Case: After years of drudgery working in an office, Levi and Penina Klein both decided to venture off and start their own businesses. Penina was naturally artistic, and so she started a business designing high-end maternity wear. Levi enjoys working with his hands and makes most of his parnassah selling esrogim before succos, as well as working as a general handyman for local shuls. Some years the Kleins are successful and make a decent living, while other years are harder and they struggle to pay their bills. One of the most difficult elements of their career choices has been navigating government programs. Working in the office had many downsides, but it had supplied consistent salaries and made reporting their income to government programs very simple. The Kleins now enjoy the benefits of self-employment, but they are confused about how to navigate government programs.
Question: What advice would you give the Kleins regarding how they should navigate government programs?
Answer: Being self-employed and receiving government benefits can be tricky, and it requires some extra effort to stay on top of the situation. Below are a few pointers to keep in mind.
Inform government programs about your business:
When you start a business, it is important to inform all government programs that you receive benefits from. Simply send them a letter stating that you are starting business X. If you have a business plan, include it with the letter. If you do not have a business plan, write that you do not yet know your projected income and that you will keep the agency informed of any changes. It is important to call the LRRC to discuss how to report changes of income to each government program.
No more disability:
One big shock for many people who start their own businesses is that they are no longer eligible for Temporary Disability, Unemployment insurance, or Family Leave benefits. This can be hard for mothers who are used to having some paid time to recuperate after having a baby. In order to be eligible for Disability or Family Leave Insurance, one needs to be a W-2 employee who pays into the benefit on his/her paycheck. You also need to have earned either $8,400 or worked 20 weeks earning a minimum of $168 a week in the 12 months before filing a claim. Once the Kleins leave their W-2 jobs, they are no longer eligible for these benefits.
It is absolutely critical to save receipts of all your business expenses. Proper accounting of your business expenses will have significant ramifications for taxes as well as for SNAP benefits. SNAP follows a formula which simply assumes that 51% of a self-employed person’s income constitutes expenses. This means that if you had a net income of $10,000 selling esrogim, SNAP assumes that $4,900 is profit and $5,100 was spent on expenses. The reality is that people often spend far more than 51% of their total net gains on expenses. From advertising to renting a location to ordering inventory, the esrog dealer may have spent $8,000 to earn the $10,000 net gain. Because of this reality, it is critical to save receipts of all expenses. If you supply the SNAP office with a 12-month profit and loss statement along with receipts for all expenses listed, they will accurately calculate your profits. If you do not have receipts, they will likely use their 51% expense formula to calculate your income. It is important to note that there are certain expenses that the IRS allows you to deduct but which SNAP will not, such as home office and travel expenses.
NJ FamilyCare (Medicaid) will determine eligibility based upon your taxable income, with a few additions. If you are self-employed, they will rely on your net business income. Any expenses that the IRS allows you to deduct can be deducted from your total profits. It is therefore beneficial to submit a profit & loss statement, with all the expenses deducted by the IRS included. Consult your accountant for help putting this together.
When you sign up for health insurance on the Marketplace during Open Enrollment (November 1 – December 15 this year), you will be asked to provide a projection of your income for 2018. The greater the income, the less one is eligible for in government subsidies. For self-employed people with highly fluctuating incomes, filling out this projection can be very difficult. Many self-employed people have absolutely no idea how much money they will make over the coming year. Nevertheless, an estimate must be filled out. If one has a business plan, one can use it to formulate an estimated income. One can also use last year’s income to try and project what next year’s income will be. Do not worry if your estimation turns out to be wrong. You can call the Marketplace or log into your online account to update your income projection as many times as you need to. Like NJ FamilyCare, the Marketplace will rely upon your net income, so make sure to deduct expenses that are acceptable by the IRS.