Lenders will classify you as a wage earner employee or self-employed. How file your taxes in accordance with your percentage of business ownership could classify you as self-employed even though you are an employee.

Lending Income Buckets

Bucket 1 Employee-individuals receive an annual W2 of their earning and receive paycheck throughout the year . From the paycheck, federal state and taxes are withheld.

Bucket 2 Self-employed- includes; a sole proprietorship, any business entity where income is derived or lost including all affiliated corporations, income derived from real estate,  and/or dividend income is also considered to be under the self-employed bucket.

Where Things May Overlap

Employees who also have an ownership interest in the company can actually be considered self-employed.

Yep, it’s true…

For example if you’re a W-2 wage earner employee and you have an ownership interest in your company whom you’re employed for that is more than 25%, you as are self-employed  for the purposes of applying for the loan. Additionally, if you own the company, but you receive a W-2, you are still considered self-employed even though you receive a W-2 because you control the salary you take.

How Another Business Affects The Mortgage Application

Your federal tax returns are required for the lender in documenting ability to repay.  On your tax returns, as a sole proprietor a Schedule C  is filed and the income will carries Schedule A. However, things change when you have a business. Two  factors enter the picture…

1. Schedule E  identifies whether or not there is additional business income and/or that you are an owner in an additional business
2. If an additional businesses are identified, the housing lender will require the K-1 for each business to determine the amount of percentage of ownership

Mortgage Tip:  if you own 24% of a business you are not self employed for the purposes of the loan application and the lender will not need to obtain the corporate income tax returns. On the flipside if you own  25% or more of an additional business whether it’s your current employer or another business entity, as identified on the K-1, then yes you’ll need to provide additional income tax returns for the Corporation in addition to your personal tax returns for obtaining the mortgage.

Why All The Questions

Providing W-2s, pay stubs and personal tax returns is not enough if you have more than a 25% business ownership percentage elsewhere. If you’re receiving additional income from another business and income or loss of income is tied to your personal tax returns, it becomes material to your ability to qualify. Here’s why- lenders are required to average your income over the last two years and that averaged income is used on the loan application in procuring new financing. See how much you can afford with our income affordability calculator.

*So if you’re self-employed simply by virtue of having an ownership interest in a company, you need not to provide the additional tax returns if you are small share owner.

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