Verifying Self-Employment Income Without Losing Your Mind 🤯📊
- Erica Davis
- Jul 15
- 9 min read
Self-employment income.
Just those three words can make even an experienced compliance professional reach for another cup of coffee. ☕😂
Unlike traditional employment income, self-employment income rarely comes wrapped in a neat little package. There may be tax returns, Profit & Loss statements, 1099s, bank deposits, cash payments—or some interesting combination of all five.
And somehow, compliance is expected to take all of that information and answer one seemingly simple question:
What income should we count?
The goal is not to find a perfect number. The goal is to use the best available documentation, apply the appropriate methodology, and clearly document how you arrived at the household’s anticipated annual income.
Because when it comes to self-employment income, the math matters—but the story your file tells matters too. 👀
Why Is Self-Employment Income So Complicated🧐
Traditional employment income usually gives us something concrete to work with: paystubs, employment verification, or another third-party source.
Self-employment income? Not so much.
Income may fluctuate from month to month. Business and personal expenses may be mixed together. Cash payments may not be clearly documented. And last year’s tax return may look completely different from what the business is earning today.
That means compliance professionals have to do more than collect documents.
We have to analyze the information, identify inconsistencies, ask questions, and determine what reasonably represents anticipated income.
Who Is Considered Self-Employed? 💼
Before we start collecting documents and calculating income, we need to answer a basic question:
Who is actually considered self-employed?
Self-employment is not limited to someone who owns a traditional business with employees, an office, and a business license.
A household member may be considered self-employed if they earn income independently rather than as a traditional W-2 employee.
This may include:
Independent contractors receiving Form 1099
Rideshare and delivery drivers working through platforms such as Uber, Lyft, DoorDash, or Instacart
Hair stylists, barbers, nail technicians, and other beauty professionals
Childcare providers
Housekeepers or cleaning professionals
Landscapers and maintenance workers
Freelancers and consultants
Online sellers and content creators
Individuals performing cash-based services or side work
💡 TCC Tidbit: The fact that someone does not consider themselves a “business owner” does not necessarily mean they are not self-employed.
If a household member is earning money independently, compliance needs to understand how the income is earned, how frequently it is received, and what documentation is available to verify it.
Start With the Documentation 📂
Depending on the program requirements and circumstances, documentation may include:
Many owners, management companies, and housing agencies have established policies regarding the documentation required to verify self-employment income.
A common industry practice is to request the two most recent years of federal tax returns, including all applicable schedules.
But what happens when the household member cannot provide them?
First, determine why the tax returns are unavailable.
Is the business new? Was the household member not required to file? Did they request an extension? Have they simply failed to provide the documentation?
The answer matters.
Depending on the applicable program requirements and the owner or management agent’s policies, alternative documentation may include:
A current Year-to-Date Profit & Loss statement
Business bank statements
Personal bank statements showing business deposits
1099s or other statements of earnings
Payment histories from gig platforms
Invoices, receipts, or client payment records
Bookkeeping records
A statement from an accountant or tax professional
Other credible documentation supporting the income received
📌 The goal is not simply to check a box that says “tax return received.”
The goal is to obtain sufficient documentation to reasonably determine and support the household member’s anticipated self-employment income.
And remember: the file should document why the standard documentation was unavailable and what alternative documentation was used instead.
Let’s Talk About the Math 🧮
One of the most common mistakes with self-employment income is confusing gross business revenue with income that should actually be counted.
Generally, you are looking at:
Gross business income – allowable business expenses = net business income
But don’t stop there.
Certain expenses deducted for tax purposes may need to be added back when calculating income for affordable housing purposes.
Let’s Look at an Example 👇🏾
A household member provides a Schedule C showing:
Gross receipts: $48,000
Total business expenses: $18,000
Depreciation included in expenses: $3,000
Net profit: $30,000
If the applicable program requires depreciation to be added back, the calculation would be:
$30,000 Net Profit + $3,000 Depreciation = $33,000 Countable Annual Income
Seems simple enough, right?
