Can I Use 1099 Income Paid To My LLC
Use of 1099 Income Paid to an LLC
You may ask ” Can I use 1099 income paid to my LLC “. The eligibility for using 1099 income paid to a borrower’s LLC varies significantly between Non-QM programs. Where permitted, strict requirements regarding ownership and the application of a mandatory expense factor must be met.
Eligibility and Strict Ownership Requirements
Certain Non-QM products explicitly permit the use of 1099 income directed to a business entity, provided the individual borrower maintains complete control.
- General Acceptance (Advantage/Connect): Under specific guidelines (such as our Advantage and our Connect programs), a 1099 paid to the borrower’s LLC is acceptable for qualification.
- 100% Ownership Requirement: This is the most crucial requirement for processing entity-paid 1099 income. The borrower’s ownership interest in the entity must be 100%.
- Verification Documentation: This 100% ownership must be formally documented. The file requires a CPA letter or equivalent documentation (such as an EA/tax preparer letter) verifying that the LLC is 100% owned by the borrower and is active.
- Borrower Requirement (Edge Series): If the borrower is an entity being used to qualify for the 1099 income type in our Edge Series, the 1099 must reflect the entity as the payer and the guarantor as the recipient.
Income Calculation and Mandatory Expense Factor
When 1099 income is paid to an LLC, we require a higher expense factor to account for the implicit business costs absorbed by the entity, differentiating it from the simpler 1099 calculation.
- Mandatory 15% Expense Factor: When a 1099 is paid to the borrower’s LLC, we must apply a 15% expense factor to the gross earnings to determine the net qualifying income.
- Standard 1099 Comparison: This 15% factor is higher than the standard 10% expense factor typically applied when the 1099 is paid directly to the individual borrower.
Contradictory and Restrictive Policies
It is important to note that many non-QM lenders maintain strict prohibitions against using 1099 income paid to an LLC:
- Ineligibility by Entity (Nations Direct Mortgage/River Series): Some guidelines explicitly state that the 1099 statement must be payable to the individual borrower(s), and 1099 statements payable to a business entity owned by the borrower(s) are not eligible.
- Ineligibility by Program (Horizon Alt Doc): The 1099 Income documentation eligibility is limited to individual borrowers being paid via a 1099 but are not the business owner of the entity issuing the 1099. For self-employed borrowers who are business owners receiving their earnings via a 1099, this Alt Doc product is not eligible. (However, this program suggests the loan may be considered if an expense letter is provided by a licensed tax preparer, even if paid to the business).
- Entity Vesting: While some programs restrict how the 1099 income is verified, using an LLC for title vesting is generally acceptable only on investment property transactions. Furthermore, specific programs, such as our Prime Non-QM Series, list the LLC as an ineligible borrower.
FAQ's
Yes, under specific Non-QM programs like our Advantage and our Connect, a 1099 paid to the borrower’s LLC is acceptable.
The loan may be considered if an Expense Letter from the borrower’s CPA, EA, or PTIN licensed Tax preparer is provided to determine the qualifying income.
The 1099 must reflect the entity as the payer and the guarantor as the recipient.
No, LLCs are explicitly listed as ineligible borrowers for our Prime ITIN Alt Doc program, alongside corporations and partnerships.
The CPA letter must confirm that the LLC is active.
Yes, ownership or title vesting in the name of an LLC is generally acceptable on investment property transactions only.
No, some guidelines explicitly state that 1099 statements payable to a business entity owned by the borrower(s) are not eligible; the 1099 must be payable to the individual borrower(s).
A 15% expense factor must be applied to the gross earnings to calculate the net qualifying income.
A CPA letter or equivalent documentation (EA/licensed tax preparer letter) must be provided, verifying that the LLC is 100% owned by the borrower and is active.
The borrower’s ownership interest in the entity must be 100%.
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