How to Report Student Business Income on FAFSA

Can student business income affect financial aid? In short, yes.

Many students juggle school and self-employment. Some run their own digital storefront, some freelance on weekends, some tutor online — the sky’s the limit. Side income has pretty much become a normal part of college life and that’s a great thing. 

It’s not easy, but it makes students more independent, it strengthens résumés and helps cover tuition or living expenses. But what many students (and their families) don’t realize is that this income can also affect eligibility for financial aid. 

When you apply for federal aid through the Free Application for Federal Student Aid (FAFSA) or institutional aid through the CSS Profile, income from the business you run on the side doesn’t fly under the radar. Depending on how much your child earns and how you report those earnings, they might receive less financial assistance even if they barely turn a profit. 

So, what do you do? You educate yourself, of course. This article will walk you through how to report business income on the FAFSA and the effect a student-run business can have on financial aid. 

How the FAFSA and CSS Profile Treat Student Income

According to the National Center for Education Statistics (NCES), 40% of full-time undergrads and 74% of part-time students had jobs during college. The NCES doesn’t specify separate gig work, but younger students are heavily involved in it. 

Financial aid applications consider job income and self-employment income. If a student works for an employer, it’s simple and straightforward. But if they run a business, freelance or have a gig on the side, the IRS counts that as self-employment and so do financial aid forms. 

The FAFSA allows students to earn $11,510 without affecting aid. However, this figure is subject to change based on factors such as family size and annual inflation adjustments. If your student earns more than that, it can reduce eligibility, since it’s assessed at up to 50%. 

Business income is included if it’s reported on your tax return. The CSS Profile, which some colleges use, goes even deeper, and it might consider income before expenses are deducted and look at assets as well. 

Even if your child makes a small profit from their student business, it can still change how much aid you receive. This is why it’s so important to track everything and to report it correctly. 

Learn more: What is Financial Aid?

How to Organize Documents and Report Accurately

If your child is in school and also self-employed, you have to stay organized because income reporting mistakes can cause a lot of trouble down the line. 

Here’s how to keep everything in order. 

Track All Sources of Income

Have your child track every dollar they earn through their business counts. This includes digital payments, affiliate commissions, cash tips, and even money you get through PayPal, Venmo or Stripe. Small payments are easy to forget, but over time, they add up and affect the amount of income your child reports. 

Use a spreadsheet or an accounting app to track month to month, and you’ll never have to worry about surprises when filing taxes or reporting aid. 

Learn more: What is Need-Based Financial Aid?

Keep Receipts and Business Expenses

One of the best ways to lower your reportable income is to simply track your expenses. If your child is selling products, tutoring or freelancing, you probably have costs that qualify as deductions, for materials, software, website hosting or even mileage if your child travels to see clients. 

Keep receipts for every purchase because this will help you subtract costs from total earnings, meaning you’ll report lower income, which can make a big difference on your child’s FAFSA. 

In terms of storage, ensure you’re not just stuffing receipts and tax papers in random drawers or folders. Instead, use what accountants and tax preparers use, such as tax return folders by Mines Press and similar printing services.

File Schedule C and Related Tax Forms Accurately

Self-employed students often need to file a Schedule C form to report business income. A Schedule C is a form that shows both the money your child earned and the expenses they’re claiming. If they don’t do this or enter incorrect numbers, they might overstate their income.

Use tax software to help you through the process or work with a tax preparer who knows how to properly report student income. 

Learn more: What is Merit-Based Financial Aid?

Keep Multi-Year Tax Records for FAFSA Renewals

Financial aid forms often look at tax data from last year, so those records are just as important as this year’s. Help keep full copies of your child’s tax returns and any supporting documents because the school or aid office might ask for them and keep your tax paperwork organized by year to keep it all in one place. This makes the renewal process much easier and faster.

5 FAFSA Mistakes Student Entrepreneurs Often Make

The FAFSA is way more than just a form — it’s a system that pulls in your tax information and helps schools determine the amount of aid to allocate, including federal student loans, such as the Parent PLUS loan. If you’re self-employed, the way you report income is much more important than you may think. 

Here are five mistakes many student entrepreneurs make and how to avoid them. 

Learn more about how student loans work, including private student loans.

1. Forgetting to Report Self-Employment Income

Students often don’t think side income counts if it’s casual or under the table, but the FAFSA wouldn’t agree. Whether it’s tutoring, designing websites or flipping products online, everything your child earns is considered income, and you have to report it. 

