Self-Employment Income and Bankruptcy: How To Know What Counts and How To Report It

What’s Considered Business Income in Bankruptcy?

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:

• 1️⃣ 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.

• 2️⃣ 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.

• 3️⃣ 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. 

Business Income and Expenses

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.

Types of Self-Employment

Self-employment can look a lot of different ways. The rules for bankruptcy are the same whether you make a little money on the side or run your own company full-time — but how you’re set up affects how you report your income, which debts and assets are included, and whether your business itself could file for bankruptcy.

Here are the main types of self-employment:

• Independent contra

• Gig workers

• Sole proprietors

• Business owner

Independent Contractor & Gig Workers

Independent contractors are paid directly by clients or customers instead of being on someone’s payroll. You’re in charge of paying your own taxes, insurance, and business expenses. 

👉 Most independent contractors receive a 1099 tax form from each client or company they work with.

Gig workers are a specific type of independent contractor who find work through a platform or app. You’re still responsible for your own expenses and taxes, but instead of finding each client yourself, the company sends you the work and pays you directly.

Independent contractors don’t need to file a separate business bankruptcy because everything is handled through their personal filing. On your bankruptcy forms, you’ll need to list both your total (gross) business income and the expenses you’ve paid to run your business. Any assets or debts connected to your work are automatically part of your personal bankruptcy case. 

✨ Upsolve has helped thousands of independent contractors and gig works file Chapter 7 bankruptcy for free through our online filing tool. It only takes a few minutes to see if you’re eligible.

Sole Proprietor

A sole proprietorship is the default business structure if you haven’t registered as a different type of entity (like an LLC or corporation). You and your business are legally the same — there’s no separation between your personal and business assets or debts.

Many sole proprietors also work as independent contractors or gig workers. You usually file your business taxes on your personal tax return using your Social Security number as your taxpayer ID, but some sole proprietors apply for an Employer Identification Number (EIN).

In bankruptcy, all your business debts and assets are included in your personal case. If you have significant business property or inventory, this can make it more complicated to protect them through exemptions. 

Like independent contractors, sole proprietors can’t file a separate bankruptcy for the business — it’s always handled as part of your personal filing. You’ll need to report your total business income and subtract your allowable expenses to show your net income.

✨ Sole Proprietors with simple Chapter 7 cases may be eligible to use Upsolve’s free filing tool to prepare their Chapter 7 bankruptcy paperwork.

Business Owner (Separate Legal Entity)

If you’ve formed a corporation, LLC, partnership, LLP, or professional corporation, your business is a separate legal entity. That means it can own property, take on debt, and even file bankruptcy in its own name.

In your personal bankruptcy, you’ll need to include:

• Any wages or draws the business pays you.

• The value of any personal expenses the business pays on your behalf — these count as income even if the money never enters your bank account.

🤝 Because separate business entities have their own legal rules and bankruptcy procedures, Upsolve’s free filing tool isn’t a good fit for business owners. But we can connect you with a trusted bankruptcy attorney for a free consultation to review your options and help you understand whether a personal, business, or combined filing makes sense.

Identifying Your Business Structure and Name

When you file for bankruptcy, the court needs to know not just your income but also how your business is set up and what it’s called. This helps determine which debts and assets are included in your case.

Business Structure

Your business structure describes the legal setup of your work. In bankruptcy, this matters because it affects how your assets, debts, and income are treated.

• Registered entities: These include corporations, LLCs, LLPs, partnerships, and professional corporations. 

  • If you’ve officially registered your business with your state (usually through the Secretary of State), your business is a separate legal entity from you. It can own property, have its own debts, and even file bankruptcy on its own.

• Sole proprietorships: If you haven’t registered your business as a separate entity, you’re automatically considered a sole proprietor. 

  • This is the most common setup for freelancers, gig workers, and small business owners. Legally, you and your business are the same — your personal assets and debts are connected to your business assets and debts.

Business Name

You’ll also need to list your business name on your bankruptcy forms. How you figure this out depends on how you operate:

• Registered Businesses – Use the name that appears on your official registration documents.

• Sole Proprietors With a DBA (Doing Business As) – Use your trade name (for example, Michael’s Lawn Service or Special Moments Photography).

