TN 7 (01-07)
DI 10510.015 Test One of General Evaluation Criteria: Significant Services and Substantial Income
Work activity in self-employment performed by a title II disability beneficiary after he/she has received title II disability benefits for 24 months, must be evaluated under the “countable income test” (see DI 10510.010) if the purpose of the evaluation is to determine whether the beneficiary’s disability has ceased due to the performance of SGA. In all other cases, the work activity of non-blind self-employed individuals will be evaluated under three tests, all of which must be considered before it can be established that the individual’s work is not SGA. If the individual has not engaged in SGA under test one, then consider tests two and three (see DI 10510.020).
A. Policy — test one: significant services and substantial income
The individual's work activity is SGA if he or she renders services that are significant to the operation of the business, and if he or she receives a substantial income from the business.
B. Policy — significant services
1. Self-Employed persons other than farm landlords
a. One-person businesses
Self-employed carpenters, gardeners, handymen, nurses, bookkeepers, consultants, and people in numerous other business operations may engage in their trade or profession by themselves, without employees, partners, or other assistants. The services of an individual in a one-person business are necessarily “significant.”
The receipt of substantial income (see DI 10510.015C.) by the operator of a one-person business will result in a finding of SGA. Where income is not substantial, SGA may be found on the basis of tests two or three (the comparability or worth of work tests) as explained in DI 10510.020.
b. Other businesses
In a business involving the services of more than one individual, a sole owner or partner will be found to be rendering significant services if he or she:
Contributes more than half the total time required for management of the business; or
Renders management services for more than 45 hours a month regardless of the total management time required by the business. (IMPORTANT: The number of hours used in the evaluation of self-employment for SGA differs from the number of hours that indicate a self-employment service month for a Trial Work Period. See DI 13010.060.)
Where the services of a sole owner or partner are significant under either of the above tests, the individual will be found engaged in SGA if he or she receives a substantial income (see DI 10510.015C.) from the business. A sole owner or partner may also be found engaged in SGA on the basis of tests two or three (the comparability or worth of work tests) as explained in DI 10510.020.
2. Farm landlords
a. Presumption based on material participation
A farm landlord is one who rents farm land to another farmer. A farm landlord may be given Social Security earnings credits if he or she materially participates in the production or management of the production of the crops and/or livestock raised on the farm. (See RS 01803.700 for an explanation of “material participation.”) If the services performed by the farm landlord are considered “material participation” in the activities of the farm, they will also be considered significant services to the operation of the business; therefore, the farm landlord who performs such services will be considered engaged in SGA if he or she also receives substantial income. A farm landlord may also be found engaged in SGA on the basis of tests two or three (the comparability or worth of work tests) as explained in DI 10510.020.
b. When “significant services” are not presumed for farm landlords
The continued existence of an agreement to materially participate, or the crediting of earnings to the farm landlord's Social Security account, is not necessarily inconsistent with a substantial reduction or cessation of significant services by the landlord.
Mr. S., a materially participating farm landlord, had a stroke in January but continued to exercise significant managerial authority over the rented farm through June. Thereafter, he became unable to continue such activity because of a worsening of the impairment. The agreement of material participation continued to the end of the year, and Mr. S was credited with farm earnings for the entire year. However, since he stopped providing significant services as a farm landlord as of July 1, that is the date he was no longer engaging in SGA under the significant services/substantial income test.
c. Development of services by farm landlords
Where a materially participating farm landlord is involved, development of significant services should generally be limited to ascertaining whether the individual is personally performing the same services which were the basis for the finding of material participation. Additional development concerning the extent of services being rendered will be necessary only where the individual's services are alleged to have changed significantly since the alleged date of disability onset, or where the finding of material participation was not based solely on the individual's services but also on the services of an agent of that individual.
For taxable years beginning after December 31, 1973, the activities of an agent are not considered in determining whether a landowner or tenant is materially participating in the management or operation of a farm. If an agent is involved, the agent's activities must be distinguished from those of the landowner or tenant. Only the latter are to be considered in determining whether the test of material participation is met. The income derived from the activities of the agent is rental income and does not count as income from self-employment.
C. Policy — substantial income
A self-employed individual will have a substantial income from a business if:
“Countable income” from the business (see DI 10510.012) averages more than the amount shown in the SGA Earnings Guidelines, or
“Countable income” from the business does not average more than the amount referred to above, but the livelihood which he or she derives from the business is:
Comparable to that which he or she had before becoming seriously impaired, or
Comparable to that of unimpaired self-employed individuals in his or her community engaged in the same or similar businesses as their means of livelihood.
