Calculating Lost Wages for the Self-Employed
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UPDATED: Nov 16, 2020
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One of the costs of a serious injury is lost income or wages. If you can’t work and earn money, that’s a loss in addition to any medical expenses you incur.
It’s easy to calculate lost wages if you are the average employee: you simply look to your weekly or annual earnings, as documented by pay stubs or a form W-2. However, calculating lost self-employed income is much more complicated and often requires an attorney and an expert (i.e., an accountant) who can determine potential economic losses. Since self-employment does not always result in regular work, you will need to calculate your losses by demonstrating previous profits, upcoming contracts, and lost opportunities. If your injuries and your losses are substantial, you will definitely want to consult with an attorney in order to prove your losses and collect the damages that you deserve.
Lost Wages for the Self Employed
Are you an independent contractor who performs work for other people or business, or are you the sole proprietor of your own business? That affects what you have to do to prove your lost income. (Note: while we are asking if you are a “sole proprietor,” the same principles apply if you are the sole owner of your own limited liability company [LLC] or corporation [inc.].)
It will almost always be easier for an independent contractor to establish lost income by providing one or more forms, a 1099-MISC, showing lost income from work done for particular individuals or companies. If the independent contractor can show a history of earnings, such as by forms 1099-MISC for several years, he or she has gone a long way towards establishing his or her lost income.
However, a sole proprietor may need to use his or her business’ average income to determine lost income, especially where the income is seasonal or varies due to other factors. This is simpler for the sole proprietor of an established business who can document lost income by showing a history of earnings or pointing to long-standing customer accounts. Your (or the business’) tax returns, preferably from several years, can be used to establish some consistent amount of, or pattern in, your income. Financial and bank statements for the current year are also valuable, to show what you and your business have made so far.
Lost income is more difficult to prove for a new business which does not yet have regular customers or an earnings history. A new business which at least has entered into contracts for future work (or has orders for products) can use those in an effort to extrapolate or anticipate what the business’ income will or should be. A new business which does not have orders or contracts may find, however, that it cannot establish what its income would be to a sufficient degree of proof or certainty to recover compensation for lost wages. To oversimplify somewhat, what you can’t prove in the law, you can’t get.
But even without an earnings history, you may be able to show what you should have made. If you have worked in similar businesses in the past, you can analogize from what those businesses earned previously. If you are in a business with a fairly predictable income stream, you may be able to use the results of similar businesses to show what you would be expected to earn. This can be a valuable approach with franchises, where even if there is no financial history yet for your location, you can provide evidence of what the same business has done in similar locations or conditions.
In addition, you can provide your calendar of appointments, and possibly obtain letters or statements from those with whom you would have been meeting, if such meetings might have produced income in the future. More generally, any letters or other communications from potential clients or customers can be valuable, if they show that the client/customer was going to, or least may have, done business with you. All these things can be used to show the economic opportunities you have lost or given up due to injury. While it is difficult to prove lost opportunities, it is worth the effort.
The damages to which you are entitled, if provable, are:
- Lost income,
- Loss of earning capacity,
- Lost profits,
- Lost business opportunities, and
- Loss of good will.
But despite the different names for these things, they all come down to lost income—either income you’ve lost to date, or income you can prove you are likely to lose in the future, due to an inability to work.
Example of Self Employed Lost Wages Calculation
Suppose you are a management consultant, incorporated as ABC Management, in business for yourself for only two years. You had a 6-month contract with Richman Corporation where you had consulted for four months before you were injured. At the same time, you were marketing your services to several other companies. You were in the process of negotiating a contract with Wealthco to begin in two to three months; you had appointments in the next month to meet with Joe Blo from Happy Company to discuss a future assignment; and with Susan Summer of WannabeCo. to discuss some part-time consulting work now and in the future. Nothing was definite but you can show that you had promising discussions.
Your injuries required one month of recuperation. In the meantime, you lost a month of income on your current contract with Richman, and they hired another consultant to finish your contract, so that’s two months of lost income there. You couldn’t meet with Joe, so he hired someone else for that future assignment. You missed your meeting with Susan, and now she’s decided to use an in-house person to do the work.
What are your losses? Besides the one month of income, you lost the balance of the contract with Richman Corporation; you lost the potential contract with Wealthco; you lost the part-time potential with WannabeCo. In addition, perhaps these companies will not call you in the future when something comes up, because you weren’t there when they needed you (loss of good will).
You also lost valuable marketing time. This is speculative and difficult to prove, especially since you are fairly new at this and you can’t point to your past tax returns as proof of a certain level of income. It is up to you, your attorney, and your attorney’s expert, to make your case with the best possible documentation.
Here is a sample of this management consultant’s lost earnings:
|Two months lost on contract with Richman:||$ 36,000|
|Potential contract with WealthCo:||$108,000|
|Potential part-time consulting with Wannabe:||$50,000|
|Loss of Good Will||$ 20,000|
|Loss of Marketing Time (based on number of phone calls|
|you make, letters you send out, and meetings you have|
|with potential clients per week||$ 10,000|
|Total Lost Earnings/Earning Capacity||$224,000|
(These are fictitious figures based on the hypothetical situation detailed above. The companies are also fictitious and any similarity to real company names is unintentional and purely coincidental.)
It’s possible you won’t be able to recover the $224,000.00. But the more lost income and opportunities you can show, the greater the potential economic recovery. A fraction or portion of a larger number is more than a fraction or portion of a smaller number. It behooves you to diligently document all the losses you might have.
The best strategy here and for you is to hire an attorney who has experience in cases involving self-employed clients. He or she will be able to tell you exactly what you need to provide in order to prove your case and get the most equitable settlement for your claim.