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Hi all, I'm hoping to get an answer from a loan officer or someone who's been in my same situation. I will be switching from a W2 employee to a 1099 independent next month. I'm also planning to buy a house in the near future. I understand that as a 1099 most banks want to see 2yrs of tax documents.
Here's my unique situation. I have been a government contractor since 2003. I have been working for the same "customer" since 2005. At first it was as an employee of a contracting company. Then in 2010, I negotiated my own contract and have worked as an independent contractor. However, this is where it gets interesting, I use a company to do my invoicing, taxes, subsidized medical insurance, and back office support. This company would accept payments and I would set my own payroll. The business model of this company allowed me to be a W2 employee of that company which provided many benefits. Starting next month a new contractor has won the prime contact and I cannot use the company that I have been using for back office support due to a subcontracting rule. So, I am going to be a full fledged 1099. Keep in mind, the people I work for and with everyday has not changed since 2005. I'm worried that by going 1099 I may run into some trouble if I apply for a mortgage in the next 3-6mo.
I can have my customer write a letter stating that I have been working for them for the past 8yrs. I have a great repoire with them and I'm sure they would vouch for me if needed. My contracts have always been 1yr with option years. This new contract has option years out til 2018. I would like to believe that I am more secure than most 1099s as I have regular income (I am full-time 40hrs/wk) and I have been able to remain in this position for so long.
Am I going to be royally screwed for being an independent consultant when I apply for a mortgage?
How is your business now set up? Are you a single person SCorp or LLC? I was an independent contractor and set myself up as an SCorp. That way I was a W2 employee of my own corporation.
Right now it's not setup as anything. I am in the planning process and was under the assumption that I would go as a 1099 to the prime contractor. Due to certain requirements with the new prime contractor, they cannot sub-contract to another company. They need to be direct employees or 1099s. Not sure how an S-Corp or LLC would affect that arrangement since I would then be a company sub-contracted to the prime (which is not allowed according to what I've been told). 1099 seems to be the easiest way to go and if I decided to change that, I could at a later time with more planning.
Hi all, I'm hoping to get an answer from a loan officer or someone who's been in my same situation. I will be switching from a W2 employee to a 1099 independent next month. I'm also planning to buy a house in the near future. I understand that as a 1099 most banks want to see 2yrs of tax documents.
Here's my unique situation. I have been a government contractor since 2003. I have been working for the same "customer" since 2005. At first it was as an employee of a contracting company. Then in 2010, I negotiated my own contract and have worked as an independent contractor. However, this is where it gets interesting, I use a company to do my invoicing, taxes, subsidized medical insurance, and back office support. This company would accept payments and I would set my own payroll. The business model of this company allowed me to be a W2 employee of that company which provided many benefits. Starting next month a new contractor has won the prime contact and I cannot use the company that I have been using for back office support due to a subcontracting rule. So, I am going to be a full fledged 1099. Keep in mind, the people I work for and with everyday has not changed since 2005. I'm worried that by going 1099 I may run into some trouble if I apply for a mortgage in the next 3-6mo.
I can have my customer write a letter stating that I have been working for them for the past 8yrs. I have a great repoire with them and I'm sure they would vouch for me if needed. My contracts have always been 1yr with option years. This new contract has option years out til 2018. I would like to believe that I am more secure than most 1099s as I have regular income (I am full-time 40hrs/wk) and I have been able to remain in this position for so long.
Am I going to be royally screwed for being an independent consultant when I apply for a mortgage?
YES.
You will need 2 years as a 1099'd employee, and as a 1099'd employee you are going to have (perhaps far) less usable income for the transaction.
I think you are misunderstanding my situation. I have been basically working as a 1099, only I am W2 of the company that does my back office support. They charge a 5% fee of my invoice for their services. I claim monthly deductions within the employee record system that I use for billing/expenses/payroll. Part of these services is that they handle my tax witholdings. I have been paying the proper taxes (employer/employee/SS/SDI ets) all along. My income is not going to change into the negative. I will earn 5% more by not using this company to do my back office work. In addition, I have negotiated a 6% raise. So total will be 11% increase.
