How to Annualize Five Types of Employment Income
To determine whether a household is eligible to live at your assisted site and how much assistance it should get, you must count income that the household “expects to receive” during its 12-month certification year [HUD Handbook 4350.3, par. 5-5(A)]. This includes amounts household members earn at their jobs. But sometimes you can’t be certain how much employment income household members will actually get during the coming 12 months. In these instances, you must “annualize” their employment income—that is, project it for the next 12 months based on current information. If you don’t know the rules for annualizing employment income, you could end up miscalculating household income and assistance.
To help you avoid that problem at your assisted site, we’ll tell you how to annualize five types of employment income correctly.
1. Annualizing Income from Full-Time Jobs
Here’s how HUD says you must annualize the income a household member earns from a full-time job:
Household member earns annual salary. If a household member currently earns a salary for a full-time job—that is, she’s paid a fixed amount per year—simply use her salary as her income. Follow this rule for all salaried employees regardless of whether they’re paid monthly, biweekly, or under some other payment schedule.
Example: John Doe and Jane Roe each earn a salary of $28,000 a year as physical therapists at different clinics. Doe gets paid each month, and Roe gets paid every other week. You should count $28,000 as income for both Doe and Roe.
Household member gets substantial paid vacation. Some full-time employees get substantial paid vacation time. When including a household member’s annual salary in the household’s annual income, don’t adjust the salary up or down for paid vacation time.
Example: April earns $25,000 a year as a high school teacher. She doesn’t teach during the summer, and the school is closed around certain holidays, as well. You should count her teaching income as $25,000. Don’t add to or deduct from her salary for the summer or holidays that she doesn’t work.
Household member earns wages by hour, week, or month. Very often, household members with full-time jobs earn wages for a time period—for instance, by the hour, the week, or the month. In that case, you must multiply the household member’s periodic wages by the correct factor to annualize his income, says Roxie Munn, a consultant and trainer in affordable housing compliance. Here’s what HUD says you must do:
- Multiply hourly wages by 2,080;
- Multiply weekly wages by 52;
- Multiply biweekly wages by 26;
- Multiply semimonthly wages by 24; and
- Multiply monthly wages by 12 [Handbook 4350.3, par. 5-5(B)].
Example: Joe earns $7 an hour at a full-time job. His annualized income is $14,560 ($7 x 2,080 hours). If you instead annualized his hourly wages by determining how much he earns per day, then per week, per month, and finally per year, you might come up with a different, incorrect amount.
2. Annualizing Income from Part-Time Jobs
If a household member works part-time, annualize her income by multiplying her periodic wages (for instance, her hourly or weekly pay) by the number of periods (that is, hours or weeks) that she’s expected to work during the next 12 months [Handbook 4350.3, par. 5-5(B)]. Don’t use the standard annualization factors described above. You must annualize the income based on the estimated time that the household member will work at her pay rate in the coming year.
Example: Jill tutors a student one hour a week and gets paid $15 an hour. You expect Jill will tutor this student for 25 hours over the next 12 months. Her annualized tutoring income is $375 ($15 hourly wages × 25 expected hours of work).
3. Annualizing Income from Jobs with Overtime
Annualize income from jobs with overtime pay in a three-step process. First multiply the household member’s regular pay rate by the number of regular periods that he’s expected to work over the next 12 months. Then, multiply the household member’s overtime pay rate by the number of overtime periods that he’s expected to work over the next 12 months. Add both estimates together for the household member’s annualized income.
Example: Brian earns $7.50 an hour as a waiter for regular periods and $9 an hour when he works overtime. His employer tells you he expects Brian to work 500 regular hours and 200 overtime hours over the next year. To annualize his pay, multiply $7.50 (his regular hourly rate) by 500 (the number of regular hours his employer expects him to work). You get $3,750. Then, multiply $9 (his overtime hourly rate) by 200 (the number of overtime hours his employer expects him to work). You get $ 1,800. Add these two numbers together ($3,750 + $1,800 = $5,500). You must count $5,550 as his annual income.
4. Annualizing Income from Sporadic Jobs
If a household member works sporadically, reasonably estimate what the household member will earn in the next year. You can choose the best way to make the estimate depending on the household member’s individual circumstances [Handbook 4350.3, par. 5-5(C)].
Example: Jack is a landscaper’s assistant. He works only if the weather permits and if his employer needs an extra worker. In the past three years, he has earned $7,500 (year 1), $3,000 (year 2), and $2,500 (year 3). A reasonable way to annualize Jack’s income is to average his earnings from the past three years [Handbook 4350.3, par. 5-5, Examples-Irregular Employment Income].
5. Annualizing Income that May End
Generally, owners must use current circumstances to anticipate income. Even if a household member tells you that she expects to stop getting certain employment income before the end of her 12-month certification year, you must still annualize her current employment income [Handbook 4350.3, par. 5-5(A)(1)]. You can deduct for a period of time that the household will be without this income only if the household member’s employer verifies that the employment will end [Handbook 4350.3, par. 5-5(A)(2)]. Otherwise, annualize the employment income as if it would last all year. But remind household members to let you know if and when their income changes. If changes occur later in the year, an interim recertification can be conducted to change the family’s rent [Handbook 4350.3, par. 5-5(A)(1)].
In some cases, an employer may tell you that it anticipates that the amount of a household member’s income will change in the next 12 months. If this is the case, take this anticipated change into account when annualizing the member’s income [Handbook 4350.3, par. 5-5A(2)]. And make sure the employer documents the anticipated change on the member’s employment verification form.
Example: Mark gets $300 a month in unemployment compensation. He expects to get his last unemployment check four months into his certification year, but you haven’t gotten written verification that his unemployment compensation will end. To annualize his unemployment compensation income, multiply the monthly compensation amount ($300) by 12 to get $3,600. The fact that he may not be eligible for this income after four months mustn’t affect your calculations.
Example: Jake earns $11 an hour as a bookkeeper and works 30 hours a month. He plans on retiring mid-year. To annualize Jake’s employment income, multiply $11 (his hourly wages) by 30 (the number of hours he works a month), then that amount by 12 (the months in a year). Include $3,960 in his annual income. If and when he retires, you can perform an interim recertification.
Roxie Munn: President, Roxie Munn, Inc., 117 Kingsland Way, Piedmont, SC 29673; www.roxiemunn.com.