When using 1099 income to qualify for a mortgage… 1099 income refers to income earned by an individual or business entity that is paid in the form of a 1099-MISC or 1099-NEC tax form.

These forms are typically used for reporting various types of income other than salaries, wages, and tips. Examples of income reported on Form 1099 include freelance work, independent contractor earnings, rental income, royalties, and miscellaneous income.

When someone earns 1099 income, they are not considered employees of the payer and are instead considered self-employed. This means that taxes are not withheld from their payments, and they are responsible for reporting and paying taxes on this income themselves, usually through quarterly estimated tax payments to the IRS.

There’s a bit of a misconception here: there’s no such thing as a “1099 employee.” The term “1099 employee” is a misnomer.

Employees are typically classified as either W-2 employees or independent contractors (1099 workers).

• W-2 employees are individuals who are hired by an employer and receive a Form W-2 at the end of the year. Their employer withholds taxes from their paycheck, pays employer taxes, and provides benefits.
• Independent contractors, on the other hand, are individuals who are self-employed and receive payments from clients or businesses. They receive Form 1099-MISC or 1099-NEC to report their income. Independent contractors are responsible for paying their own taxes and typically do not receive benefits from the client or business they work for.

So, to clarify, there’s no such thing as a “1099 employee.” It’s either a W-2 employee or an independent contractor.

Using 1099’s as income including the year to date income made as a 1099 contractor can be used in two different products with less than two years on the job.

You have a Freddie Mac version of the program and Flagstar also has the option in our Non-QM (ADV) Advantage Plus program.

Today, I want to explain the differences and the similarities between the two.

In both cases, this product’s design is intended for borrowers who work for a single employer with low overhead and expenses that just happen to be paid 1099 vs W2.

THE DIFFERENCES

FREDDIE AND ADV – Two years 1099’s plus year to date preferred. Option for one full year of 1099 plus YTD ok if transitioned from W2 to 1099 with the same employer or was W2 in the same line of work.

ADV – Allows for less than one year if transitioned from W2 to 1099 with the same employer and employer states the borrower will not have any out-of-pocket expenses.

FREDDIE – YTD stub or reliable 3rd party statements like YTD earnings statements or proof of payments received but must show YTD earnings. Most recent one year’s tax returns plus schedules. Copies of 1099’s.

ADV – YTD stub covering at least 30 days or most recent three months bank statements showing deposits. 1099’s, 1099 or 1040 transcripts.

FREDDIE – Income must not be from self-employment (1099’d by someone), total expenses on Sch C must be <=5%, cost of goods sold must = $0.00 on Sch C.

ADV – Employer must state the borrower has no job-related expenses. IF this is not attained, reduce income by 10%. Can have multiple 1099’s if in an industry where this is the norm. (Medical, entertainment etc.). This means the employer has multiple 1099’s they send. Not the borrower works for multiple employers.

FREDDIE AND ADV – You calculate the income like you would calculate a W2 employee except the gross income is reduced by the % of actual expenses averaged for Freddie and either 0% or 10% with advantage depending on what you can get from the employer.