Well…not so fast. 😂
That tax return reflects a prior period. Compliance still needs to determine whether
$33,000 reasonably represents what the household is expected to earn moving forward.
And that brings us to projection.
The Self-Employment Affidavit Matters Too 📝
The tax returns, Profit & Loss statements, and bank statements help us understand the household member’s income history.
But remember what we are ultimately trying to determine:
What does the household member anticipate earning during the applicable certification period?
Many owners and management companies require a Self-Employment Affidavit or Self-Employment Certification to be completed by the household member.
This document gives the household member an opportunity to identify the nature of the business, report anticipated income and expenses, and explain changes that may affect future earnings.
Let’s go back to our previous example.
The household member’s prior documentation supports $33,000 in self-employment income.
However, on the Self-Employment Affidavit, the household member reports that they anticipate earning $40,000 during the upcoming year because business has increased and they have gained additional clients.
Now we have something that needs to be evaluated.
The compliance professional should review the available documentation, determine whether the household member’s explanation is reasonable, and document the methodology used to calculate anticipated income.
If the household member reasonably anticipates earning $40,000 and the documentation supports that projection, the anticipated income—not simply the prior year’s tax return—is what should drive the income calculation.
💡 TCC Tidbit: A tax return tells us what happened. A Self-Employment Affidavit helps us understand what the household member expects to happen next.
That is why simply pulling the net profit from a tax return and dropping it into the income calculation may not be enough.
Historical income is evidence. Anticipated income is the determination.
The Tax Return Is History. We Still Have to Look Forward. 🔍
Affordable housing compliance generally requires us to determine anticipated income—not simply copy a number from last year’s tax return.
Ask questions such as:
Is the business income increasing, decreasing, or remaining stable?
Has the household gained or lost major clients?
Has the business recently started or significantly changed?
Does the YTD Profit & Loss statement support the prior year’s earnings?
Do bank deposits appear consistent with the income being reported?
If current-year performance is materially different from the prior tax year, the file should address that difference.
📌 Document the methodology.
A reviewer should be able to look at the file and understand:
What documentation did you review? What did the documentation show? What income did you project? And why?
If the reviewer has to play detective to figure out your calculation, the file probably needs more documentation. 🕵🏾♀️
What About Income Averaging Properties? 🏢
Self-employment income can create additional considerations at Income Averaging properties because changes in household income may affect how compliance teams evaluate unit designations, applicable limits, and Available Unit Rule requirements.
The key takeaway?
Do not attempt to change a unit’s designation simply because a household’s income has increased.
Income Averaging and the Available Unit Rule require careful application of the applicable program requirements. Compliance teams should evaluate the household’s income, the unit designation, and any Available Unit Rule implications based on the facts of the property and household.
This is one of those areas where “just change the percentage” is definitely not the
answer. 🚫
And Then There’s HOTMA…Because Why Not Add Another Layer? 😅
HOTMA has changed several aspects of income and asset calculations, which means compliance professionals also need to consider how business assets are treated.
Necessary business equipment may be treated differently from cash reserves, investment accounts, or other assets associated with the business.
The important part is not to assume that everything connected to a business is automatically excluded—or automatically counted.
Evaluate the asset. Determine its purpose. Apply the applicable program requirements. And, as always…
Document. Document. Document. 📝
Red Flags That Deserve a Closer Look 🚩
Not every inconsistency means someone is misrepresenting their income.
But certain situations should prompt additional questions:
🚩 Large or recurring deposits with no documented source
🚩 Reported income that does not appear consistent with the supporting documentation
🚩 Significant business losses reported year after year
🚩 A household member who repeatedly claims tax returns are unavailable without providing alternative documentation
🚩 Profit & Loss statements containing only round numbers with little or no supporting detail
🚩 Business and personal expenses that appear to be mixed together
🚩 Major differences between tax returns, bank statements, and current reported income
When something does not make sense, ask questions.
A deadline is not a reason to approve a file that still has unresolved income discrepancies.
