How tip income is reported can mean the difference between a credit turn down and a credit approval especially if your FICO scores are poor
Tip Income and Bad Credit
The skinny

People who depend on tips for much or all of their income often face a number of problems when applying for an auto loan.

This can be a problem especially for credit-challenged individuals and we're aware of this here at Auto Credit Express because we've spent the last two decades helping people like this get approved for car loans.

So here is what we've learned:

Tip income reporting

People who receive tips don't always accurately report this income on their tax returns. They don't do it because it saves them money on their taxes. But it can also prevent them from getting an auto loan if their credit is, shall we say, less than stellar.

Here are four things the IRS wants you to know about tip income:

1. Tips are taxable. Tips are subject to federal income, Social Security and Medicare taxes.

2. Include tips on your tax return. You must include in gross income all cash tips you receive directly from customers, tips added to credit cards, and your share of any tips you receive under a tip–splitting arrangement with fellow employees.

3. Report tips to your employer. If you receive $20 or more in tips in any one month, you should report all of your tips to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes.

4. Keep a running daily log of your tip income. You can use IRS Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tip income.

Proving income

With that being said, while traditional lenders usually don't verify income, this isn't true for those involved with high-risk borrowers. As far as they're concerned, if the income isn't listed on a W-2 or a professionally prepared tax return, there is no proof. This holds true even if there are supporting bank records that show the claimed income.

Income conditions

Non-prime lenders typically have minimum monthly income requirements. This income, along with all monthly bills, is used to compute a debt-to-income ratio and determine a car budget. This can affect people with tip income in two ways:

1. If the income reported on a tax return is too low, the loan application will not be approved.

2. If the income is sufficient but the monthly bills are too high when compared to the reported income (typically because the actual income is higher) the loan application will also not be approved.

The Bottom Line

If you have poor credit and receive tip income, the only solution is to report all of it on your tax return. If you don't, it could prevent you from getting an auto loan approval.

If you have been turned down for a conventional auto loan here at Auto Credit Express we'll help you find a dealer for your best chance at an auto loan that can help rebuild your car credit.

So if you're looking to get your auto credit on track, you can begin now by filling out our online auto loans application.