Proving Lost Earnings When You Are Self‑Employed: A Practical Guide for Texans
Disclaimer: This is general information, not legal advice. I am not a lawyer. Consult a Texas attorney for guidance tailored to your situation.
Detailed Answer
If you run your own business or work as an independent contractor and an accident prevents you from working, you can recover economic damages for lost earnings and lost business profits. To succeed in a claim in Texas you must show two things with reasonable certainty: (1) you actually lost earnings or profits because of the accident, and (2) the amount of those losses. Courts and insurers require documentation and a logical method for calculating the loss, not guesswork.
1. What counts as recoverable earnings
For self‑employed people, recoverable items usually include:
- Lost net income (business revenue minus ordinary business expenses).
- Income you would have earned as compensation if you ran payroll for yourself.
- Lost future earnings, when supported by reasonable proof (rare and requires experts).
2. Core documents that prove lost earnings
Gather these contemporaneous records whenever possible. Courts prefer records created in the ordinary course of business:
- Tax returns (Form 1040 plus Schedule C or other forms showing business income). See IRS resources: Schedule C.
- Form 1099‑NEC / 1099‑MISC copies from clients or payors: 1099‑NEC.
- Invoices sent to clients, estimates, signed contracts, and canceled contracts or bookings.
- Bank and merchant account statements showing deposits tied to invoices or clients.
- Accounting software reports (QuickBooks, Xero, etc.), cash‑flow statements, and profit & loss statements.
- Receipts for business expenses and payroll records if you normally pay yourself a salary.
- Daily logs, calendars, emails or text messages that show canceled jobs or lost opportunities because of the injury.
- Medical records and work‑restriction notes that link your inability to work to the accident.
3. How to calculate the loss
Common approaches include:
- Historic average method — average net income for prior months or years, adjusted for seasonal trends and growth, then multiply by the time missed.
- Projective method — show specific contracts or scheduled work you were forced to cancel and calculate the exact revenue and profit lost.
- Hybrid method — combine averages for routine work and specific documentation for one‑off contracts.
Courts expect you to explain adjustments (e.g., variable expenses saved because you weren’t working). Net profit—not gross receipts—is often the correct measure because it shows what you actually lost.
4. Experts and testimony
When your records alone don’t make the loss clear, a forensic accountant, CPA, or vocational economist can prepare a lost‑earnings report. These experts reconstruct income from tax returns, bank records, and business records and present a methodology a court or insurer can evaluate. You (as a business owner) can also give sworn testimony about your usual schedule, income patterns, and how the accident interrupted work.
5. Admissibility and discovery in Texas
Business records produced in the ordinary course of business are admissible under the Texas Rules of Evidence business‑records exception. For procedural steps like depositions, document requests, and subpoenas, follow the Texas Rules of Civil Procedure. For more on evidence rules: Texas Rules of Evidence. For civil procedure and discovery rules: Texas Rules of Civil Procedure.
6. Burden and standard of proof
You must prove lost earnings by a preponderance of the evidence (more likely than not). The proof must be reliable and tied to the accident. Courts in Texas will reject speculative numbers. If you expect ongoing loss, be prepared to use experts to present a reasonable projection.
7. Mitigation obligations
You must take reasonable steps to reduce your losses. That could include rescheduling work, hiring temporary help, or taking light duties. If you fail to mitigate without good reason, the defendant or insurer can argue that your recoverable loss is smaller.
8. Practical timeline
- Immediately preserve all business records and communications about cancelled jobs.
- Get and keep medical documentation linking your incapacity to the accident.
- Collect tax returns and accounting reports for at least 2–3 prior years (more if seasonal or variable work).
- If needed, hire a CPA or forensic accountant early so they can gather contemporaneous data and prepare a report.
- Consult an attorney to help present claims, negotiate with insurers, and handle discovery and expert testimony.
For information on how Texas treats damage awards and limits, see Texas Civil Practice & Remedies Code, Chapter 41: texas statutes, Chapter 41.
Helpful Hints — Quick Checklist to Prove Lost Earnings
- Keep originals and make digital backups of invoices, contracts, receipts, and bank statements.
- Save tax returns for the previous 3–5 years (Schedule C, K‑1s, etc.).
- Obtain contemporaneous proof of canceled work (emails, texts, calendar entries).
- Secure written work‑restriction notes from medical providers tying your condition to the accident.
- Track time you could not work and tasks you missed; note who lost the work (client name and job value).
- Get client statements or affidavits confirming cancelled work or lost projects.
- Keep records of any income you did receive despite the injury and any expenses you saved.
- Talk to a CPA or forensic accountant early if your bookkeeping is incomplete.
- Document mitigation efforts (offers to reschedule, hiring help, or alternative revenue sources).
- Consider consulting a Texas attorney to protect rights, handle subpoenas, and prepare expert evidence.