Same Income. Different Program Rules. 🏘️
One of the biggest mistakes in affordable housing compliance is assuming that self-employment income is handled exactly the same way across every housing program.
It isn’t.
While the basic goal may be similar—determining and documenting countable income—the verification requirements, calculation methodology, and treatment of business expenses and assets may vary depending on the applicable funding source.
LIHTC: Compliance professionals must follow Section 42 requirements, applicable Treasury regulations, IRS guidance, and the procedures established by the state Housing Finance Agency. Owner and management agent policies may also establish documentation requirements, such as requesting multiple years of tax returns or requiring a Self-Employment Affidavit.
HUD Multifamily Housing/PBRA: Self-employment income must be evaluated under applicable HUD income and verification requirements, including current HOTMA implementation guidance. Verification methods and documentation requirements should follow HUD’s established hierarchy and applicable owner policies.
HOME: Participating jurisdictions must determine income using an approved definition and methodology under HOME requirements. The treatment and verification of self-employment income should be consistent with the income definition selected for the property or activity.
Layered Properties: This is where things can get interesting. 😅 A household may be subject to more than one program, and the documentation or calculation requirements may not always align perfectly.
📌 TCC Tidbit: Never assume that satisfying one funding source automatically satisfies them all.
At a layered property, compliance professionals should identify each applicable program, determine the requirements that govern the household and unit, and ensure the file contains sufficient documentation to support compliance across all applicable funding sources.
Same household. Same business. Different program requirements.
Before You Approve That File…Check This List ✅
Self-employment files are rarely one-document-and-done. Before approving the file, make sure the documentation supports both the household member’s historical earnings and the income you are projecting for the applicable certification period.
Your self-employment income documentation may include:
✅ Completed Self-Employment Affidavit or Self-Employment Certification, when required by the owner, management agent, housing agency, or applicable program procedures
✅ Most recent federal tax returns and all applicable schedules, based on program requirements and established owner or management agent policies
✅ Current Year-to-Date Profit & Loss statement, signed and dated when applicable
✅ Business and/or personal bank statements supporting reported business income
✅ 1099s, gig-platform earnings statements, invoices, payment histories, receipts, or other documentation supporting income received
✅ Documentation supporting significant increases or decreases in anticipated business income
✅ A clear calculation showing gross income, allowable business expenses, applicable adjustments, and the final amount of countable self-employment income
✅ A written explanation of the projection methodology when the final anticipated income differs from historical earnings
✅ Documentation explaining why standard verification documents, such as tax returns, were unavailable and what alternative documentation was used
✅ Self-certification only when permitted under the applicable program requirements and when other acceptable verification methods are unavailable
And perhaps most importantly:
✅ Enough documentation for another compliance professional—or an auditor—to follow your reasoning without needing you in the room to explain it.
📌 One final reminder: documentation requirements are not one-size-fits-all.
Before determining that a file contains sufficient documentation, review the requirements of the applicable housing program, allocating or monitoring agency, owner, and management company.
The strongest compliance files do not simply contain a stack of documents.
They clearly show what was reviewed, how anticipated income was determined, and why the final calculation is reasonable and compliant.
The Bottom Line 🎯
Self-employment income will rarely be perfectly packaged.
The documents may not match exactly. Income may fluctuate. The current year may look completely different from the prior year.
That does not mean the file cannot be approved.
It means the compliance professional needs to evaluate the available information, ask appropriate follow-up questions, apply a reasonable and compliant methodology, and document how the final income determination was reached.
Because a strong compliance file does not simply contain documents.
It tells the story of how the eligibility determination was made.
And when the auditor comes knocking? 👀
That is exactly the story you want your file to be able to tell.
Need support reviewing complex income calculations or strengthening your compliance processes?
The TCC Firm partners with affordable housing owners, operators, and site teams to make compliance more manageable through practical guidance, file review support, training, and customized compliance solutions.
👉🏾 Visit www.thetccfirm.com to learn more.
Compliance made manageable. Practical support. Real partnership.
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