Self-Employed Residents Don’t File Tax Returns

Q I manage an affordable housing site, and a number of our residents are self-employed as housecleaners and other service personnel who are paid in cash, or as babysitters, dancers, singers, and waiters/waitresses who live on tips. They don't file tax returns. How do we handle their claims about the income they receive?

A The income you describe is considered income from self-employment, Moreland says.

The HUD Occupancy Handbook 4350.3 REV-1, CHG-2 is vague about how to verify income of this type. Basically, you need to get the residents' tax returns showing their net income as self-employed persons. This usually means getting a copy of the Schedule C, which is what individuals who are sole proprietors (rather than corporations) file with their tax returns. As the residents you describe don't have Schedule Cs, you should implement a site policy on this point.

The Handbook indicates that it is acceptable for a resident to give you a signed affidavit on income. However, the resident will attest to an amount that keeps him or her below the income limit, which may or may not be true.

Therefore, you should require all self-employed residents who cannot provide a tax return to have a third party complete a “self-employment verification form” that indicates gross income, allowable business deductions, and net income. Acceptable third-party sources include an accountant, attorney, or nonprofit or social services entity that works in this area, such as the Small Business Administration.

It is also advisable to have a written policy about this at your site, so you can point to it in the event that a resident claims you are singling him out for treatment. Of course, you must apply the policy consistently. Also, be prepared for some residents to claim that they can't afford an attorney or accountant to complete the form. For that reason, have ready a list of nonprofit organizations, social services agencies, or, if possible, the names of an attorney and/or accountant to whom you might refer a resident and who would charge little or no fee for filling out the form.

Insider Source

Elizabeth Moreland: President, Elizabeth Moreland Consulting, Inc., 6907 University Ave., Ste. 196, Middleton, WI 53562; 1-800-644-0390; Elizabeth@taxcredit.com; http://www.taxcredit.com.

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