🧾 Calculating Self-Employed Income Using Tax Returns (2024/2025)

🧾 Learn how to calculate self-employed income for 2024/2025 using real tax returns. We break down Fannie Mae vs. Freddie Mac guidelines, review key documents, and show how lenders determine qualifying income step-by-step.
See how the same borrower can qualify differently—and how to structure stronger deals with confidence.

Join this stream to learn how top loan officers analyze real tax returns and structure self-employed deals with confidence.

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Transcript

Speaker 0:15

All right, welcome everyone to another episode of the loan officer training. My name is Nick Hiersche . I'm the president here at The Mortgage Calculator. It is the day after tax season, so great topic for today. All of our borrowers have filed, hopefully filed, their 2025 tax returns. So this will be helpful for our team members, our loan officers out there, as well as any borrowers that are curious how the income is calculated. We're going to actually go through a live demo here. So a couple of disclaimers. Of course, this is not a real borrower, this is a real tax return. Let's go. I'm going to use a demo from one of the political candidates that has to disclose their tax return. So fortunately, we have some real data to use. A great example, but I have redacted any names. If you do see a name, it is not important. They are not our client. And this is just for demo purposes. Let's go ahead and get into it. Let me try to make my screen bigger here. That way we can focus in on what we need. So a couple of things to look at here. So over here on the left, I have our tax return that we're going to use. And over here on the right, maybe I could zoom in a touch. Let me try to zoom both in a touch. We have our income calculator. So our partners at Enact Mortgage Insurance offer this great tool for us. But it is a standard tool. We're just applying the Fannie Mae cash flow analysis. This is also known as the Fannie Mae 1084 form, which is what all of the lenders that participate in the Fannie Mae conventional programs will use to calculate the income. So here it is pretty standard. There's tons of different versions of this form. What's important is we grab these key items that you'll see here that we take from the actual tax returns. Another couple things to consider here, disclaimers, make sure you read the notes. I love that our partners use these notes and give us some great details. I'll explain that as we go. So I don't think we'll have time today to go through the 2025, uh 2024. I want to go through 2025 since that's the new one. But if we have 2024, we want to make sure we do the two-year average. Remember, we can only use a one-year return if our DU says we can use one year return and if the borrower is self-employed for five years. But in this case, let's start going through the return. So we have a return here. Here are just some general statements uh from their tax preparer here, their 2026 estimator. Uh so this is all typical for a tax return. You'll see a bunch of stuff. What we're looking for here is the 1040, uh, the form 1040 for the US tax return. This is the 2025 version. It does change a little bit from year to year, uh, not too much. Uh, but uh, this is why we do this demo, just in case there are some variations. Uh so you here see here we've redacted everything, it doesn't matter uh who it is for. Um, what's important is we go through a demo and see what info we type in what box. Let me use the highlighter function here. That way you guys can see where my mouse is. Okay, so first thing here, uh, we see we have uh W2 uh income here. Uh however, notice our form here, our Fannie Mae cash flow analysis for the self-employed borrower. Uh we're only going to use W2 from self-employment. So I know it's kind of hard to see. Yeah, we can zoom in a touch more. There we go. So W2 come from self-employment is what we're looking for here. We can't just grab the box one unless we know it's from self-employment. So in order to determine that, we would need to look a little deeper. Uh, that is basically uh it from the first uh page of this item. If we want to add uh schedule B income, we're gonna have to get to the schedule B. If we want to add schedule C income, we're gonna have to get to the Schedule C and Schedule D, Schedule E, Schedule F, and so on and so forth. Uh once we get down towards here, this is where we use a 1065 for a partnership. So that's a LLC. Typically has a 1065 partnership return. Another common form is the IRS 1120S for an S corporation. So once we get down here, we'll need those returns. And if we have a regular corporation, we'll use the form 1120 here. So these are all the uh big ticket items, the big categories here as we go down this form. Uh but what's important to note is we can't add this W 2 income in line one unless we know that it's from our self-employed borrower. So we're gonna scroll through the return. This is schedule one, that is not needed for any of these calculations, so we can go through that. Schedule two is also not needed, so we can scroll through that. Schedule three is not needed, so we can scroll through that. But here we have Schedule C, profit and loss from business, sole proprietorship. So this is exactly what we're looking for here when we're looking for this schedule C section section here, and this is where we can actually start to calculate income because this is our self-employed borrowers' income. So it looks like uh one or more of the borrowers in this uh loan is self-employed. Another couple key things here is uh if this is a new business, you'll see here, so that's something you can look at when you're analyzing these returns. Um other than that, this is pretty standard here. So let's go through the form and see what items we pick up. So the first item we're looking for in our calculator is line 31, net profit or loss from self-employment. So