2. Determining whether “countable income” averages more per month than the SGA amount for the particular year
Determine average monthly countable income under DI 10510.012. Then use the Earnings Guidelines in DI 10501.015 to determine if countable income averages more than the SGA amount.
3. Determining whether a self-employed person's livelihood compares with personal or community standard of livelihood
If the self-employed person's average monthly “countable income” does not exceed the amount shown in the Earnings Guidelines, consider whether his or her livelihood from the business is comparable to: that which he or she had before becoming seriously impaired, or that of unimpaired self-employed persons in the community engaged in the same or similar businesses as their means of livelihood.
a. General considerations
NATURE AND SIZE OF BUSINESS
The experience of the DO is of particular value in determining whether the individual is deriving, or can be expected to derive, a substantial income from his or her business. The detailed instructions in RS 01803.000 concerning how to derive net earnings are pertinent in the development of substantial income in disability claims. The DO should include in its determination an account of all the factors considered, so that it will be clear when an earnings report is not to be taken at face value. It is especially important that a detailed explanation be given as to the reasons why an apparently substantial business is reported as yielding a less-than-substantial income. In farm cases, for example, the file should specifically indicate whether real income in the form of produce is unreported for taxes because it is being held over for sale in a succeeding year. On the other hand, a description of special conditions affecting an individual's business may make it clear why he or she cannot derive the income ordinarily obtained from an enterprise of that type and scope.
The type of business, amount of gross sales, the markup on products sold, and expenses such as rent, utilities, transportation, labor, costs, profit shares to employees and partners, etc., are among relevant items to consider.
When the business has been in existence for some time, data regarding operations in the past (e.g., income tax returns) should be obtained for the file. (See also DI 10510.025B.)
The impressions of the field office, based on knowledge of local conditions obtained in the investigation of earnings credits claimed by self-employed individuals, will be particularly helpful in determining the validity of reported income and expenses.
CHANGES IN OPERATIONS DUE TO IMPAIRMENT
A business from which the individual previously derived a substantial net income may now be expected to yield considerably less as a result of the curtailment of the individual's work due to the impairment.
Development should show whether the individual has been obliged to cut down the size of the business; operate the business fewer hours; hire additional labor to replace the individual's own labor; accept the unpaid help of family members or others or enter into a partnership arrangement so that the duties and income of the business will now be shared with others.
b. Personal standard
If the business was the individual's sole means of livelihood for a number of years before he or she became seriously impaired, and the individual continues to receive a comparable livelihood from it after becoming seriously impaired, his or her income will be considered substantial. However, in some cases, chronic illness or other special circumstances existing for some time prior to the individual's becoming (or allegedly becoming) disabled may indicate that his or her financial situation in that period cannot fairly be considered an indication of the individual's standard of livelihood. Under such circumstances, the community standard of livelihood would be a more pertinent basis for determining whether current and expected income from the business is substantial.
In some businesses, particularly farming, the operator derives a livelihood despite the fact that cash income is small. Items which do not lend themselves to precise monetary evaluation such as homegrown food may be a considerable part of the individual's livelihood although not reportable for Federal income or Social Security tax purposes, and, therefore, not reflected on the earnings record. In the case of a farmer, although a monetary evaluation of such commodities is not controlling, the commodities should be considered in determining whether the yield from the farm is comparable to personal or community standards of livelihood.
c. Community standard
Meeting the community standard of livelihood will be a sufficient basis for finding substantial income, regardless of the individual's economic circumstances prior to becoming (or allegedly becoming) disabled. However, in determining the community standard for similar business, exclude from consideration individuals who are for various reasons considered unrepresentative, e.g., where chronic illness accounts for a low level of income.
d. Developing personal or community standard of livelihood
The self-employed individual should be questioned concerning the source and amount of his or her livelihood over a number of years (generally not less than 5 years) prior to becoming (or allegedly becoming) disabled. Where the individual's personal standard of livelihood is not met or the information furnished is inconclusive as to his or her personal standard of livelihood, obtain evidence regarding the community standard of livelihood for businesses of a similar nature. In some cases, the FO’s own observations and knowledge will be sufficient. In others, evidence will be needed from the local Chamber of Commerce or other informed sources.