A self-employed plaintiff's economic claim starts from a figure that is not earnings at all. The net income on a sole proprietor's schedule, or the distributions from a closely held company, combine what the owner's labor earned with what the owner's capital, the equipment, the goodwill, and the employees earned, and only the first is a lost earnings claim. The economist separates the return on the owner's labor from the return on the business, documents it from the business's records rather than from a single return, and then measures the loss along the path the business actually took after the injury: it hired a replacement for the owner's work, it declined while the owner worked less, or it closed. Each path has its own measure, the cost of the replacement labor, the lost profits, or the lost value of the business, and the report has to choose the one the record supports and avoid counting the same dollar twice. This guide explains the separation, the records, the three post-injury paths, the treatment of self-employment taxes and benefits, the worklife horizon for an owner, and what each side should expect to see.
An employee's earnings are what the employer paid for the employee's work, and the wage forms record them. A self-employed person's income is what was left after the business paid its costs, and it was produced by everything the business had: the owner's hours and skill, the capital invested in equipment and inventory, the goodwill that brings customers back, and the employees who did part of the work. An injury to the owner takes away the owner's labor and nothing else. The equipment still runs, the customers still call, and the employees still work, so the lost earnings claim is for the return on the owner's labor alone, not for the whole of the income the business reported.
The first task is therefore to divide the business income into the part that paid for the owner's work and the part that paid for everything else. The usual method is to ask what the business would have had to pay someone else to do what the owner did, the hours, the skills, and the responsibility, and to take that reasonable compensation as the owner's earnings, with the remainder treated as the return on the business. The published wage data for the owner's occupation supply the benchmark, adjusted for the hours the record shows the owner worked, and the lost earnings versus lost earning capacity comparison explains why the claim is often framed as capacity when the owner's hours and roles were many.
The personal tax return is the starting record, and the tax returns post explains what the schedules for a proprietor, a partner, or a shareholder each report. It is not the ending record. A proprietor's schedule nets the owner's labor against depreciation, the home office, vehicle expenses, and whatever else the preparer deducted, so the net figure can be well below what the owner's work was worth; an owner of a closely held company may have taken a modest salary and large distributions, or the reverse, for reasons that have nothing to do with the value of the owner's labor. The economist reads the entity's own return and its books to see what the business earned and what it paid the owner in every form, and the business tax returns post describes the entity return for that purpose.
Beneath the returns are the records that show the owner's actual work: the general ledger and the bank statements for the cash the business took in and paid out, the invoices and job records that show which work the owner performed personally, the payroll records for the employees whose work the owner did not do, and, where the owner has since hired a replacement, the replacement's pay. Several years of records are needed because a self-employed income is more variable than a salary, and the report explains which years were used and why an unusual year was included or excluded. A base built from one year of one return, without the business records, is the first thing the opposing economist will set aside.
What happened to the business after the injury decides how the loss is measured, and the record, not the economist, says which path it took. Where the business hired someone to do the owner's work and continued, the loss is the cost of the replacement labor, less what the owner still contributes, over the period the replacement is needed; the business's profits are unaffected except by that cost, and a claim for lost profits on top of the replacement cost counts the same loss twice. Where the business continued but declined because the owner worked fewer hours or lost the roles no employee could fill, the loss is the difference between the profits the business would have earned and the profits it did earn, and the lost profits method describes how the but-for profits are built from the business's own history. Where the business closed, the loss is the value of the business as a going concern at the date it failed, together with the owner's lost earnings from that date forward, with care that the two measures do not overlap.
The lost profits versus lost business value guide explains the boundary between the second and third measures. The report states which path the record supports, measures the loss along it, and, where the path is contested, presents the loss under each so the fact finder can attach a figure to whichever finding it makes. The single most common error in these claims is to measure the owner's lost earnings at the full business income and then add the business's lost profits, which is the whole income twice over.
Whatever the business did, the owner has a personal claim for the earning capacity the injury took, and it is measured as for any other person: the value of the owner's labor before the injury, from the reasonable compensation analysis, against what the owner can now earn, in the business or elsewhere, over the worklife horizon. The post-injury earnings are often the hardest input to fix, because an owner who still draws from the business may be drawing on the return to capital rather than earning the draw, and the report has to ask what the owner's reduced hours and roles would command if the business paid for them at market. Where the owner has moved into a supervisory or office role that the record shows the business needs, that work has a wage; where the owner is drawing a salary the business pays for reasons of its own, the draw is not earnings.
