Analyzing the earnings capacity of the self employed

Calculating the earnings capacity of individuals who are self employed is involved but very do-able. The research question in injury and death cases involving the self employed is the same with wage earners:

'How much damage, if any, has been done to the plaintiff's ability to earn a living?'

The biggest difference for the self employed is that there are a number of different ways a self employed person will report the earnings. For instance, some self employed individuals will receive income as an independent contractors while others will receive payments thru a closely held corporation. Other self employed people are sole proprietors; estimating the earnings capacity is different for each of these worker types.

The key piece of information that is used in these analyses is the personal income tax return, usually a form 1040, AND all the supporting schedules. The supporting schedules are used by the analyst to look closer at the plaintiffs' earned wages, business expenses, and to separate accounting adjustments and expenses (such as real estate depreciation) from real business expenses. Attorneys trying to calculate damages in these types of cases should make sure to obtain the supporting tax form schedule for every item on the main 1040 personal tax form .

In general, the most accurate estimate of the plaintiffs earnings capacity involves adding reported wages, business income and accounting depreciation.