when we scroll through here, we see line 31, 41, 493. So we simply type that in the box. Now we're gonna have to look for non-recurring other income on line six. So we see line six here is empty. Don't let me highlight it very well. You see, there's nothing here for line six, so we can put a zero there. Depletion, line 12. These are the some of the things we can add back. Uh so line 12 is going to be here for depletion. You can see there's nothing here for depletion, so we can put zero depreciation, another big add back. So we can actually add this back and capture this depreciation. It is an accounting loss. Many people do have line 13, uh, but these customers or potential customers do not. So we put a zero. Line 24B, non-deductible meals and entertainment. Uh, so that is listed here. You see 24 line B, and you see we have 175. And one of the final items here on this first page, business use of home, line 30. Uh, you do need to check applicable guidelines, it says, but you see here, line 30 has zero in this case, so we could put zero, and this next part amortization or casualty loss, we can only add back amortization or casualty loss, and it's gonna be on schedule C, part uh page two, part V. So in this case, we need to go to the next page. So we scroll down here. This is our schedule C part two, and uh, I mean page two, and this is part B, part five here. And so in this case, we're looking for the words amortization or casualty loss. If you don't have those words, you typically can't capture it. Uh, so a lot of uh newer MLOs will make the mistake of just adding back everything in part uh uh B, uh part five, but we cannot, none of these actually say what we need it to say, which is going to be uh amortization or casualty loss. So in this case we have no addbacks from that category. Now the final thing on this form that we need is going to be on page two, part four, line 44a, or if we do have a 45 uh 62, which we'll look for at the end of this form, uh that could be where we have some depreciation where we need to capture a pack. In this case, we do have some. So remember this is part uh four, and we're looking for 44a, 44a. So this tells us the business miles that were claimed here. So we have 1,207 business miles that were claimed on the return, which we can add back because that is a depreciation expense. So you see here uh the calculation changes per year. So the 2024 return, we can use a 0.3, 2025, we can use 0.33. So this is where uh little variation on the form that we just have to pay attention to. So in this case, pretty simple, we just calculated the self-employed borrower income for this uh borrower for this. Uh it looks like they do real estate uh property management. So for the property management, we have 41,000 for the year of 2025 that we can use for self-employed borrower income. Now let's go through the rest of this form and see if we can capture any other items that may be used. Uh, one thing to note here uh wages, uh $12,000. So if there were W-2 income from self-employment, this would be the maximum amount that we would see from here, but we still would need to see it that it belongs to our borrower and it's from the self-employed activity because we would need to add it to the income. So let's cruise down here, let's see if we find any other forms we need to add. Schedule D. So schedule D is capital gains and losses, but remember this is only from self-employment. So we can always use this uh if our borrower qualifies, uh, doesn't need to be from self-employment, but in this case, we're trying to add any self-employment uh activity. Uh so in this case, if we're going to capture any of the capital gains, in this case, they have some losses. Uh, we need to show us from self-employed income. So in this case, I don't believe there is activity from there. So let's continue. Now we have the schedule E. So schedule E is a very important schedule here. Uh, this will tell us a lot of details. Uh, this is these this uh first page is for real estate. Uh the second page is where we have some other royalty info. So uh this is where we have real estate listed. Uh, you see here uh they've redacted the actual properties, but you can see we have two properties. We have property A and property B. They're both single family residences, and you can see the fair rental days, they've rented out both properties here for 365 days. So if we want to use this income, we do need to calculate this income, and we'll need to do that on the actual rental income form. So I want to do that real quick as well. So I did pull up that for our demo borrower. We scroll in. So property one, we don't know which one it is, we're just gonna call it A and B because that's all we have on this redacted return. Uh but let's go through and add this income, especially if this is for our borrower who mines uh that they do this is income we're gonna want to capture as well. Uh so you see here we have gross rents, which is line three, which is going to correspond to line three right here. So for property A, we have 2784. For property B, we have 23, oh, five, six. Now we need to add in all the expenses. So line 20. So come back down here, line 20. And we need to add these back for each property. So property A has 23326. And property B has 33, 223. Now we can add back depreciation. So since this is a counting figure, it's not a real figure, uh, we can actually add this back. So that's line 18. So this is a great feature for any of our uh borrowers that own rental properties because many of our accountants do a lot of depreciation, which we can add back and reduce uh what would appear to be losses on paper here. Both of these properties appear to have lost money, but with some of these addbacks, sometimes we can actually uh show a profit here. Uh so for property number two, the appreciation is eight, seven, three, nine. And just like the other uh one, uh, this is a hard one. So amortization, casualty loss, non-recurring