..Am I going to be royally screwed for being an independent consultant when I apply for a mortgage?
Steve
Welcome to the world as a 1099 contractor - the world of income/tax write-off's.....
Understand your situation - worked as a contractor for government in the late 80's (MIL-Q-9858 / ISO-9000), through BWI Westinghouse, traveling around the country as a source (vendor) inspector examining main-frames computers to component level before it would ship to the next stage of manufacturing. Since then have been self employed with my C-Corporation, then seven years as a loan officer. Five years ago formed my own LLC helping homeowners in mortgage hardships.
Either W2 or 1099 Contractor, your going to need to show your tax returns for the last two years. It's all about how you list your personal income. Though when applying for a loan, the Lender will mostly require a professional profit n loss statement from an accountant.
You are going to need to include your monthly checking accounts (normally the last twelve months). Make sure the monthly checking deposits match your total gross income for the respective month to your profit n loss statement. On the profit n loss statement you minus the business expenses to show your net income. The net business income is what is looked at for your personal gross income.
I have been self-employed for many years - every thing I spend, try and relate as a business expense, like telephone, internet, auto expenses, even spending time discussion options with home owners concerning mortgages and not charge them. Then charging my corporation $20 an hour in billable time that becomes a tax write off.
Being able to write off your expenses, it is very easy to start looking for things that can be written off so you pay less taxes. To prevent an audit from IRS - as a Sole Proprietor, you need to show a profit in three years, as an Limited Liability Corporation need to show profit within seven years, as a S/C Corporation need to show a profit in 15 years.
Do not let your accountant steer you into forming a C or S Corporation, because you will be paying twice - first for a tax return on your business, then paying a second time for your personal tax return. I suggest forming an LLC, that why you can include your business with your personal income on one tax return. That way you are only paying your accountant once.
Word of advise for your future - for every year you do show a loss, you have nothing going into your social security for when you retire. Your should check by going to the social security .gov website, to see have much you are going to get when you retire.
Sorry I went over board, just sharing my ideas. If I knew the things I know today 20 years ago, I would be in a very different situation.
Modification Specialist, thank you for the very thorough response. I appreciate the insight from someone who has the knowledge!
Understood and can supply my W2s that show my previous 2yrs income which are with the company that provides my back office. They basically invoice the client (in my case the prime contractor), the contractor pays the invoice (NET 30), they take out their 5% service fee, business taxes that I am liable for, and process my payroll (with all the regular taxes as a normal W2 employee) and then it is direct deposited to my personal checking account.
It's a unique business model because I am able to submit my monthly expenses and deduction into their system to have applied to my monthly paychecks and also receive group health care, and legal protection. It has its advantages and benefits but unfortunately, the new contract will not allow this so I must go the 1099 route.
I feel that I can educate myself, handle the accounting, and keep that 5% fee that I've been paying this company. I have an appointment set for later in the week with a CPA to discuss the best way to structure myself; there are so many questions that I have for him. I am not sure if forming an LLC would be viable option in my situation because as I've stated before, under the new contract, there are to be no sub contractors. My uneducated thought is that if I were to form an LLC, checks would be made payable to the LLC and not me personally, so this would come off as a sub contracted company. I'm not sure if naming the LLC my own name would make any difference either.
Getting back to my original question and now that I've painted a clearer picture:
If I provide my previous 2yrs of tax returns, and clarify that my current employment situation is no different than it has been besides that I have cut out the back office company which processes my payroll, in your professional opinion, do you foresee any issues getting a loan?
If I provide my previous 2yrs of tax returns, and clarify that my current employment situation is no different than it has been besides that I have cut out the back office company which processes my payroll, in your professional opinion, do you foresee any issues getting a loan?
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