Completing the FAFSA® for self-employed or small business owners
Increasingly, the “9-to-5” doesn’t represent the landscape of American jobs. Over 10% of the American working population is self-employed, and 16% report working on some sort of freelance or online gig job. But these “unusual” job setups can make it complicated to fill out the FAFSA®.
So we’re here to break down how to report parent (or student) finances if you’re self-employed or own a small business.
First, what IS “self-employed”?
There are many ways a person might be self-employed, like:
- Do freelance work – This might be informal (like teaching yoga classes, or doing handyman jobs) or via a more “formal” online platform like Upwork or Fiver.
- Act as a contractor – This might be short-term or long-term work, at a company where you have a solid contract; or it might also be “gig work” on platforms like Uber, Lyft, or Amazon.
- Run a formal small business or family farm – This is probably something you created an LLC or S Corp for, with invoicing, vendors, clients/customers, and so forth.
- Work for an S Corp, trust, or estate that you’re ALSO an owner/beneficiary of – If your family has a trust and you manage it, you might receive beneficiary/owner dividends, as well as a drawing a salary for your “employment” there
All of these kinds of income need to be reported on your FAFSA®. Depending on your kind of self-employment or business, you might also need to report their finances in other areas too. Let’s dig in.
Now, how do you report…
For each parent’s (and student’s) income, you’ll see a question like “How much did you/Parent1/Parent2 earn from working in 2021?” – For this question, you are asked to sum four things:
- Salaries/Tips: W-2 or the first line of your Form 1040
- Business income: Schedule 1, line 3
- Farm income: Schedule 1, line 6
- Self-employment earnings: Schedule K-1, Box 14, Code A
If one of those four things is negative (e.g. business income because you ran a business loss that year), then you treat it as 0 in your calculation. Also, as with any financial figures on the FAFSA®, you should only report full dollar amounts (ignore the cents).
Note that the government FAFSA® won’t actually label/name what these tax lines are, so you’ll have to rifle through your tax documents to check if they apply. For instance, here’s what the 2023-2024 paper FAFSA® form says:
If you’re instead using Going Merry’s more user-friendly (and equally free!) FAFSA® Made Easier form, we clearly name what these are, to make it a bit easier on you:
First, we first pull out the most common kind of income (for salaried jobs):
And then we ask you about self-employment or small business income:
- If you are a freelancer or contractor (and therefore receive a 1099), then in tax terms you run a “sole proprietorship business” and this “business income” should be reported in your Schedule 1, line 3. In this case, you’d check the first box.
- If you run a more formal business you created an LLC for, then you probably also have “business income” reported in Schedule 1, Line 3. I. this case too, you’d check the first box.
- If you own or run a farm, then you probably have “farm income” reported on Schedule 1, Line 6. In this case, you’d check the second box.
- If you own (in full or in part) a Partnership, S Corp, Trust, or Estate and actively do work for it, then you probably draw “self-employment income” from it (separate from your owner’s drawings/dividends), which would be reported in your Schedule K-1 form, in Box 14 under the code A. In this case, you’d check the third box.
There are plenty of things that should NOT be reported here, even though they are included in your Adjusted Gross Income (AGI). For instance, you should NOT include any benefits, social security, alimony, unemployment, workers compensation, etc.
There are two relevant questions here.
#1. The FAFSA® also asks for parental and student personal “net worth of investment assets.”
- In general, if your company is a separate entity (like a trust, S Corp, or LLC), then any assets it owns doesn’t count here.
- (Check out our FAFSA® Made Easier help article on what should be included here.)
#2. The FAFSA® also asks for the parental and student “net worth of businesses and/or investment farms.”
- However, at least for this FAFSA® year 2023-2024, the “small business exclusion” still applies, so you do not need to report the value of your business if you have fewer than 100 employees. (This is set to change in the future.)
- If you own a business with more than 100 employees, you’ll need to estimate the value of your business, including all the physical assets it owns, and subtracting out any debt it owes.
This one is simple. Self-employed individuals generally have to pay “self-employment taxes” in addition to “income taxes.”
- The FAFSA® only asks for income taxes.
- You should not (and do not need to) report self-employment taxes anywhere on the form.
Let us simplify it for you. At Going Merry, our FAFSA® experts built the FAFSA® Made Easier, a more user-friendly version of the government form, 100% free.
No advice disclaimer: The information provided via Going Merry customer support, blog articles, and/or FAFSA® Made Easier help articles does not, and is not intended to, constitute legal, tax, investment, financial, or other advice. As a user of the Going Merry website or help services, you understand and acknowledge that no information, content, or materials should be construed as such advice, nor as comprehensive and/or complete statements of the matters discussed thereto.
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