expenses in item 19. Uh so this one takes explanation. So you can't just add this back if there's something in this box, it needs an explanation, needs to be one of these categories. Uh, thankfully, they didn't use it on this, so it makes it a nice easy demo. So we'll put zero and zero. Uh, we can also add back uh insurance if it's escrowed. So there's some notes here too. I believe it says uh uh make sure they're escrowed. Uh but if it's uh escrowed already on the mortgage payment, we would need to add back uh the insurance and taxes. So in this case, uh line nine is insurance, which is twenty-nine oh seven for property A. And for property B it is six twenty-two. And mortgage interest line twelve, another big ticket item uh that we get can add back here. So property one is line two nine. Property B property three six zero. And uh taxes is line sixteen. So property A property two, property bine four two five. And HOA if applicable, because we're gonna already hit them uh for the HOA on our actual loan application. Uh so we don't want to double charge them. So if we're already charging them the HOA, we want to add that back if applicable. Uh in this case, uh it doesn't have that. Usually it's listed under other. Now let's put uh the factor in here. So now that we have the total, let me put zero, I guess, in HOA, just everybody sees. Now we have our total income. So it looks like we actually have uh actually 19,000 in income once we take off all those non-uhre uh paper losses there. Uh so we need to divide by the number of months. So remember that we found the uh fair rental days here of 365, so that means it was a full 12 months. So if we own the property less than 12 months, uh we can uh get a little benefit there by putting in the proper number. But for both of these, let's add 12 months, and then we can simply click the button here to have the form calculate. And you see on our 1003, our customer is going to be able to offset any mortgage and expenses here with 1589.50 in this case and 668.25 on property B. So the same thing we would do for 2024, we need to fill that out to compare those two years. Now let's keep going. We have self-employment tax. So that does show us also if the self-employed borrower has a W2. We have some education credits, none of these are applicable to our form. Let's keep scrolling down. Here's uh income deductions, these are the different forms. None of these are forms that we need to worry about. Uh, this is one that we did mention earlier, so this is uh the depreciation form. So this is for schedule E number one, so this is for our rental property. Oh, but we already captured that here, so that just tells us how we calculated that number. You see here that's where we got this number. Uh, we see another depreciation calculator, another 4562 for schedule E property number two, and again, you just see that's where they calculated uh that second figure here. And that is it for those depreciation forms. We already captured those, so we're good to go. Uh, this is not a form we need to look at. This is the end. So these are just all the schedules. Uh, so many times you'll have some schedules here if you need to uh review the schedules of different uh items. These are just the schedules that go along with the form. So let's show the worksheets of what was completed. But we already have everything here, so I could keep scrolling down. But you get all these worksheets are not necessarily needed. So uh we have everything here uh for our rental properties to type in, and we did not have any self-employed capital gains, we did not have any self-employed royalties uh received, and we did not have a schedule F which is farming. So, since none of those are needed, uh we also did not have a 1065 or an 1120S or an 1120 for this borrower. Therefore, we're at the end here. We can type in 12 months for our self-employed income, and we have this figure for our borrower that has self-employed income. Uh, remember they had a combined income uh with a W 2, so we can obviously add the W 2 borrower as their full W 2, but for our self-employed borrower that's on the Schedule C, we need to use this figure here uh for if we get uh the one-year findings. Once we add in 2024, then we can get the two-year average and compare those. And same thing with the rental income. So we did the rental income analysis. So once we set up the borrower here, you can see that we were able to add back some items and get this as our income figure. If we knew the monthly mortgage payment, we could put that here and get a net rental income or loss figure, which would obviously affect our qualification, but at least we were able to add back those paper loss items. Uh, so this is a quick demo just using an example 2025 return. Uh, it is a pretty complicated return. Uh, hopefully we can uh come back later and find uh 2025 1120, a 2025 1120s, and a 2025 1065, and uh we'll do some additional calculations uh which are uh pretty much the same. You just have to follow the same formula, but we need those returns in order to find line one and line 19 to type in this box. We actually need to see the actual 1065 return. It'll be referenced on the borrower's individual return, but it will not uh be actually attached. It is a full separate return when it is a full separate business. So that was a great example for our Schedule C borrowers where it's reported right on the 1040, super easy to calculate. Uh, we have everything we need already. Uh, when we have borrowers that have those uh 1065s or 1120s or 1120s, we actually need a full copy of those. So a little bit more difficult uh to get through, but we can definitely do it. So hopefully that helps our borrowers out there looking at how we calculate the self employed income and the 2025 version of the tax returns, pretty much the same and uh pretty easy to calculate. So thanks everybody for tuning in. We'll be back later with another loan officer training. Don't forget to answer.