(PPS-108)

SSR 83-34

SSR 83-34: TITLES II AND XVI: DETERMINING WHETHER WORK IS SUBSTANTIAL GAINFUL ACTIVITY -- SELF-EMPLOYED PERSONS

PURPOSE: To state the policy regarding whether work performed by self-employed persons is substantial gainful activity (SGA) under the disability provisions of the law. (This Program Policy Statement (PPS) pertains only to the evaluation of the work activity of self-employed persons. Social Security Ruling (SSR) 83-33, PPS-107, Determining Whether Work Is Substantial Gainful Activity -- Employees, deals with the evaluation of work of employees.)

CITATIONS (AUTHORITY): Sections 216(i), 223(d) and 1614(a) of the Social Security Act, as amended; Regulations No. 4, Subpart P, sections 404.1571, 404.1572, 404.1573, 404.1575, 404.1578, and 404.1584; Regulations No. 16, Subpart I, sections 416.971, 416.972, 416.973, and 416.975.

INTRODUCTION: Under the disability provisions of the law, except within the trial work period (TWP) provisions, a person who is engaging in SGA is not eligible for payment of disability benefits. SGA is defined in the regulations as work "that involves doing significant physical or mental activities . . . [and] is the kind of work usually done for pay or profit. . . ." "Significant activities" are useful in the operation of a business and have economic value. Work may be substantial even if it is performed on a part-time basis, or even if the individual does less, has less responsibility, or makes less income than in previous work. Work activity by a self-employed person is gainful if it is the kind of work usually done for profit, whether or not a profit is realized. Activities such as self-care, household tasks, unpaid training, hobbies, therapy, school attendance, clubs, social programs, etc., are not generally considered to be SGA.

By working, an individual may demonstrate that he or she is, at least during the time of working, able to engage in SGA. A finding that the individual did not engage in SGA during a particular period, however, does not answer the question of the individual's ability to engage in SGA. To answer this question, it is necessary to consider all the medical and vocational evidence, of which the work performed after alleged onset of disability is only a part. The complete evidence may show that the individual's impairment is less severe than alleged, or that he or she has the physical, mental and vocational capabilities necessary for SGA.

In determining whether a self-employed individual is engaging in SGA, consideration must be given to the individual's activities and their value to his or her business. Self-employment income alone is not a reliable factor in determining SGA, since it is influenced not only by the individual's services but also by such things as market conditions, capital investments, the services of other people, and agreements on distribution of profits. An individual's services may help build up capital assets during a period of development when no profits are evident, or they may reduce losses during temporary periods of poor business conditions. On the other hand, a person who is incapable of rendering valuable services may receive a large income solely because of his or her capital investment in the business. Hence, it is necessary to consider the economic value of the individual's services, regardless of whether an immediate income results from such services.

POLICY STATEMENT: SGA determinations for self-employed persons are based on three tests, all of which must be considered before it can be established that the self-employed person is not or was not engaged in SGA. (The application of these tests is discussed in detail later in this statement.)

With respect to all three tests, it is essential that the evidence show not only what the individual's activities have been since the alleged date of disability onset, but also how such activities compare with those he or she performed before that date. A before-and-after comparison in development should point up any discrepancies between allegations as to a reduction in the individual's services and the apparent need of the business for services of that type. For example, it would not be adequate to document an alleged decline in the individual's activities after the alleged onset date without at the same time documenting how this affected the business and the extent to which supplementation or replacement of the individual's services was made by other individuals after the alleged date of onset.

Work in self-employment would not demonstrate the ability to engage in SGA if, after working a short time (that is, no more than 6 months), the individual involuntarily discontinued or reduced such work below the SGA level for reasons relating to his or her impairment. Such an effort would be identified as an unsuccessful work attempt (UWA). (Regulations sections 404.1575(a) and 416.975(a).)

Evaluation of Work Activity By Self-Employed Persons

NOTE: The following discussion is applicable to nonblind claimants and beneficiaries under title II and nonblind claimants and recipients under title XVI for all years, and to blind claimants and beneficiaries under title II through calendar year 1977. (See section B. in "Evaluation of Work Activity in Title II Blindness Cases" below concerning work activity by blind claimants and beneficiaries under title II in 1978 and later. The SGA tests are not applicable to blind persons under title XVI.)

