6.6.5 Self-employment income
ISSUE DATE: 07/2023
Self-employed people are those who are responsible for their own work schedule and do not have coverage under an employer's liability insurance or workers' compensation.
Self-employed people generally work for themselves rather than an employer. However, people employed in some types of services may be self-employed even if they have an employer or work out of another's business location (for example: real estate sales people, people who work for commission sales, manufacturer's representatives, independent contractors). Self-employed people may or may not have FICA deducted from the check an employer or another party issues to them.
People who provide gig work, including those using digital platforms such as an app or website, are considered self-employed independent contractors unless an employer verifies W-2 employee status.
Examples of gig work include:
Refer to the following chapters for information about:
Rental property income
Rental property income is earned or unearned self-employment income, depending on the amount of time the owner spends maintaining or managing the rental property. See Chapter 6.15.9 (Annualizing Rental Property Income).
Farm income
Farmers are considered self-employed. They may be working full-time, part-time or as hobby farmers.
Common types of farm income include:
See Chapter 6.15.12 (Annualizing Farm Income).
Roomer/boarder income
When the family owns a home and is renting all or a portion of the home to someone else, this is considered rental income. The family may or may not also be residing in the same home. See Chapter 6.15.9 (Annualizing Rental Property Income).
When the family rents a home from someone else, lives at the same home, and also rents rooms or a portion of the home out to someone else, this is considered self-employment from a roomer or a boarder and is counted as earned income. A roomer lives with the family and pays for lodging only. A boarder eats with the family and pays for meals only. A roomer and boarder lives and eats with the family and pays for lodging and meals.
See Chapter 6.15.6 (Annualizing self-employment income) for information about annualizing roomer/boarder income.
Self-employment ownership types
Self-employed people may own a business solely or in partnership.
Sole proprietorship
A sole proprietorship is an unincorporated business with only one owner who pays personal income tax on profits earned. A sole proprietorship may also be referred to as a sole trader or proprietorship.
In a sole proprietorship, the owner is:
A sole proprietorship when both spouses in a marriage carry on the trade or business is known as a qualified joint venture. Generally, a qualified joint venture whose only members are a married couple filing a joint return is permitted to not be treated as a partnership for Federal tax purposes. All items of income, gain, loss, deduction and credit are divided between the spouses in accordance with their respective interests in the venture. Each spouse takes into account their respective share of these items as a sole proprietor.
A sole proprietorship must report their business income as part of their 1040 using schedule C, E or F.
Partnerships
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each partner contributes money, property, labor or skill, and expects to share in the profits and losses of the business. A partnership contract spells out the manner in which profits are to be distributed.
All wages, draws, guaranteed payments, or compensation of officers paid to the business owner or a household member is considered earned income and entered in MEC2 as wages. Any other income is considered self-employment income and entered in MEC2 as such.
A partnership can be one of these three types: general, limited and limited liability.
General Partnership
A general partnership has the following major features:
General partners have:
Limited Partnership
A limited partnership is a form of partnership that has one or more general partners and one or more limited partners.
Limited partners are partners that may invest in, but are not directly involved in, the management of the partnership. They also have limited liability to the extent of their investments.
The general partner pays the limited partners the equivalent of a dividend on their investment, the nature and extent of which is usually defined in the partnership agreement.
Limited partnerships are different from limited liability partnerships in which all partners have limited liability.
Limited Liability Partnership
A limited liability partnership (LLP) has elements of partnerships and corporations. In a limited liability partnership, all partners have a form of limited liability similar to that of the shareholders of a corporation. However, the partners have the right to manage the business directly, and (in many areas) a different level of tax liability than in a corporation.
A limited liability partnership is for businesses where all investors wish to take an active role in management.
A partnership must file an annual information return (IRS Form 1065 and 1065 Schedule K-1) to report the income, deductions, gains, losses, etc. from its operations. A partnership does not pay income taxes. The profits or losses are “passed through” to its partners. Each partner includes their share of the partnership's income or loss on his or her tax return (IRS Form 1040). Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners.
S-Corporations
S-Corporations are considered self-employment businesses. Income received by the shareholders is countable income regardless of whether the individual decides to reinvest their income back into the corporation.
An S-Corporation must file an annual information return (IRS Form 1120-S and related schedules) to report the income, deductions, gains, losses, etc. from its operations, but it does not pay income tax. Profits or losses are “passed through” to its shareholders.
Each shareholder includes their share of the partnership's income or loss on his or her tax return (IRS Form 1040).
All wages, draws, guaranteed payments, or compensation of officers paid to the business owner or a household member is considered earned income and entered in MEC2 as wages. Any other income from is considered self-employment income and entered in MEC2 as such.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a hybrid business entity having certain characteristics of both a corporation and a partnership. When someone sets up an LLC, they separate their business and personal identities. If an LLC has only one owner, treat the LLC as a sole proprietor. All wages, draws, guaranteed payments, or compensation paid to a business owner or household member is considered earned income and entered into MEC2 as wages. Any other income is considered self-employment income and entered in MEC2 as such.
Legal authority
Minnesota Statutes 119B.09, subd. 4
Minnesota Statutes 119B.011, subd. 15
Minnesota Statutes 256P.05
Minnesota Rules 3400.0170, subps. 7 - 11
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