agency. The Handbook doesn’t state specifically how to estimate a freelancer’s anticipated income, but gives suggested approaches:

Seasonal work. The employer is able to provide the total number of regular and overtime hours worked during the past three years. In this case, estimate the anticipated annual income by using the average number of regular hours over the past three years times the current regular pay rate, plus the average overtime hours times the current overtime rate.

Sporadic work. A resident says she worked sporadically last year, but will probably not work much in the current year because of medical problems. In this case, exclude her income at the time of recertification because she’s not currently working.

Self-employment. With self-reported income, there typically is no employer-provided documents to consult. In this case, without formal records of self-employment income, use the last IRS Form 1040 where the income has been reported.

In the case of a tenant or applicant working as a driver in the rideshare industry, this person should be treated as self-employed. When a tenant is self-employed, the tenant is responsible for record keeping of the business operation. According to the IRS Form 8823 Guide (8823 Guide), record keeping of the business activity is essential because “the net income from the operation of a business” is counted as tenant income for qualification purposes.

Because net income is used for qualification purposes, the tenant is required to keep track of all revenue and expenses. Acceptable expenses to be included when arriving at net income include amenities for passengers such as water and gum, tolls, parking fees, maintenance, gas, and vehicle loan interest. Only the expense portion that’s related to the business use of the vehicle can be deducted. The tenant should have receipts, logs, and other documentations to support the vehicle expenses, especially when the vehicle is also being use for personal transportation. The tenant is also allowed to deduct depreciation on the vehicle.

The HUD Handbook says that owners are expected to “make a reasonable judgment as to the most reliable approach” for estimating what the resident will receive in income during the year. Here are four tips for calculating freelance or independent contractor income:

Tip #1: Consult Tax Returns

You should ask to see the tax returns that the resident filed for the last two years. Then use the reported income as the basis for your income estimate. You’ll find the figure entered on the line labeled, “Wages, salaries, tips, etc.”

When a tenant is self-employed, you can also ask for financial statement of the business and Schedule C as support for the self-employment income. In situations where the tenant is unable to provide a financial statement of the business and/or tax returns, a notarized statement or affidavit showing the net income for a business may be accepted. In addition, in the case of a gig economy worker, you may request a summary of payments to the tenant from the company.

Tip #2: Check for Any Necessary Adjustments

Ask the resident whether the reported income includes more than freelance work. Some residents may do freelance work in addition to regular, full-time employment. If some of the reported income comes from regular employment, ask the resident for a W-2 form to verify that amount. Subtract the non-freelance employment income from the total to come up with a figure that represents the freelance income.

Also, ask whether the reported income covers less than a year’s worth of freelance work. If the resident says the income is for less than a year, determine how many months it does represent, divide the total by the number of months, and then “annualize” it by multiplying that figure by 12 months.

Tip #3: Verify as Much Information as You Can

You should ask for copies of documents such as Form 1099, which employers use to report “miscellaneous income” paid to workers like those who freelance. Ask the resident if he or she expects to continue working for that employer for the same amount of time, earning approximately the same amount of income. You can then adjust your estimate based on the response.

In situations where records are not available or the tenant or applicant just started working as a freelancer, you should use care when evaluating the tenant’s income. It’s recommended that you obtain a notarized statement or affidavit showing the anticipated net income. And you should communicate with the tenant that it’s the tenant’s obligation to notify the site manager of any changes to the net income within the certification year.

Tip #4: Document Assumptions and Reasoning

You may run into situations where all the information is not readily available to calculate the tenant or applicant’s income. When the circumstances are difficult or challenging, according to the 8823 Guide, “owners are expected to make reasonable judgment regarding the most reliable method of estimating what the tenant will receive in the coming year.” When there is ambiguity with calculating the tenant’s income, be sure to ask additional questions and document the assumptions in the file. For example, you can ask how many hours a week the tenant is working, average pay per week, etc. The tenant’s responses to these questions, your assumptions, and any supporting documentation should be clearly documented in the file.

When you make assumptions or there’s ambiguity surrounding a tenant’s income, care should be given to make sure that you document assumptions and the reasoning for how you solved the ambiguity. It’s important to include the details of the assumptions and the conclusion of the tenant’s income. Some of the best practices for documentation include clearly identifying the issues, having assumptions supported, and having a conclusion. When there are gray areas, discuss the issue with your local state agencies for any additional requirements on income documentation.