W2 income vs. 1099 income – Questions and Answers

Q: Please differentiate between W2 and 1099 income.

A: Typically, a W2 employee is a full employee of a company given a salary versus a 1099 employee where the employer doesn’t pay taxes for the employee AND 1099 employees can write off business expenses.

Q: How does an underwriter view different types of pay structures:

A: W2 salary gets the same pay regardless of world events. That means less uncertainty, and it makes an underwriter happy. For new hires, this is ideal. A new employee can qualify with 30-60 days of pay stubs after starting a new job. However, commission and bonus pay that amounts to 25% or more of one’s income will require tax returns just like a self-employed borrower.

Q: Why is that the case?

A: There is no going-forward guarantee of income. In order to get an idea of what to expect, an underwriter looks at the past two years (24 months) to get an idea of how events are likely to unfold moving forward.

Q: Describe self-employed or 1099 pay qualifications:

A: Up to two years of tax returns are going to be required because, again, there is no guarantee of income and self-employed or 1099 borrowers can write off business expenses that W2 employees typically do not/cannot write off. For instance, one’s income may have been $120,000 in 2009. Come tax season, $60,000 was written off as business expenses. An underwriter interprets that as it cost the borrower $60,000 to make $120,000-meaning the actual income was $60,000.

Here are some examples of different ways one might be paid and what steps are necessary to document the income:

• W2 salaried income – this is the easiest to document. All that is needed is the past 30 days of pay stubs. If recently moved to a new job in the same field still as a W2 employee, a pay stub reflecting 30 days on the job with an acceptance letter to the new position should do it.
• W2 base pay with commission/bonus income – if commission/bonus income is less than 25% of the total salary, then the same rules apply as above should apply. If more than 25% of the total salary, then up to two years of tax returns will be required to document the income.
• Full commission income – up to two years of tax returns will be required. Note that any business expense write-offs on the tax return will lower the income that can be used to qualify you for the loan.
• Self-employed – two years of tax returns will be required. Again, any claimed business expenses (personal or for the business itself) will reduce the income that can be used to qualify you for the loan.
• Bonus income – two years of documented bonus income will be required along with documenting its continuance.
• Same job at the same company but change from W2 salary to commission/bonus income – This is happening more frequently in the business world. Positions that were once salaried are becoming positions with base pay plus commission. If the base salary is sufficient to qualify for the loan, then only pay stubs are required. However, if the commission is also needed to qualify for the loan, then up to two years of tax returns would be required.

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