The FAFSA uses your tax return to decide whether you’re eligible for aid or not, so if that money isn’t there, you could be flagged for inconsistencies or even accused of misreporting. Even if it seems small, your child’s aid could be reduced or you could get penalties down the road. 

2. Reporting Total Income Without Subtracting Expenses

The FAFSA looks at your net income, not gross. So if your child earned $6,000 selling handmade jewelry but spent $2,500 on supplies and shipping, only $3,500 counts. 

If you report the full $6,000, your child would be overstating their financial strength, which can make it seem like you need less aid than you actually do. Always subtract the expenses first. 

3. Completely Skipping the Schedule C Form

Schedule C allows your child to list business income (and lost income) and deductions. If you don’t do this or you file incorrectly, the FAFSA won’t know how to read your business activity and it may assume you have a higher income than you really do. 

Without this form, your child loses the chance to properly document business expenses, which directly impacts aid calculation. Filing Schedule C is extra work, but it’s important. 

4. Mixing Personal and Business Finances

Mixing personal and business finances makes it hard to track what you actually earned, but it happens all the time to people who use the same account for personal expenses and business income. Your numbers might be off when it’s time to report income on the FAFSA. 

Consider encouraging your child to open a separate business account because it helps them stay organized and offers clean documentation if they ever need it. 

5. Misunderstanding the IRS Data Retrieval Tool

The IRS Data Retrieval Tool (DRT) is supposed to make the FAFSA easier because it pulls your tax information directly from the IRS. But if you didn’t file correctly or you left out important forms like Schedule C, the tool won’t pull in the full picture, causing discrepancies between what the FAFSA sees and what your student’s actual finances look like. 

Some students assume that using the DRT means they don’t have to double-check anything, but that’s super risky. Always ensure all tax returns are complete and accurate before using the DRT. 

Learn more: What is Room and Board? and How to Get In-State Tuition When You Live Out-of-State

How to Reduce Aid Impact from Business Income

If your child’s business is bringing in decent money, pat them on the back! That’s quite an accomplishment for someone who’s studying and working. However, you might wonder how to reduce the impact on your child’s financial aid. This might sound sketchy, but there are 100% legal ways to go about this. 

• Timing: Timing is a big one. Your child can choose when to receive payments, meaning they can speed them up or delay them so they don’t have to report higher income in the year they’re applying for aid. Another smart move is to contribute to a retirement account, such as a Roth IRA. This will lower their reportable income and do something good for their future self.
• Buying equipment or tools: If your student must buy equipment or tools for your business, you might want to do it before the end of the tax year because those purchases count as expenses and can reduce your net income.
• 529 plans: If your family uses a 529 college savings plan, it’s better to keep it under your parents’ name because that can reduce its weight when it comes to calculating aid.

Consider All Angles for Student Business Income

It’s important to remember that IRS audits on small business filers happen: about 0.42% of those reporting under $25,000. This number seems trivial, but it’s higher than the zero-income audit rate. The IRS also flags Schedule C filers, especially since an estimated 76% of sole proprietors misreport business expenses each year, amounting to almost $92 billion in annual discrepancies. 

Many students have some self-employment income and the FAFSA calculates against it. 

Mistakes or sloppy reporting could cut into your aid or even make you ineligible for it. 

FAQs

Do you still have questions about student business income affecting college aid? Let’s walk through some FAQs.

Do I need to report hobby income on the FAFSA?

Absolutely. If your child makes money from it, you need to report it. The IRS and FAFSA don’t care whether selling muffins is just something they do here and there because they like it. If they get paid for it, they must report it. 

What if my business loses money?

Welp, that’s unfortunate, but your child still needs to report it. Actually, you want to report it. If the expenses for their business are higher than its income, that can work in their favor on FAFSA. When you report net loss on your Schedule C, that reduces your total income, which could help increase aid eligibility. 

Does income from Venmo or CashApp count?

Yes, because it’s still money. Even if the money comes from the Tooth Fairy, it needs to be reported. It doesn’t matter where it comes from; if you’re getting paid for services or selling something, it’s income. Keep records, even peer-to-peer apps, because neither FAFSA nor the IRS ignores digital payments. 

Can parents report the business under their name instead?

No. If your child is the one doing the work and getting the money, that income is theirs, even if you help you manage the money or file taxes. If you report it under someone else’s name, the IRS and financial aid offices won’t be pleased.