How to Calculate a Self-Employed Borrower's Income

Original post by Alia Nikol of Demand Media

The income of a self-employed borrower is not as easily verified as the income of a borrower who holds a regular W-2 wage job. Many lenders and credit analysts request tax returns of applicants who are self-employed and calculate income based on the net amount of self-employment income reported to the IRS. Self-employment income is reported to the IRS on Schedule C as an attachment to the individual's federal tax return on Form 1040.

1 Step 1
2 Step 2
3 Step 3
4 References
5 About the Author

Step 1

Request copies of the borrower's last tax return. It is common to request the last two years of a self-employed borrower's returns to demonstrate income consistency and develop an average income figure.

Step 2

Look at line 12 on the first page of the borrower's tax return on Form 1040. Line 12 lists the applicant's net self-employment income from all sources, and represents annual self-employment income. If you average net income from two returns, add line 12 from both returns and divide by two.

Step 3

Divide the figure from line 12, or the average line 12 figure when using data from two returns, by 12. The result is the borrower's monthly income from self-employment.

References

About the Author

With a background in taxation, Alia Nikol specializes in business and personal finance topics. She is an IRS enrolled agent pursuing a Bachelor of Science in accounting and journalism at Metropolitan State College of Denver.