How to Calculate Lost Earnings if You’re Self Employed

In a personal injury lawsuit, plaintiffs are entitled to get compensation for the economic losses resulting from their injury, including lost earnings.  So if you’re not able to work for an extended time because of the injury, you are supposed to get money to compensate for the income you lost.

If you file a lawsuit and ask for lost earnings, you don’t simply tell the court how much you lost.  Damages for lost earnings must be calculated based on evidence.  If you are a W-2 employee with a salary, lost earnings calculation is easy.  You must present documentation from your employer stating what your lost wages were.  There may be a battle over whether the employee needed to take off work.  But the calculation itself is simple.

Self-Employed Calculations Are More Complex

deposition2-300x215Lost earnings calculation will be much more complicated if you are self-employed.  First, self-employment income is often harder to document, particularly for certain types of small business owners.  Second, self-employment income usually varies month-to-month and even year-to-year.  Your business may be seasonal so your income is much higher in certain months.  Calculating lost earnings will vary depending on what type of self-employment income is involved.

This seems like a good a time as any to break some bad news to you.  If you are self-employed and a significant portion of your claim is a lost wage claim, your chance of reaching a fair out-of-court settlement without filing a lawsuit is pretty low.  Lost wage claims for self-employed victims are usually nuanced.  Insurance adjusters do not do nuance well before suit is filed.  They typically wildly discount self-employed lost wages until the case gets closer to trial.

Lost Earnings for Independent Contractors with 1099 Income

If you work as a consultant or independent contractor, you probably get a form 1099 at the end of the year from each of your clients.  When a company pays you for services they are required to report those payments to the IRS at the end of the year using a 1099 form.

The 1099 notifies the IRS exactly how much that particular company or client paid you during the year.  If you work for multiple clients, you probably get separate 1099 forms from each of them.  When you file your taxes the amounts on the 1099 forms get reported as self-employment revenue.  Once you write off your reasonable business expenses the amount leftover is considered your net income.  This is what you pay taxes on.

Calculating lost wages based on 1099 self-employment income is usually very straightforward. The net income shown on Schedule D of your most recent tax return can establish your average annual income.  So if your most recent tax return showed that you received 1099 payments totaling $100,000 and you wrote-off business expenses of $40,000 then your annual income would be $60,000.  An annual income of $60,000 works out to $5,000 per month.

So if the accident left you unable to work for 3 months, you could easily establish lost income earnings of $15,000.  There are a few potential problems with this approach.  First, this method does not account for seasonal income fluctuations.  For example, suppose you earn 70% of your total 1099 income in the summer months.  It does not reflect this in your year-end tax returns.  You will need other evidence such as account records to establish monthly income variations like this.  Plaintiff’s attorneys and insurance companies tend to draw lines in the battlefield over how to interpret these issues.

Lost Earnings for Small Business Owners

Maryland law is clear that when a victim of negligence is in business for herself, loss of profits is the same thing as loss of earnings from personal services. So lost profit is the key to and calculating damages for an injury claim.

If you are a small business owner, documenting self-employment income to compute lost earnings can be complicated.  Your business probably does not receive the income that gets reported in 1099 forms at the end of each year.

This can make the income and expenses on Schedule D of your tax returns less informative for purposes of lost earnings.  Detailed, accurate receipts and ongoing accounting records for your business will be much more helpful. Monthly profit-and-loss statements, expense receipts, payroll and account records may be necessary to support your lost earnings calculation.

Diminished Earning Capacity

This article focuses on past lost wages.   Maryland also provides compensation for diminished future earning capacity. Loss of earning capacity has to do with what the individual is capable of earning, and impairment of that ability as the result of negligence is compensable.  This is true, in the case of a child, for example, even if the plaintiff had never exercised that earning capacity.

Lost Opportunities & Goodwill

If you are self-employed, being sidelined with an injury can result in more than just lost earnings from not working.  Being out for a long period can cause you to lose clients or miss out on opportunities to pick up additional clients.  Or maybe you were planning to engage in some marketing activities to promote your business and the accident forced you to miss out on that opportunity.  You may be able to recover additional damages for these sort of loses, but this is much more complicated than simply lost earnings.  Again, this is not something an insurance adjuster is likely to seriously consider without a lawsuit.