Self-employed, but not alone!
Before I begin, this is for informational purposes & based on my experiences in the mortgage industry. I am not a tax professional. I am attempting to simplify the process, but always encourage you to consult and hire a tax professional.
I see self-employment income constantly and thought I would write a few notes about how we use your income to help you out. Self-employment income is a tricky topic to navigate, especially when it comes to your salary. In a perfect world we would use your last two years income and average them out. However, we can only do this if your income is increasing. If your income is decreasing year-over-years, we must use the lower amount. This is referred to as "Average VS Most Recent Year".
Schedule C , don't get overwhelmed.
This formula has a few moving parts but it's actually fairly simple. We are going to look at 5 different blocks and come up with what is referred to as " Qualifying Income". This will give you an immense amount of power and knowledge when making decisions throughout the year. (Assuming you don't show a net loss).
Start on your Schedule-C
Let's crunch the numbers:
Net Profit (Or Loss) (Line 31)
+ Plus Depreciation (Line 12)
- Minus Meals & Entertainment (Line 24B)*
+ Plus Business Use of Home (Line 30)**
= Qualifying Income
* Careful adding too much here throughout the year, we have to add 50% back on this as a business expense, due to the “50% Limitation Rule”
**We can add this back to your income, again another topic