A. 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.
1. Significant Services
a. Self-Employed Persons Other Than Farm Landlords. Self-employed carpenters, gardeners, handymen, nurses, bookkeepers, consultants, and people in numerous other one-person 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 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 section B. below.
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. Where the services of a sole owner or partner are significant under either of these tests, the individual will be found engaged in SGA if he or she receives substantial income 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 section B. below.
b. Farm Landlords. A farm landlord is one who rents farm land to another person. 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 or livestock raised on the farm. (See Regulations No. 4, Subpart K, section 404.1082, 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, and the farm landlord will be considered engaged in SGA if he or she 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 section B. below.
The continued existence of an agreement to materially participate, or the crediting of earnings to the farm landlord's Social Security earnings record, is not necessarily inconsistent with a substantial reduction or cessation of significant services by the landlord.
Example:
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. On that date 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.'s earnings record 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.
Where a materially participating farm landlord is involved, development of significant services should generally be limited to 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 landlord 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 landlord 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.
2. Substantial Income. A self-employed individual will have substantial income from a business if "countable income" (see subsection b.(1) for discussion of the term "countable income") from the business averages more per month than the amount shown for the particular calendar year in the SGA Earnings Guidelines presented below. Even if "countable income" from the business does not average more than the applicable amount shown in the Guidelines, a self-employed individual will have substantial income from a business if the livelihood which he or she derives from the business is comparable to that which he or she had before becoming disabled, or is 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.
a. SGA Earnings Guidelines and Effective Dates Based on Year of Work Activity.[1]
(1) Blind and Nonblind Individuals
Year(s) "Countable Income" is substantial if it averages more per month than the amount of:
1975 and before $200
1976 230
1977 240
(2) Nonblind Individuals Only
Year(s) "Countable Income" is substantial if it averages more per month than the amount of:
1978 $260
1979 280
1980 and after 300
(3) Blind Individuals Only
Year(s) "Countable Income" is substantial if it averages more per month than the amount of:
1978 $334
1979 375
1980 417
1981 459
1982 500
1983 550
b. Determining Whether "Countable Income" Averages More Per Month Than the Amount Shown in the Earnings Guidelines.
(1) Determining "Countable Income." The SGA Earnings Guidelines are a basis for evaluating whether an individual engaged in SGA. Evaluation of a self-employed person's work activity for SGA purposes is concerned with only that income which represents the person's own productivity. Therefore, before applying the Earnings Guidelines, it is necessary to ascertain what portion of the individual's income represents the actual value of the work he or she performed. To do so, the adjudicator must first determine the individual's net income (i.e., gross income less normal business expenses). Once net income is determined, it is necessary to deduct the value of any significant amount of unpaid help furnished the self-employed person by a spouse, children, or others; impairment-related work expenses (IRWE) (if not already deducted from gross income as a business expense); unincurred business expenses paid for the self-employed person by another individual or agency; and soil bank payments if they were included as farm income. (An amount reported under the optional method (see Regulations No. 4, section 404.1094) is not the actual net income, nor is it reported as such for purposes of Federal income tax. Therefore, a copy of the tax return should be obtained for any year in which the actual net income is pertinent.) The portion of the individual's income remaining after the applicable deductions represents the actual value of work performed. This is the amount which is counted for purposes of determining the issue of SGA and is, therefore, compared to the Earnings Guidelines. For ease of reference in this PPS, it is called "countable income."
Unpaid Help: The reasonable monetary value of any significant amount of unpaid help furnished by a spouse, children, or others should be deducted from net income. The file should include facts which would permit an estimate of the reasonable value of unpaid help furnished by family members or others. When it is clear that the help rendered consists of miscellaneous duties carried on in connection with the person's general activities as a member of the household or as a friend, statement to this effect will be sufficient, and no estimate of value will be necessary (e.g., a farmer's children feed a small flock of chickens or tend a home garden). On the other hand, where the help furnished is of a nature to which commercial value would ordinarily be assigned, the following type of information should be in the file: the name of the helping individual and this person's relationship to the impaired self-employed individual; the reason why unpaid help was furnished; a full account of the services rendered, the amount of time furnished, and how long the arrangement existed; an estimate of the reasonable value of the services, on the basis of prevailing pay for that type of work in the community; and, if the help was furnished by a spouse or by a child under age 18, an explanation of how the previous pattern of such individual's activities was affected, if at all.
In estimating the amount to be deducted for unpaid help, it is necessary to consider the prevailing wage rate in the community for similar services. Where the unpaid help is rendered on a part-time or intermittent basis, only the pro rata value attributable to the services actually performed (as compared with those that a full-time employee would perform) should be deducted.
EXAMPLE:
Mr. J., a former automobile mechanic, became disabled as a result of an accident. Through the services of a rehabilitation agency, he opened a candy and cigarette counter in January 1982 in the lobby of an office building. He ran the business as a self-employed individual and was able to serve customers, make change, and perform the various other duties connected with the business. However, once a day, he needed help in restocking the shelves. Mr. W., an elevator operator in the same building, donated an hour of his time each day, without pay, to perform this service for the claimant. In estimating the amount to be deducted from net income, the prevailing local rate of $3.25 an hour for this type of help was used. Hence, although Mr. J.'s net reportable income for income tax purposes was $3,900 a year (or an average of $325 a month), his income was found not substantial because the deduction of approximately $65 per month for unpaid help resulted in "countable income" which was not more than $300 per month for 1982; and, development established that Mr. J.'s livelihood from the vending stand was not comparable either to his own past personal standard of livelihood or to the community standard of livelihood as explained in subsection 2.c. below.