The interaction between the personal claim and the business claim is where the two have to be kept apart. On the replacement-labor path, the owner's personal lost earnings and the business's replacement cost are two views of the same dollar, and the report presents one of them. On the lost profits path, the owner's lost earnings are the reasonable compensation the business would have paid, and the lost profits are what the business lost beyond that, so the two can be added only if the compensation was deducted in computing the profits. The report shows the deduction so the reader can see that no dollar appears on both schedules.
A self-employed person pays both halves of the payroll contribution an employee shares with an employer, and where the venue measures the loss after tax the report computes the tax on the owner's compensation as self-employment income, which differs from the wage case. Fringe benefits are usually self-provided: health coverage the owner bought, a retirement plan the owner funded, and no paid leave at all. The fringe benefits method values what the record shows the owner actually provided for the household, and a report that applies the employer-paid benefit rate from the published series to an owner who had no such benefits has overstated the claim. Where the business itself paid for the owner's coverage and plan, those payments are part of the owner's compensation and are moved to the labor side of the division.
The worklife horizon comes from the published tables for the owner's age, sex, and education, as the worklife expectancy method explains, and self-employment is a fact in the record that can support an adjustment. Owners of businesses often work past the age at which employees in the same occupation retire, and a documented history of the owner's parents or predecessors doing so, or a succession plan with a stated date, is evidence; a table value adopted without considering it, or extended without evidence, is equally open to challenge. In a motor vehicle accident matter venued in Texas, or anywhere, the report states the horizon and the evidence that moved it from the table.
Many self-employed plaintiffs run family businesses, and the family's unpaid work in the business complicates both the earnings claim and the household services claim. A spouse who kept the books or worked the counter without pay was contributing labor the business did not buy, which means the business income overstates the return to the owner's labor alone, and the report divides the compensation among the family members who earned it. After the injury, a spouse who took over the owner's work has supplied the replacement labor at no cost to the business, and that work is a loss to the household that belongs in the claim at its replacement value, even though the business's books show no expense for it.
The household services method measures the work the owner did at home before the injury and can no longer do, from the time-use data and the local replacement wage, and it is separate from the business claim. The two can be confused when the owner worked from home or when the business and the household shared a vehicle, a building, or a bank account, and the report keeps them apart by asking, for each hour and each dollar, whether it served the business or the household.
Each side should expect to see the division of the business income between the owner's labor and the return on the business, with the reasonable compensation benchmark named and the hours it assumes; the records behind the base, over several years, with the unusual years explained; the path the business took after the injury and the measure chosen for it; the owner's personal lost earnings with the post-injury earnings fixed at what the owner's remaining work commands; the deduction that keeps the personal and the business claims from overlapping; the tax, benefit, and horizon treatment; and the alternative measures where the path is contested. The reading guide explains how to trace each of those inputs to its source.
The defense economist's usual corrections are to the division, where the plaintiff's report has treated the whole business income as the owner's earnings; to the overlap, where lost earnings and lost profits have been added without the deduction; and to the post-injury earnings, where the owner's draw has been treated as earnings or as nothing when the owner still contributes work the business needs. The plaintiff's economist, for the same reasons, documents the division, states the deduction, and fixes the post-injury earnings from the owner's actual roles, so that the figure survives the cross-examination that begins, in these claims, with the question of what the business would have paid someone else to do the owner's job.
No. The net income combines the return on the owner's labor with the return on the business's capital, goodwill, and employees, and the injury took away only the labor. The economist measures the owner's earnings as the reasonable compensation the business would have paid someone else to do the owner's work, benchmarked to the published wage for the occupation and the hours the record shows, and treats the remainder as the return on the business.
Only if the two are measured so that no dollar appears in both. The owner's lost earnings are the reasonable compensation for the owner's work; the business's lost profits are what the business lost beyond that compensation, computed after deducting it. Adding the full business income as lost earnings and then adding lost profits on top counts the same income twice, and the report shows the deduction that prevents it.
By asking what the owner's remaining hours and roles would command if the business paid for them at market. A draw that continues because the owner still owns the business is a return on capital, not earnings; a salary for supervisory or office work the business actually needs is earnings at the wage that work commands. The report fixes the post-injury figure from the owner's actual roles rather than from the amount drawn.
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