Non Employee Income Problems with Poor Creditby Steve Cypher on Friday, December 14th, 2012
If all or even just a part of an applicant’s income is not shown on a W-2 wage and income statement, this can negatively affect their loan application if their FICO scores fall into the high-risk category.
Here at Auto Credit Express we understand why this can happen because we’ve spent the past two decades helping with car buyers with credit problems find new car dealers that can give them their best opportunity for approved car loans.
During this time, we’ve also seen what can happen when employers who try to avoid paying payroll taxes pay their employees either in cash or with a personal or business check that doesn’t reflect any payroll tax deductions. So if you think you fall into this category we suggest you read on about today’s topic: how receiving income in this way can result in a rejection of credit even from subprime auto lenders and why, if you really are an employee, you should insist on being paid as one.
Unlike regular employees that receive a W-2 wage statement at the end of the year, independent contractors don’t have payroll taxes taken out of their checks. Instead, these employees receive a Form 1099 from their employers.
But just because you receive one of these Form 1099s doesn’t mean you should be. In fact, the IRS looks at three things to determine whether a person qualifies as an employee or is actually an independent contractor:
Behavioral control – if you receive extensive instructions on how, when or where to do the work, what tools or equipment to use, what assistants to hire to help with the work or where to purchase supplies and services, you are usually considered an employee. If not, you could be an independent contractor. Extensive training on how to perform the work also might suggest that you are an employee.
Financial control - If you have a significant investment in your work, if you are not reimbursed for some or all business expenses, or if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.
Relationship of the parties – If you receive benefits, such as insurance, pension, or paid leave, this is an indication that you may be an employee. If you do not you could be either an employee or an independent contractor. A written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine your status.
In our experience
The fact is, in a number of situations that we’ve come across where an employee is paid with a check that doesn’t have any taxes taken out, it isn’t because the employee actually is an independent contractor. In some cases the employer is actually doing this to avoid paying their portion of employment taxes. In some extreme cases that involve being paid “under the table”, the employer, to avoid suspicion from the IRS, doesn’t even issue the employee a Form 1099.
And while doing this can save money by avoiding paying taxes on it for both the employee and the employer, it’s against the law and it could affect the employee’s future social security benefits.
Worse yet from the standpoint of financing a car, if the employee has bad credit and doesn’t report all of his or her income on a tax return it could result in a credit denial for an auto loan from a poor credit lender.
Remember that if you are an independent contractor, it’s equally important, for those very same reasons, that you report all your income at tax time, even if you don’t receive a 1099.
What to do
If these guidelines indicate you are an employee but you aren’t being paid as one, you should contact both the Internal Revenue Service and your state’s employment relations board to make them aware of the situation.
The Bottom Line
If you have credit problems and you’re an employee, it’s important that you make sure your wages get reported on a W-2. If you’re an independent contractor it’s equally important that you insist on receiving a Form 1099 and correctly report your income and expenses. Doing so will give you your best opportunity for an auto loan approval.
Another important thing to know: Auto Credit Express specializes in matching consumers with poor auto credit with new car dealers that can offer them their best chance for car loan approvals.
So if you’re ready to reestablish your car credit, you can begin now by filling out our online car loans application.