Impairment-Related Work Expenses. IRWE paid before December 1, 1980, are deductible in determining "countable income" only to the extent that such expenses exceeded what would have been work-related expenses if the person were not impaired (e.g., the amount by which the use of special transportation exceeded what the individual, if unimpaired, would have had to pay for regular transportation to and from work). Expenses paid before December 1, 1980, for items, e.g., medication or equipment, which the individual required whether or not he or she worked would not be deductible.
IRWE paid on or after December 1, 1980, can, however, be deducted from earnings in determinations as to SGA, regardless of whether these items and services are also needed for normal daily activities (if not already deducted from gross income as a business expense). The amount deductible from earnings is the cost of certain attendant care services, medical devices, equipment, prostheses, and similar items and services. The costs of routine drugs and routine medical services are not deductible unless such drugs and services are necessary to control the disabling condition so as to enable the individual to work. The amount of IRWE may be deducted only if the cost is paid by the disabled individual, i.e., the individual has not been, cannot be, and will not be reimbursed by any source for the expense; and payments must be within "reasonable limits" and on a monetary (not an "in-kind") basis. (IRWE will also be deducted from earnings for the purpose of determining a Supplemental Security Income (SSI) recipient's monthly payment amount. However, an individual initially filing for title XVI disability payments who is working and alleges IRWE, must first meet the SSI income test and qualify for SSI payments without the deduction of IRWE.)
Unincurred Business Expenses: In the course of doing business, a disabled self-employed person ordinarily incurs (i.e., becomes liable for) normal business expenses. These incurred expenses, whether paid by the self-employed individual or by someone else, are deducted from the individual's gross income in order to determine net income. In some instances, however, an individual may be aided in establishing or sustaining a business by a rehabilitation or other agency or another person. For example, a sponsoring agency or another person may incur responsibility for and pay certain business expenses for the disabled individual (e.g., rent, utilities, purchase and repair of equipment, etc.). In addition, the individual may be provided with material, equipment, or stock. In order to determine "countable income" in such cases, it is necessary to deduct from the individual's net income any business expenses which were incurred and paid by another person or agency, as well as the value or the cost of material, equipment or stock provided. This policy is consistent with the principle that only income attributable to an individual's own productive work activity should be considered in determining SGA. It is also analogous to the policy on unpaid help, discussed above, which makes it possible for a disabled individual to have a higher income than he or she would ordinarily have by virtue of his or her own work activity alone.
The following information must be obtained concerning the payment of any business expenses by someone other than the self-employed individual: the name of the individual or agency who paid the expenses, and the relationship of that person or agency to the self-employed individual; the reason why the expenses were paid; and a full account of the expenses paid, the kind and amount of expenses, and the period during which they were paid.
Soil Bank Payments: Certain activities similar in nature to ordinary farming operations are required of participants in the soil bank program. However, since these activities are quite limited as compared with regular farming operations, soil bank payments will not be indicative of the extent of the management function involved in the total enterprise. Evidence from the individual should show whether any of his or her farm income includes soil bank payments, and the extent of such payments, unless income tax returns for the periods in question contain this information. If the farmer did include any soil bank payments as income, those payments should be deducted in determining "countable income" for SGA purposes.
(2) Determining Average Monthly "Countable Income." With respect to income under test one, determinations are made in terms of average monthly income. Thus, if a self-employed person's average monthly "countable income" exceeds the Earnings Guidelines, he or she will be found to have substantial income. (See SSR 83-35, PPS-109, Averaging of Earnings in Determining Whether Work Is Substantial Gainful Activity, for discussion of the policy and procedure on averaging of income.)
c. 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 for the particular calendar year in the Earnings Guidelines, it is necessary to consider whether his or her livelihood from the business is comparable to either that which he or she had before becoming disabled, or to that of unimpaired self-employed persons in the community engaged in the same or similar businesses as their means of livelihood.
(1) General Considerations. The experience of the District Office (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 DO should have included in its determination a discussion 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 successful 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. The impressions of the DO, 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.
A business from which the individual previously derived a substantial 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 working arrangement so that the duties and income from the business will now be shared with others.
(2) Personal Standard. If the business was the individual's sole means of livelihood for a number of years before he or she became disabled, and the individual continues to receive a comparable livelihood from it after becoming disabled, his or her income will be considered substantial. However, in some cases, chronic illness or other special circumstances existing from some time prior to the individual's becoming disabled may indicate that his or her financial situation in that period should not 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.
(3) 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 disabled. However, in determining the community standard for similar businesses, exclude from consideration those individuals who are for various reasons considered unrepresentative, e.g., where chronic illness accounts for a low level of income.
(4) 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 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, it will be necessary to obtain evidence regarding the community standard of livelihood for businesses of a similar nature. In some cases, the DO's own observations and knowledge will be sufficient. In others, evidence will be needed from the local Chamber of Commerce or other informed sources.

