Consumer Car Buying Advice Blog

When it comes to financing a car with a FICO score below 640, you need to make sure that you are reporting all your income to Uncle Sam, especially if you happen to be a waiter or a waitress.

Tips as part of your income

Here at Auto Credit Express, we know that one of the most difficult types of car loans to get approved is for customers that are waiters or waitresses. Due to the nature of the business, this income isn’t always reported on tax returns. This might save you money in the short term, but it could prevent you from getting a loan. Here is why…

Tip income and the IRS

Many wait staff employees report only a portion of their tip income on their tax returns. This practice has been going on for years and for many waiters and waitresses, it is a way to avoid paying income tax on a portion of their income. The IRS is very clear when it comes to the reporting of tip income. If you receive tips, here is what you have to do:

1. Keep a daily record of tips.
2. Report these tips to your employer.
3. Report all tips on your income tax return.

This means that if you receive a tip, it needs to be reported as income. Tips that are received using a credit card are usually added to your yearly W-2 (wage and tax statement) by your employer. Tips that you receive in cash are harder to track and it is the waitperson’s responsibility to report this income to their employer. The IRS has a form that can be filled out on a daily basis to keep track of tips. It is the responsibility of the employee to not only report this amount, but to pay taxes out of this amount to the employer. Many waiters and waitresses ignore this and think that they are saving money on taxes by ignoring this income. While this may decrease the amount of income tax that you pay, it can make it very difficult to buy a car – especially with a bad credit car loan.

Proof of Income

While traditional lenders usually don’t require proof of income, this isn’t the case with bad credit lenders. If your total income is not listed on a W-2 or on your tax return, it just isn’t there. Even if you have bank records that support this additional income with daily or weekly deposits, if it isn’t listed on your tax return, you don’t have “proof” of your income.

Minimum Income Requirements

Most subprime lenders have a minimum monthly income requirement. They also use your stated income to compute your monthly debts in order to come up with a budget for your car payment. This could affect you in two ways:

1.    Most subprime lenders have minimum monthly income requirements that range from $1,500 to $1,800. If you are a wait person and your base wage is $3.00 per hour, this computes out to $516 gross income per month (based on a 40 hour work week). Even if the employer reports tips of $175 per week (based on credit card sales), this still only adds an additional $753 per month. This means that the total reported gross monthly income is $1269. In this case, the gross monthly income is too low and you would not qualify for a loan.

2.    Even if your reported income meets the lender requirements, you may have monthly expenses that are out of proportion to your income. As an example, you report income of $2,000 per month including your base hourly wage and your reported tips. Your actual monthly income is $3,500 and you have monthly expenses of $1800. Even though your debt to income (actual) is fine, the difference between your reported income and actual expenses would not qualify you for a loan.

The Bottom Line

If you receive a significant amount of your income from tips, you need to report this income to your employer. This situation is even more critical if you need to purchase a car with a bad credit car loan. If your income is not reported on a W-2, or you don’t show all of it on your income tax form, the banks that do subprime loans will not allow you to count it as income for lending purposes.

For more information on tip income, visit the IRS website at: http://www.irs.gov/pub/irs-pdf/p531.pdf. For more information on bad credit car loans, visit www.autocreditexpress.com.

Tags: bad credit car loans, fico, Fico Score, tip income

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