How To Calculate Your Income for Your Bankruptcy Forms if You’re Self-Employed

There are a few bankruptcy forms that ask you about your income. If you're self-employed, you likely aren't paid in the same way as a salaried worker, so it may be difficult to figure out your monthly income. This article provides some tips for calculating your income for your bankruptcy forms when you’re self-employed.

Types of Self-Employment

Your income is calculated differently depending on whether you have a legal business entity or you operate as a sole proprietor or independent contractor. Let's first take a look at what’s considered income depending on how your business is set up. Then we’ll talk about how to calculate your income for your bankruptcy forms. 

If you’re self-employed, you may be…

An Independent Contractor, Gig Worker, or Sole Proprietor 

This means you do work for clients or customers, and you’re responsible for paying your own expenses, taxes, and insurance. Each of your clients or customers sends you a 1099 tax form. If you’re an independent contractor, all the funds you receive from your clients or customers are considered income. 

Gig workers are a type of independent contractor. All the funds you receive from the company (or companies) that you do gig work for are considered income. For example, if you're an Uber driver, what you receive from Uber is your income.

A sole proprietor is a tax designation. Sole proprietors may work as independent contractors. They don’t have a separate legal business entity. They file their business taxes on their personal tax returns usually using their Social Security number as their taxpayer identification number.

A Business Owner

If you're operating a business that has a separate legal entity, like a corporation or an LLC, you’re considered a business owner. If you’re filing personal bankruptcy as a business owner, there are two things to look out for. 

1. Whatever money the business pays you for wages or in the form of a draw is considered income.

2. If your business entity is paying some of your personal expenses, that’s also considered income. For example, if you're making your car payment using business funds, the car payment is still considered income for the purpose of your bankruptcy filing, even if the money never actually goes into your bank account. 

Calculating Your Income for Your Bankruptcy Forms

You’ll need to calculate your income on two required bankruptcy forms: the Chapter 7 Means Test Form and Schedule I: Your Income. If you’re an independent contractor, gig worker, or sole proprietor, this will be more straightforward than if your business is a separate legal entity. If that’s the case, you may want to consult with an experienced bankruptcy attorney.

Means Test

The good news here is that the income on your Chapter 7 Means Test Calculation is based on your actual business income and expenses over the last six months. Using the information provided above, go through your records and determine how much money you received during each of the last full six months. You may want to look at your bank statements or review payment on any payroll services you’re paid through. Then, go through your records to add up your business expenses from the same time period.

Remember, the month you file in isn’t part of the income calculation for the means test. For example, if you’re filing in July, you’ll count your income from January through June. Once you have your total number, divide it by six and you'll have your average monthly income for your means test calculation. 

Schedule I 

On Schedule I, you'll need to estimate how much net income, on average, you'll earn as a self-employed individual every month going forward. That’s the income you expect to earn after accounting for expenses. So you’ll need to know your average monthly expenses too. If you've been running your business for a while, it's easiest to figure this out based on your last 12 months of business income and expenses. 

The key for this form is to make sure that you give the bankruptcy court a realistic idea of how much you expect to make each month going forward. It doesn't have to be accurate down to the cent (that's really impossible), but do your best to provide an estimate that’s as accurate as possible. The bankruptcy court will want to see a statement of your business income and expenses if you include business income on your Schedule I. You may be able to pull this information from a recent tax return.

Let’s Summarize…

If you’re self-employed, your income may look a little different than a salaried or hourly W-2 employee. If you’re a sole proprietor, gig worker, and/or independent contractor, any funds you earn from doing work for clients or customers are considered income. If you’re a business owner who has a separate legal entity for your business, you may earn income as a draw or wages. If the company pays for any of your expenses, that’s also considered income even if the money never hits your bank account.

You’ll report your income on the means-testing form and your Schedule I if you file bankruptcy.