B. Tests Two and Three: Comparability of Work and Worth of Work.

1. General. If it is clearly established that the self-employed person is not engaging in SGA on the basis of significant services and substantial income, both the second and third SGA tests concerning comparability and worth of work must be considered. According to these tests, the individual will be engaged in SGA if evidence clearly demonstrates that:
a. The individual's work activity, in terms of all relevant factors such as hours, skills, energy output, efficiency, duties, and responsibilities, is comparable to that of unimpaired individuals in the same community engaged in the same or similar businesses as their means of livelihood; or
b. The individual's work activity, although not comparable to that of unimpaired individuals as indicated above, is, nevertheless, clearly worth more than the amount shown for the particular calendar year in the SGA Earnings Guidelines when considered in terms of its value to the business, or when compared to the salary an owner would pay to an employee for such duties in that business setting.
2. Development of Comparability and Worth of Work Activity. When the impaired individual operates a business at a level comparable to that of unimpaired individuals in the community who make their livelihood from the same or similar kind of business, there can be a finding of SGA by the impaired person. To establish comparability of work activity, it is necessary to show that the disabled person is performing at a level comparable to that of unimpaired persons, considering the following factors: hours, skills, energy output, efficiency, duties and responsibilities. The lack of conclusive evidence as to the comparability of the required factors will result in a finding that work performed is not SGA.
An important part of the comparison is the selection of the group of unimpaired persons. The type of self-employment must be the same. In addition, the unimpaired persons must maintain on the basis of their activity a standard of living regarded as adequate for a particular community. Well-established businesses are generally the most reasonable choice for comparison.
Development must be specific. Each work factor cited above must be described in detail, showing its contribution to the business operation. General descriptions are considered inconclusive evidence for the point-by-point comparison that is required. If only a general description is possible or available, any doubt as to the comparability of the factors should be resolved in favor of the impaired individual.
Evidence of the impaired individual's activities accompanied by a statement that the work is comparable to the work of unimpaired persons is insufficient for a sound decision. If necessary, a description should be obtained through a personal interview with an unimpaired self-employed individual from the selected group. It may be necessary to have a more comprehensive description of the impaired individual's activity than that which can be provided by the impaired person. Contact, therefore, should be made with people having firsthand knowledge of the impaired individual's work situation obtained through actual participation or observation.
With respect to tests two and three, the degree to which evidence of comparability or worth of services should contain data supplied by outside authorities (e.g., county agents, etc.) will depend on the factual situation. In many instances, familiarity with local conditions will make it unnecessary to document the file in great detail. For example, it may be evident in a poor farming area that management services on a small farm yielding a less-than-subsistence income would not be comparable to the full range of physical and mental activities performed by an able-bodied farm operator, nor would the services be clearly worth more than the amount shown for the particular calendar year in the SGA Earnings Guidelines. On the other hand, where there is any doubt as to the comparability or worth of services, it will be necessary to obtain evidence in appropriate detail, supplemented as required by opinions from authoritative sources in the community.

