BUYING A HOME WHEN YOU’RE SELF-EMPLOYED is a whole different ballgame, and one for which you need to prepare in advance. Without a W2, it can be a little more complicated to show income effectively. I’m setting out a few tips to help you get on the right track.
1. Never comingle money. Keep all business and personal expenses separate. Dedicate a checking account for all business income, from which you pay any and all business expenses. This should include your wages, which need to be deposited into a separate and private account. Don’t ever conflate the two; it can be easy to “expense” a lunch here or there, but strict discipline will prevent a sticky conversation with an IRS representative should you be audited.
2. Monthly reconciliation. Never skip a reconciliation—if possible, hire a bookkeeper with an accounting background to handle your reconciliation monthly. This will help you identify any accounting inconsistencies that might occur within the same business period, and also help you keep an eye on your monthly sales numbers so you know how your business stands financially. Hire an accountant to handle your quarterly and yearly reviews/filings.
3. Develop a system for receipts/invoices. The IRS, your accountant, and bank do not need copies; you only need them in the event of an audit. Regularly scanning your receipts and invoices and using a cloud backup system will help keep you organized, as well as keep all your documents in one easily accessible place should you be audited.
4. Consider your write-offs carefully. I frequently get calls from people filing a 1099 who write off a large chunk of their business income as expenses. While this does lower your taxable income considerably, this will also directly affect your ability to get a loan. At some point a bank wants to see a profit on your Schedule C, and your underwriter will be verifying your IRS transcript to verify self-employment income and how much is reported after itemized expenses.
For example, if you have reported $60,000 in business income but write off $40,000 in business expenses, when applying for a loan they will look not at the gross but at your taxable income, which would be $20,000.
5. Pay quarterly taxes. It’s extremely important to prepare a Schedule C and a 1099 for the IRS; many self-employed people discover during tax season that they haven’t saved enough to cover their taxes for the previous year. By paying quarterly you can avoid a large balance due in April and possible penalties.
6. Tell your tax preparer. If you are looking to buy a home, let whomever prepares your taxes know. They should be able to offer some good tips and advice on how to plan and budget for your upcoming home purchase.
Buying a home when you're self-employed can seem tricky, but it doesn't have to be difficult. Good business practices never hurt in any situation, but especially when you are looking to purchase a home!
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