Is the Money I Make From Self-Employment Considered Business Income, and How Will This Affect My Bankruptcy?
5 minute read • Upsolve is a nonprofit tool that helps you file bankruptcy for free. Think TurboTax for bankruptcy. Get free education, customer support, and community. Featured in Forbes 4x and funded by institutions like Harvard University so we'll never ask you for a credit card. Explore our free tool
If you're self-employed (as a sole proprietor, gig worker, or independent contractor) and you're struggling with business or personal debt, you can file personal bankruptcy like Chapter 7 or Chapter 13. If you have a separate business entity like an LLC or corporation, you also have the option to put your business into bankruptcy.
Written by the Upsolve Team. Legally reviewed by Attorney John Coble
Updated October 12, 2022
For many people, the term “business income” calls to mind images of filing cabinets, spreadsheets, or busy people in suits. Consequently, if this imagery doesn’t apply to you, you may not think of yourself as having a business. But if you sell your thrift-store finds on eBay, or make food deliveries a few nights a week in addition to your day job, you likely have business income.
This scenario is increasingly common in today’s economy. And if you’re considering bankruptcy as debt relief, you need to understand what counts as business income in bankruptcy and why it matters. This article covers how to determine whether you have business income, and, if so, how to identify your business structure. It also explains which bankruptcy options are available to you based on that business structure.
Do You Have Business Income?
Even if you don’t consider yourself a business owner, some or all of your income could still be classified as business income for bankruptcy purposes. Under bankruptcy law, there are three primary categories of income.
Employment income: This is money you earn by working as someone’s employee. It may include wages (salaried or hourly), commissions, tips, and bonuses. If you receive a regular paycheck with taxes withheld, or if you receive a W-2 tax form, you’re likely an employee.
Income from operating a business: If you work for profit, you’re either an employee or an independent contractor. If you do gig work or freelance, or if you receive a 1099 tax form, you’re likely an independent contractor. Any money you earn from independent contract work is considered business income for bankruptcy purposes.
Other income: This category includes income from all sources other than work. Examples include Social Security or other public benefits; alimony or child support; rental income; interest, dividends, or royalties; pension or retirement income; unemployment or disability income; money collected from lawsuits; and lottery or gambling winnings.
In your bankruptcy paperwork, you must disclose all income you’ve earned from any of the three categories during the past two years.
You must also disclose any ongoing business income, even if it’s not your primary income source. For example, if you work 30 hours per week as a retail employee and write freelance articles on weekends, you must include both income sources in your bankruptcy paperwork. Don’t include occasional hobby income if you won’t regularly receive this income going forward.
You may deduct any necessary business expenses from this income. For example, if you earn money as a freelance wedding photographer, you can deduct necessary expenses, such as tripods, lenses, and editing software, from your gross business income. Your expense deductions must be itemized, and you may be asked for documentation. If you deduct something as a business expense, though, you can’t again as a living expense.
How Do You Identify Your Business Structure?
If your bankruptcy paperwork indicates that you have business income, then you must also identify your business structure. “Business structure” refers to how your business is set up legally. This makes a difference in determining such matters as how your business income is taxed and who’s responsible for any business debts.
Some types of business structures must be established by filing specific legal documents, usually with your state’s Secretary of State. These include
Limited liability corporations (LLC)
Limited liability partnerships (LLP)
Professional associations (PA) or professional corporations (PC)
If your business is registered as one of these business structures, it is legally considered to be a separate entity, apart from you and any other owners, officers, directors, or partners. These business entities can own their own assets, incur their own debts, and even file their own bankruptcies (more on that later).
If your business isn’t structured as one of the business entities above, then you’re a sole proprietor. You can be a sole proprietor even if you’ve never filed any business paperwork. If you have business income, you’re automatically a sole proprietor unless you register as a different type of business.
Sole proprietorship is the most common business structure. Most independent contractors (including freelancers and gig workers) are sole proprietors. A business owner can also be a sole proprietor. You can be a sole proprietor even if you have an Employer Identification Number (EIN), have a business license, and/or operate under a business name.
Upsolve User Experiences2,190+ Members Online
How To Identify Your Business Name
In addition to identifying your business structure in your bankruptcy forms, you must also provide your business name. If your business is registered as a separate legal entity, filling in your business name is straightforward: The business name on your bankruptcy forms must match the business name on your registration paperwork. If you’re a sole proprietor, though, the name requirement can be a little trickier.
Some sole proprietors operate under a trade name, such as “Michael’s Lawn Service” or “Special Moments Photography.” A trade name is sometimes called a “DBA,” which stands for “doing business as.” For example: “Linda Garcia, DBA Linda’s Custom Cakes.” The business name is the part after “DBA.”
Some sole proprietors do business under their personal name without a DBA, such as “Olivia Jones, Accountant.” Some sole proprietors don’t use a business name at all, such as private nannies, housekeepers, or personal assistants. In this case, your business name is simply your name. This is true even if you contract with a business, such as DoorDash or Uber.
Finally, if you’re still not sure what to list as your business name, it should usually match the name on your paycheck or pay stub.
How Your Business Affects Your Bankruptcy Options
The way your business is structured and the amount of your business income and debt can all affect which debt relief options are available to you under the Bankruptcy Code.
For Sole Proprietors
If you’re a sole proprietor, you and your business are legally one and the same. This means you’re the legal owner of all your business assets, even if they’re registered under a trade name. You’re also personally responsible for all your business debts, even if they were incurred in the business name. This means that if you file bankruptcy, under any chapter, you must include all of your business assets and debts as well as all your personal assets and debts. A sole proprietorship can’t file business bankruptcy.
If you only have a small amount of business income from a “side hustle,” your business may not have much effect on your personal bankruptcy, especially if you have minimal business assets or debt. But for some business owners, being a sole proprietor can make certain aspects of filing bankruptcy — such as exemption planning — much more complicated. If you’re a sole proprietor who has significant business assets or debts, consider discussing your debt relief options with an experienced bankruptcy attorney.
For Other Business Entities
If your business is registered as a separate legal entity, such as a corporation, then it’s treated like a separate person for bankruptcy purposes. This means you can file a business bankruptcy without including your personal debts and assets. You can also file personal bankruptcy without including your business assets and debts (unless you personally guaranteed or co-signed for those debts).
However, an exception may apply to you. The rules are more complicated if your business is registered as a partnership. In a general partnership, the partners are personally responsible for all the partnership’s debts. This means that if you file personal bankruptcy, you must still include all the business debts as if you were a sole proprietor. Like corporations, you can file a business bankruptcy for the partnership without including your personal assets and debts. But since business bankruptcy doesn’t discharge debt, you’ll still be personally responsible for any business debts that aren’t paid through the bankruptcy.
Business income is money you make from doing work other than employment. This includes independent contract work, freelance jobs, paid gigs, and other business activities. You must disclose all business income on your bankruptcy paperwork, even if it’s not your main source of income. When you provide your business income, you must also provide your business structure and business name.
You can file legal documents to register your business as a separate entity, such as a corporation. If you don’t register your business as a separate entity, your business is automatically structured as a sole proprietorship. Some sole proprietorships operate under trade names. Your business structure determines what options you have for filing bankruptcy. If you decide Chapter 7 bankruptcy is the right step to deal with your personal or business debt, you can use our app to file for free.