Evaluation of Work Activity in Title II Blindness Cases[2]

NOTE: The following discussion is applicable to blind claimants and beneficiaries under title II. Section B below highlights those changes applicable to work activity by blind individuals in 1978 and later.

A. Self-Employment Before 1978.

For work activity performed before 1978 by blind self-employed persons under title II, the principles of evaluation and the income considered sufficient to show an ability to do SGA are the same as those for other self-employed individuals. (See the preceding section on "Evaluation of Work Activity by Self-Employed Persons.")

B. Self-Employment in 1978 or Later.

For evaluation of work activity performed in 1978 or later by blind self-employed persons under title II, there is an SGA earnings amount for each year that is higher than the SGA primary earnings amount for nonblind persons; there is no secondary amount for blind individuals. Specific amounts (as shown in the SGA Earnings Guidelines) have been established for years 1978 through 1982. After 1982, any increases in the SGA earnings amount for blind persons depend on increases in the retirement test exempt amount applicable to beneficiaries who have attained age 65.
Prior to application of the Earnings Guidelines for a determination as to SGA, the blind individual's self-employment income should be evaluated in the same manner as that of nonblind individuals in order to determine "countable income." That is, it is necessary to deduct from net income the reasonable value of any significant amount of unpaid help, IRWE if they were not already deducted from gross income as a business expense; unincurred business expenses; and any soil bank payments if such payments were included as income by a farmer.
The self-employment activity of blind persons in 1978 or later should be evaluated only in terms of the dollar amounts shown in the SGA Earnings Guidelines. It should not be evaluated in terms of the tests of comparability and worth of work discussed in subsection B of the above section on "Evaluation of Work Activity by Self-Employed Persons."

EFFECTIVE DATE: The policy explained herein is effective as of the date of publication of this PPS.

CROSS-REFERENCES: Program Operations Manual System, Part 4, sections DI 00503.001, 00503.005, 00503.020, 00503.300-00503.320, 00503.400, and 00503.415; SSR 83-35, PPS-109, Averaging of Earnings in Determining Whether Work is Substantial Gainful Activity; SSR 82-67, PPS-77, Extension of Eligibility for Benefits Based on Disability; SSR 83-33, PPS-107, Determining Whether Work Is Substantial Gainful Activity -- Employees.

[1] SGA monthly guideline amounts have been published in the Social Security regulations and are increased periodically to conform generally to increases in wages and salaries. With respect to blind individuals, the SGA Earnings Guidelines apply to blind persons under title II but not to blind individuals under title XVI because they are not subject to any SGA tests. Effective 1978, due to a change in the law, statutorily blind persons under title II became subject to SGA guideline amounts higher than those applicable to nonblind persons.

[2] Blindness is defined in Regulations No. 4, section 404.1581.

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