How do You Prove Loss of Earnings for Self-Employed People?
A commonly asked question is how to prove loss of income if someone is self employed. Well, loss of earnings claims for regular W-2 employees in personal injury cases is pretty cut and dry. However, recovering loss of earnings for our self-employed clients who are seriously injured can present certain difficulties that do not arise in the cases of employees who receive predictable and documented W2 income.
Proving Loss of Earnings with W-2 Income is Simple
For example, if one of our clients at Sally Morin Law is an employee of a company, we simply send a form to her employer to find out how much work our client missed when she was recovering for the accident, and what her salary is in order to calculate her loss of earnings. We can also submit pay stubs and/or W2 forms to make a relatively easy claim, assuming the client received a doctor’s instructions (and provides those to us in writing) to take the time off from work. This loss of earnings calculation is basic and the document speaks for itself.
Proving Loss of Earnings for Self-Employed People is More Complicated
Obviously, we do not have this option when establishing a self-employed client’s lost earnings, and thus we have to use other means to ensure they are compensated for the losses they endured as a result of another party’s negligence.
To make a valid loss of earnings claim for our self-employed clients, we must gather documentation that shows the lost profits, revenue and earnings they suffered as a result of the accident. This could include collecting receipts or profit and loss statements during quarterly periods prior to and after the accident, and subtracting the two to determine how the accident affected their business. A yearly tax return is also a method of ascertaining a self-employed client’s earnings, as you can see an earnings trend and project the average "expected" income for any particular period. However, it is important to keep in mind that federal and state laws limit the opposing party from discovering a plaintiff’s tax return documents.
Self-Employed People Cannot Be Forced to Turn over Their Tax Records, but You May Need to if You Want the Full Value of Your Loss of Earnings Claim
In Webb v. Standard Oil Co. (1957) 49 Cal.2d 509, 513 the California Supreme Court held that a plaintiff cannot be compelled to produce a copy of his federal or state tax return, except in cases involving tax enforcement or the prosecution of violations. The Court found that such information is privileged, and thus, not discoverable by a defendant in personal injury cases. The Court reasoning was based on the purpose behind the federal and state statutes governing tax enforcement, which is to encourage taxpayers to make full and truthful declaration in her returns without fear that her statements will be revealed or used against her for other purposes.
Thus, prior to obtaining tax information from our self-employed clients to calculate loss of earnings, we advise them of their right to keep that information private and also assure them that we will not disclose that information to the opposing party unless they expressly instruct us to do so. Some personal injury lawyers may operate differently, but you want to be sure YOU are the one allowing disclosure of this information, not your attorney.
Proving Self-Employed Loss of Earnings through Other Documentation
To prove a wage loss claim for self-employed clients, we often have them provide us with 1099’s for the year before the accident and the year after the accident, depending on whether or not the injury is permanent. Also, profit and loss statements generated by accounting software or even just a simple Excel spreadsheet can be helping in proving this loss.
The problem with these self-generated documents is that they can be altered for the purposes of litigation. Therefore they are less trusted by the insurance carriers and defense attorneys. That is why they ask for tax returns, because you are under an obligation to provide truthful and accurate information on you tax returns. Therefore, they are seen as more reliable. However, this is the very same reason the Webb Court held that such documents are not discoverable in the normal personal injury case. It is really a judgment call made by the client and attorney as to whether or not you turn these over to prove you self-employed wage loss claim.
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Try the Least Intrusive Method First
If you have the time and patience to go back and forth with the insurance company on the issue of your self-employed loss of earnings claim, we suggest you try some things before just straight up handing over your tax returns. You should initially go about proving your self-employed loss of earnings claim by the least intrusive method possible -- such as self-generated receipts and reports. It's really easy to generate a profit and loss report on Quickbooks. Or, you can go as far as to generate a spreadsheet of your earnings and expenses to show trends and averages.
However, if the insurance carrier doesn't give these documents credence or offer you reasonable compensation for your loss of earnings claim, you'll want to consider turning over your tax documents - redacted versions of course. This may be the only way for you to solidly prove loss of income if you're self-employed.
Get a Pro on Your Self-Employed Loss of Earnings Claim
If you are a self-employed individual and want to make a loss of earnings claim it is always best to seek consultation with an experienced California personal injury attorney before making the claim. You want to be sure you are doing it right. Read more if you want to learn more about whether Sally Morin Law is the best fit for you.
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