Surplus Income: One Person in the Household That Is Self-employed
The following is an example of how surplus income calculation would look when there is one, self-employed, person in the household.
Self-employed individuals add an entirely new level of complexity to the surplus income calculation. Surplus income is always applied to an individuals “after tax” income. In order to determine their after tax earnings a self-employed person needs to be able to determine the net income after expenses, estimate the taxes they will owe on that income, make an installment to the government for their taxes and then we can calculate their surplus income requirement.
Take a look at this example:
Peter is an owner-operator working for a large trucking company. He gets paid mileage by the company he works for, but he pays all of his own truck costs (fuel, maintenance, his lease, etc). No taxes are deducted from his pay so he has to make certain he pays those too.
For the last couple of years things have been slow and to make ends meet Peter stopped paying the government. They caught up with him last month and he decided to file bankruptcy so that he could get a “fresh start”.
In order to determine his surplus income obligation, each month Peter must prepare an income statement for his business. It might look like this:
|Mileage paid by Trucking Inc.|
|Meals $500 x 50%|
|Net income before taxes|
|Tax estimate (25%)|
|Net income for surplus calculation|
|Less the government threshold|
|Income subject to surplus|
|Surplus income rate (50%)|
|Peter’s surplus income|
Some important things to remember for self-employed individuals:
1) You have to decide when you start your bankruptcy if you will be working on an accrual or cash basis. Accrual accounting means you apply the income and expenses in the months that they were earned or incurred (not when you actually received the money or made the payment). With the cash method you record income when you get paid and expenses when you pay them.
2) In order to claim the deduction for your taxes you will have to actually make an tax installment to the government. If you can’t prove that you made the payment you will not be allowed to deduct the expense. In this example, Peter would have to pay an additional $335 in surplus (50% of $670 tax) to his trustee if he can’t prove that he has made the tax installment. In addition, next year when he files his taxes he will still have to pay the $670 – so he gets dinged twice.
3) Normally, your trustee will allow you to deduct any expense that you would be allowed to deduct for income tax purposes. Keep in mind that just because your bookkeeper tries to deduct something for income taxes that doesn’t necessarily mean your trustee will agree and or accept the deduction. For instance, if Peter claimed all of his house rent every month as a business expense it would probably be disallowed.
If you are a self-employed individual we strongly suggest you discuss in detail your trustee’s reporting requirements and procedures for determining your surplus income obligation before you file your assignment. In our experience, surplus income causes more problems for self-employed persons than any other aspect of bankruptcy. If you don’t understand what is required then you may be setting yourself up for problems with your trustee and that might result in your bankruptcy being extended and/or your appearance in Court to resolve any disputes that may arise.