Four Tips for Estimating Freelance Income Correctly
When you are 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 is 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.
The 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. In cases such as these, the Handbook advises that owners may need to plan for midyear or interim recertifications to reflect changing circumstances.
“Always try to verify what you can,” says trainer and consultant Evan Einhorn. “In the end, you can only work with the information you have.”
Einhorn offers the following four tips for calculating freelance income.
Tip #1: Consult Tax Returns
“Ask to see the tax returns that the resident filed for the last two years,” Einhorn says. 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.”
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
Einhorn advises asking 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. You also can seek third-party verification.
“Send employment income verification forms to each freelance employer,” he says. “And keep a record of your efforts to verify the income. But use third-party verification as a last resort.”
Einhorn emphasizes keeping track of attempts to verify.
“Even if you can't verify the income, you can document your attempts to verify it,” he says. “That's important if a reviewer wants proof that you tried.”
Tip #4: Ask the Right Questions, in the Right Way
Einhorn has found that sometimes residents have the information you need, but getting it depends on how you ask them for it.
He gives an example: He needed to send information to a resident, and asked her if she had a fax. She said no. Later, she told him that she had received some information from another source by fax. As it turns out, Einhorn says, she had access to a fax, in another office.
“If I had asked the question a little differently,” he says, “I would have had the answer I wanted.”
Seldom do people volunteer more information than you ask for, Einhorn notes, so you may have to keep asking the same question but in a slightly different way.
“Make the person feel comfortable and explain why you need the information,” Einhorn says. “Don't be confrontational or threatening. It can come down to asking your questions in just the right way.”
Evan Einhorn: Owner, Affordable Housing Training & Consulting Services, LLC, 11 Tamarack Dr., Essex Junction, VT 05452; (802) 598-3464; info@AHTCSonline.com.
Search Our Web Site by Key Words: self-employment income; freelance income; income verification; seasonal work; sporadic work