• Sole Proprietors Without a DBA – Use your full personal name, even if you contract through a company like Uber or DoorDash.

• No Business Name at All – Some self-employed people (like nannies, housekeepers, or personal assistants) simply use their own name. That’s the name you’ll list.

✨ Tip: If you’re unsure what to put, match the name to what appears on your paychecks, invoices, or bank deposits.

How To Calculate and Report Your Self-Employment Income on Bankruptcy Forms

When you file for bankruptcy, you’ll need to tell the court how much money you make from your self-employment. This happens on two main forms: the Chapter 7 Means Test and Schedule I.

💡 The means test is about your past six months, while Schedule I is about your future income. Both help the court decide if you qualify for Chapter 7 and understand your financial picture.

The challenge is that self-employment income isn’t as straightforward as a paycheck from an employer. You might not have pay stubs, your income might change from month to month, and you’ll also need to account for your business expenses.

Chapter 7 Means Test Form

The means test looks at your average monthly income from the last six full months before you file. It’s based on actual numbers, not estimates.

To calculate your self-employment income for the bankruptcy means test follow these steps:

• Step 1: Gather your records for the past six full months (not including the month you file).

• Step 2: Add up all the money you received from self-employment during that time. This includes:

  • Client payments

  • Gig platform payouts

  • Draws from your business

  • Personal expenses the business paid for you (like your car payment).

• Step 3: Add up your allowable business expenses for the same period.

• Step 4:  Subtract your expenses from your total income.

• Step 5: Divide by six to get your average monthly income for the means test.

✨ Tip: Bank statements, payment processor reports (like PayPal, Stripe, or QuickBooks), and invoices are often the easiest way to track this.

Schedule I: Your Income

Schedule I asks for your projected future income — what you realistically expect to earn going forward, after expenses.

Here are the steps to calculate that:

• Step 1: Look at your last 12 months of income and expenses to find a stable average.

• Step 2: Adjust for any changes you expect (like gaining or losing clients, seasonal work patterns, or upcoming contracts).

• Step 3: Subtract your average monthly business expenses to get your net income.

• Step 4: List that net income as your monthly self-employment income.

⚠️ Important: The court knows projections aren’t exact, but they need to be reasonable. If you list business income on Schedule I, you may need to give the court a statement of your business income and expenses — often from your most recent tax return.

FAQs: Self-Employment and Chapter 7 Bankruptcy

Many self-employed people successfully file Chapter 7 bankruptcy every year. Here are some of the most frequently asked questions about filing bankruptcy when you’re self-employed.

My Income Changes Every Month. Can I Still Qualify for Chapter 7?

Yes. The means test looks at your average monthly income over the past six full months (not including the month you file). 

If you had a high-earning stretch recently, it could raise your average, so sometimes waiting a month or two before filing can make a difference.

Which Business Expenses Can I Deduct in the Means Test?

You can deduct ordinary and necessary costs of running your business, like mileage, supplies, equipment, software, insurance, advertising, and professional fees. 

You can’t deduct personal expenses disguised as business costs, and you’ll need to keep receipts or other proof.

Will I Lose My Tools, Vehicle, or Equipment?

Not necessarily. Many states have a “tools of the trade” exemption that can protect items you need for work — like a vehicle for rideshare driving or a laptop for freelance work. The value limits vary by state, so it’s worth checking before you file.

What Proof Will the Trustee Want to See?

Trustees often look more closely at self-employed cases. You may need to provide bank statements, invoices, receipts, contracts, and recent tax returns to back up the income and expenses you list in your forms. If you mix personal and business finances, be ready to explain transactions.

Does Hobby Income Count?

Only if it’s ongoing and you expect to keep earning it after you file. Occasional, one-off hobby sales — like selling a few handmade items once a year — usually don’t need to be included.

What if I Owe Back Taxes From Self-Employment?

Some older income tax debts can be wiped out in Chapter 7, but the rules are strict. In general, the debt must be for a tax return due at least 3 years ago, filed at least 2 years ago, and assessed at least 240 days before filing. More recent tax debts usually aren’t dischargeable.

What Happens if I Personally Guaranteed a Business Loan or Lease?

If you co-signed or personally guaranteed a business debt, it becomes part of your personal bankruptcy case, even if the loan was for the business.