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
We have been in the bad credit car loan business long enough here at Auto Credit Express to realize that one of the most difficult approvals to receive is for credit challenged consumers who are waiters, waitresses, or anyone else that depends on tips for much of their earned income.
So before you fill out our online credit application to finance either a new or a newer pre-owned vehicle with a bad credit car loan, you need to make sure that you are reporting all your income to Uncle Sam. Because if you don't declare all or most of this income when you file your taxes, your only choice for a car may be a tote the note dealer – which could mean settling for an older car, higher interest rates and a greater chance at repossession.
Including tips in your income
It doesn't take a rocket scientist to see why one of the most difficult types of car loans to get approved would be for customers such as waiters or waitresses. 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 these folks money in the short term, but it could prevent them from getting a loan, especially if their FICO scores fall 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. 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. In addition to keeping these records, employees 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 second chance auto loan.
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 a professionally prepared 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 it isn't listed on your tax return, you don't have “proof” of this income.
Most second chance car loan lenders have minimum monthly income requirements. They use the “stated” W-2 income of an applicant to compute a debt-to-income ratio in order to come up with a budget for a car payment. This can affect individuals with tip income in two ways:
1. Most of these lenders have minimum monthly gross income requirements that range from $1,500 to $1,800. If you are a waitperson 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 this person would not qualify for a loan.
2. Even if the reported income meets the lender requirements, there is always the chance that monthly expenses are out of proportion to the stated income. As an example, let's say there is reported income of $2,000 per month that includes a base hourly wage plus reported tips. For the purposes of argument, let's say that the actual monthly income is $3,500 and there are also reasonable monthly expenses of $1800. In this case, even though the actual debt to income ratio would be acceptable to the lender, the difference between the reported income and actual expenses would not qualify this person for a bad credit auto loan.
As we see it
If you receive a significant amount of your income from tips, you should 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 lenders that originate bad credit car loans will not allow you to count it as income for lending purposes.
For more information on tip income, visit the tip income portion of the IRS website (requires Adobe Acrobat) 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, We Finance Everyone 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. Our credit application is encrypted so your personal information is secure, and you can fill it out in the comfort and security of your home.
So why not begin the process of rebuilding your credit by filling out our online car loan application here.