How to Calculate Self-Employment Income

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Disclosing your income on a credit application is simple—unless your income is complicated by self-employment. Solo entrepreneurs, gig workers, freelancers and other independent contractors may find it more challenging to report their income accurately on a credit application.

There are multiple reasons why. Self-employed people often have income that fluctuates. It may be seasonal or sporadic. Credit applications don't always explain how they would like you to calculate income. Do they want to know how many dollars flow into your business each month? Your net income after expenses? Are they more interested in what you made in the past or what you expect to make in the coming months?

Here's what to know about reporting self-employment income on an application.

Why Income Matters on a Credit Application

Income doesn't appear on your credit report, and it doesn't factor into your credit score. But your income is still critical to helping you qualify for a loan or credit card because it helps lenders assess your ability to pay. If your monthly debt payments take up too much of your monthly income (indicated by a high debt-to-income ratio), a lender may see your ability to make payments as unsustainable and either deny your application or offer a lower credit line.

Accuracy matters when it comes to reporting income. Falsely inflating your income to improve your chances of getting a loan is fraud, punishable by fines or even jail time. Lenders may verify your income, in which case lying (or even guessing) is counterproductive. On the other hand, you want to report all your qualifying income. If your estimate is too low, you'll have a harder time getting approved for the loan or line of credit you're seeking.

Bottom line: If you're going to submit income information on a credit application, take the time to make an accurate calculation. Here's how.

Calculating Your Income for a Mortgage Application

Mortgage lenders like to see stability—long employment histories and steady income. Most prefer to see at least two years of self-employment to show your ability to generate income over time. To calculate your monthly income for a mortgage application, start with this simple formula:

  1. Find your net profit before taking exemptions or paying taxes (from Schedule C of your tax return) for the two most recent years you filed taxes.
  2. Add these two figures together.
  3. Divide the total by 24.

So, if your net profit was $110,000 in 2019 and $104,000 in 2020, your average monthly income would be $214,000 divided by 24, or $8,917.

Your lender will likely verify your income by reviewing tax returns or tax transcripts as well as bank statements. You may also be required to show 1099 forms and provide a profit and loss statement for the current year.

What if Your Reported Income Seems Too Low?

Many taxpayers maximize their deductible expenses to lower their tax bills. That's great at tax time, but it minimizes your reportable income when you apply for a loan; lenders count the income you report on your taxes. If your monthly income turns out to be lower than you expected, consider these steps:

  • Include other sources of income. Although the Credit CARD Act of 2009 limits the types of income you can include on a credit application, if you have any of the following, you may be able to include them in your stated income:
    • Employment earnings
    • Investments
    • Retirement
    • Public assistance
    • Insurance payments
    • Your spouse's earnings
    • Alimony and child support
    • Some financial aid
  • Limit your loan size. Calculate a debt-to-income ratio that your lender will approve and reverse-engineer your loan. You may decide to buy a less expensive home or increase your down payment to lower your loan amount.
  • Look for a sympathetic lender. Some lenders, for example, will review a few years' worth of bank statements to determine your income instead of relying on tax returns. This may play to your favor, though it may also cost you more in interest. An experienced mortgage broker can help you find lenders and loan programs that work best for your situation.
  • Build your business now and apply later. Now may not be the best time to apply for a home loan. If your income took a hit during the pandemic or your business is just getting started, you may want to wait a year or two to let your income grow and then restart your home search.

Reporting Income on a Credit Card Application

You can use the same simple calculation and additional sources of income shown above to estimate your income for a credit card application. Credit card companies may use stated income from your application without requiring additional verification. But they may ask you to verify your information with tax returns or other documentation, or use income estimation models to check your math. This means you should only provide a good faith estimate of your income—and be prepared to show your work.

Finally, you may get an income request even after you have a credit card: You're online paying your credit card bill when a pop-up window asks you to provide your monthly income. Credit card companies may ask for an income update periodically to see if you qualify for a higher credit limit. Unless you can make a credible estimate off the top of your head, you may want to skip this exercise. There's no penalty if you decide not to respond to these pop-up requests.

If you want to be considered for a credit line increase, calculate your monthly income separately and contact your credit card company to request an increase. Or keep your estimated monthly income handy for just these types of occasions.

Making the Most of Your Application

Presenting your income in the best possible light can be key to getting approved for the loan or credit line you want. While it's never a good idea to "enhance" self-employment income to make your application look better, you do want to account for as much of your actual income as possible to demonstrate your ability to pay back your debt.

Of course, income is only one facet of your application. Your credit score and report also play a major role in qualifying you for a loan or credit card. As you prepare to apply for a loan or card, take a moment to prepare your credit. Review your credit score and report, and take steps to optimize your credit if you find areas that need improvement. Your reported income and credit file help tell the story of how well you're likely to manage new credit: Put your best foot forward.

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