Document Income For 1099 Employee
Borrower Eligibility and Work History Requirements
To document income for 1099 employee, we require clear evidence of business stability and continued income generation:
- Primary Income Source: The borrower’s primary income source must be derived from the 1099 income stream, specifically meaning more than 50% of the qualifying income must be calculated based on the provided 1099(s) less the applicable expense ratio.
- Employment History: Borrowers must generally have a two-year employment history in the same line of work. They must have received 1099 income for at least one year. Income history of less than one year is generally not considered effective income.
- Income Stability: The income must be stable, with a reasonable expectation that the same level will continue for a minimum of three years. If the income trend is declining but has not stabilized, the income may not be used. Declining income trends require close review, and if used, the most conservative income calculation must be applied.
- Verification of Continuance: All sources of income must be verified, and borrowers must execute an attestation affirming their ability to repay the loan and confirming changes to employment and income listed on the final loan application.
Required Documentation for Verification
The 1099 Only documentation type relies on a combination of IRS documents and current earnings verification:
| Documentation Type | Requirement Details |
| 1099 Forms | Most recent one or two years of 1099(s) must be provided. |
| Tax Transcripts | Wage & Income Transcripts for the year(s) of qualifying income are generally required to verify the 1099s/W-2s. |
| Year-to-Date (YTD) Earnings | Documentation of YTD earnings is required within 90 to 120 calendar days of the note date to support the ongoing receipt of income. This can include checks, a check stub with YTD totals, or bank statements showing receipt of income. |
| Verbal Verification (VVOE) | A Verbal Verification of Employment (VVOE) must be obtained for each borrower using employment income, completed within 10 calendar days prior to the note date. |
Income Calculation Methods (Expense Factor)
Qualifying income is determined by calculating the gross 1099 earnings and subtracting a mandated expense ratio.
1. Standard Fixed 10% Expense Factor
The most common method uses a uniform, fixed expense ratio applied to gross receipts.
- A 10% expense factor is applied to eligible gross receipts.
- The resulting qualifying income is 90% of the gross 1099 earnings.
- This calculation method is generally reserved for borrowers who have no office space, employees, or cost of goods sold.
2. Third-Party Certification (P&L or Expense Letter)
We may permit using a more precise expense calculation if supported by a certified tax professional:
- P&L Statement Method: A Profit and Loss (P&L) statement prepared by a CPA, EA, or licensed tax preparer can be used. The gross receipts on the 1099s must support at least 90% of the gross receipts listed on the P&L.
- CPA Expense Letter Method: A letter from a CPA, EA, or licensed tax preparer (PTIN/CTEC) stating the business’s actual expense ratio may be used. This ratio is then multiplied by the gross 1099 receipts, and the resulting expense is deducted from the gross receipts to determine the qualifying income.
3. Averaging Income
If the borrower provides two years of 1099s:
- If gross receipts are stable or increasing, a 24-month average of net income is used.
- If gross receipts are declining, a 12-month average of net income from the most recent year is utilized.
Handling Special 1099 Scenarios
Specific documentation is required when the borrower’s situation deviates from a direct 1099 payment to the individual:
| Scenario | Requirements and Calculation |
| 1099 Paid to LLC | Acceptable under some programs (e.g., Advantage/Connect) if the borrower has 100% ownership verified by a CPA letter. A 15% expense factor must be applied (higher than the standard 10%). Note: Other guidelines explicitly state 1099s paid to an entity are not eligible. |
| Multiple 1099s | Borrowers paid by multiple 1099s are generally considered Self-Employed and must typically qualify using 12- or 24-month bank statements instead of the 1099 Only product. Exceptions are made if the borrower is in an industry where receiving multiple 1099s is common (e.g., entertainment, medical contractor). |
| W-2/1099 Combination | A borrower who receives both W-2 income and independent contractor income via 1099 can include the W-2 income if a CPA/EA/licensed tax preparer letter verifies that the W-2 income is not the result of employment income. |
| Recent W-2 to 1099 Transition | A borrower converting from W-2 to 1099 may be eligible if they are in the same industry/similar role and have been with the same employer for at least two years (or in the same industry with a similar role). A contract must be provided. |
FAQ's
The YTD documentation must generally be dated within 120 calendar days of the note date (Connect Program) or within 90 calendar days of the note date (Nations Direct Mortgage).
If the trend is declining and has not stabilized, the income may not be used. If the income is used, the borrower must provide an explanation for the decline, and the most conservative income calculation (e.g., the lowest annual compensation or a 12-month average) must be utilized.
When acceptable, a CPA letter verifying the LLC is 100% owned by the borrower and is active is required. Note: Some lenders strictly state that 1099 statements payable to a business entity are ineligible.
Yes, W-2 income may be included if a CPA, EA, or licensed tax preparer letter is provided verifying the W-2 income is not the result of employment income but is part of their independent contractor employment.
The borrower must provide their last two years’ tax returns and their last two years’ W-2 income to establish an average of income that the new 1099 P&L should support.
A Verbal Verification of Employment (VVOE) must be obtained for each borrower using self-employment income to qualify. This VVOE must be completed within 30 calendar days prior to the note date.
Documentation of Year-to-Date (YTD) earnings is required. This documentation can include check stubs with YTD totals, checks showing receipt of YTD income, or bank statements showing receipt of income.
Lenders verify the income by requiring Wage & Income Transcripts from the IRS for the year(s) of qualifying income. This is often facilitated by requiring the borrower to sign the IRS Form 4506-C or an equivalent form.
The borrower must generally have a two-year employment history in the same line of work, and must have been receiving 1099 income for at least one year.
The borrower must provide the most recent one or two years of 1099(s). These documents should cover a complete calendar year.
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