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Income, Taxes and Being Self-Employed – What You Need to Know

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With tax season coming and going, I think it’s very important to write an article about self-employed income because it’s been a topic of my clients lately. There are many people who want to write-off as much as possible when being self-employed, but that will actually damage your ability to get a mortgage. 

In this blog, I will explain income, taxes and everything you need to know when being self-employed. Let’s get started. 

What’s considered self-employed?

To be considered self-employed, you have to be someone who works for themselves and does not earn a fixed salary from a third-party employer. You can be a business owner of sole proprietorships, partnerships or corporations. If you are an incorporated self-employed individual, you are still considered self-employed if you own the corporation and earn a salary from it. But, if you’re a shareholder in the corporation, that doesn’t count. 

Writing things off on your taxes.

two women sitting at a table filing their income taxes
In order to be approved for a mortgage, you need to have a net-positive income. This means that if over-used, your tax write-offs could negatively impact your changes of getting approved.

One thing that I see a lot is people who are self-employed trying to write as much off as possible on their taxes. While it may seem like a really good idea, there’s a catch. In order to apply and be approved for a mortgage, you need to have a NET-POSITIVE income. This means, if you have self-employed income and try to write it off to $0, you will not be approved. The lender will see that you made no money through self-employment. 

If you plan to go the route of writing as much off as possible, the only way you can be approved for a mortgage is if you have a lot of cash for a down payment and are okay with higher mortgage rates or a specialty stated income program. This becomes a tricky situation and something that isn’t solved/approved easily. 

A net-positive income.

When applying for a traditional mortgage, a lender looks at the net income that is declared on a person’s last two tax returns. 

For those who are self-employed, this amount can be much lower due to tax deductions and claimed expenses. A self-employed mortgage takes those differences into account and provides more flexibility with how your income is reported. But, remember, there has to be an income reported. 

It’s important to discuss with your financial partners whether it be an accountant, bookkeeper or financial advisor your plan to purchase a home. If you have a good team around you, they will be able to ensure that you have a net-positive income and are more likely to be approved for a mortgage. Additionally, speaking to a mortgage broker like myself can be critical. I know what lenders are looking for when it comes to self-employed income and I’m able to help guide you in the right direction of how your taxes should look. I’ll also let you know what type of income you need to have provided through your taxes to get qualified.

Being employed as well as self-employed.

The next question you may have is how does this work if you have a side-business where you make self-employed income as well as being employed full-time. The easy answer is that you still need a net-positive income. 

The more money you’re bringing in, the more that you can be qualified for. So, if you have a great full-time position and are killing it on your side business, you’re going to want to claim that income and not write it off to close to nothing.

Anytime a lender sees self-employed income, they will need to see a two-year average of it to include it. So, if this is the first year of your side business, the income you make won’t be included for your mortgage application. But, after another year of claiming it, it can then be included! There are exceptions to this for people who have gone from the same industry and position as an employee to doing it self employed. Using two years filed taxes of being self employed as a guideline is best though.

Reach out to me for full details.

I understand that finances can be tricky for people. We’re not taught about it in school (which we should be!) and it can be hard to understand when applying for a mortgage. If you’re self-employed, reach out to me and let’s discuss your situation. Once I know all the details, I can help put you on the right path and help you get approved for a mortgage. 

Simply fill out the application form below, submit my contact form or give me a call at 250-826-3111 and let me help you!

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