Consumer Car Buying Advice Blog

People with bad credit that depend on tips for much of their income need to be particularly careful that they report it otherwise they might not qualify for a bad credit auto loan

Who we are

In yesterday’s article, we discussed bad credit car loans and self employment income. But before we go over today’s topic on tip income, we want you to know that if you have bad credit and you’re serious about reestablishing your car credit and raising your credit scores, we want to help you. When you fill out our online bad credit auto loan application, we’ll send it to a dealer in our nationwide network that can help you get this type of loan. This will not only reestablish your auto credit, it can also help raise your FICO scores.

Tip income

In addition to self employment income, it is often difficult for credit challenged consumers who are waiters, waitresses, and anyone else that depends on tips for much of their earned income to receive an approval for car loans with bad credit.

This means that prior to filling out the credit application; if you are someone who is dependent on tips for a quarter or more of your earned income you need to make sure the yearly income you report, on a monthly basis and minus your regularly monthly bills, qualifies you for a car loan. Because if you don’t declare all or most of this additional tip income when you file your taxes, your only choice for a car may be a tote the note dealer – which usually means settling for an older car, higher interest rates and a greater chance at repossession.

Including tips in your income

We’ve seen it hundreds of times: Due to the nature of the business and the lax rules for reporting tips, this income isn’t always reported on tax returns. In truth, this practice might save you money in the short term, but it could prevent you from getting a loan, especially if your credit score falls below 640.

The IRS and tip income

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. Especially if you have bad credit, this may save you money in the short term, but it could end up costing you many times what you saved in the long term. But first, let’s look at the rules:

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.

Strictly speaking, 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, as the waitperson, bellhop, taxi driver or parking valet, it is your responsibility to report this income to your employer.

The IRS even has a form that can be filled out on a daily basis to keep track of tips. In addition to keeping these records, as an employee you are required to not only report this amount, but to pay taxes out of these funds to the employer. Many waiters and waitresses ignore this and think that they are saving money on taxes by failing to report this income. While this may decrease the amount of income tax that they pay, it can make it very difficult to buy a car – especially with a bad credit car loan. Here’s why:

Proof of Income

While traditional lenders usually don’t require proof of income, this isn’t the case with bad credit car loan banks and lenders. If your total income is not listed on a W-2 or on your tax return, it might as well not be there. Even if you have bank records that support this additional income with daily or weekly deposits, if this income isn’t listed on your tax return, according to the lenders you have no “proof” that you earned this income. In many cases, this poses a problem for bad credit auto loan applicants.

Income Requirements

Most subprime lenders have a minimum monthly income requirement. They use this “stated” income and compare it to monthly bills in order to compute a debt-to-income ratio and come up with a budget for a car payment. This can affect individuals with tip income in two ways:

1.    Most subprime lenders have minimum monthly income requirements that range from $1,500 to $1,800. As an example, if your base wage is $3.00 per hour, this computes out to $516 gross income per month (based on a 40 hour work week and 4.3 weeks per month). Even if your employer reports tips of $175 per week (based on credit card sales), this still only adds an additional $753 per month to your gross income. If you add the two together, your total reported gross monthly income is $1269. In this case, the reported income is too low and you would not qualify for a loan.

2.    Even if your reported income meets the lender requirements, there is always the chance that your monthly expenses are out of proportion to your reported income. As an example, let’s say you report an income of $2,000 per month that includes a base hourly wage plus your reported tips. For the purposes of argument, let’s say your actual monthly income is really $3,500. With this level of income, you could expect to have reasonable monthly expenses of $1400. In this case, even though the actual debt to income ratio would be more than acceptable to the lender, the difference between your reported income and your actual expenses would not qualify you for a bad credit auto loan.

As we see it

Especially if you have bad credit, if you receive a significant amount of your income from tips, you need to report this income to your employer. If your actual income is not reported on a W-2 and you’re not reporting or underreporting the rest of it on your income tax form, you could be creating a problem for yourself. This is because lenders that originate bad credit car loans will only allow count your reported income as your actual income for lending purposes.

As is the case with self employed individuals, this means that if your income tax return is not showing sufficient income, or if your monthly debts are not sufficiently offset by enough monthly income, the lenders that originate bad credit car loans will not approve your credit application.

For more information on tip income, visit the tip income portion of the IRS website at: http://www.irs.gov/pub/irs-pdf/p531.pdf

For more information on bad credit auto loans and before you buy a car from a local tote the note car dealer, consider applying for a bad credit auto loan from Auto Credit Express, a leading national car buying service for people with bad credit.

So if you are serious about reestablishing your car credit, you can begin the process by filling out our online bad credit car loan application now.

Tags: auto credit, Bad Credit, car credit, credit, credit score, fico, FICO score, income, income tax, irs, repossession, tip income, tote the note

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