When you work as a tipped employee, sometimes you make a lot of money one week and next to nothing on the following week. With this type of ebb and flow, it may be hard for you to report all of your tip income.
Tips are considered taxable. While it may be difficult to report all of your income, keep in mind that failing to accurately report taxable earnings to the IRS is illegal. Not only that, it can lead to problems when you need to apply for financing.
Subprime auto lenders rely as much on your income as your credit score in order to approve you for a loan. This is why if you have damaged credit and are in a line of work where the majority of your income is reliant on tips, accurate income reporting on your tax return is very important.
Under Reporting Tip Income & Getting Paid Under the Table
Under reporting your tip income on your 1040 form in order to increase take home pay will skew your debt to income ratio. For example, if you are paying $1,000 for rent and only reporting an annual income on your 1040 that shows that you bring in $1,500 per month, there is no way that a lender will approve you for a car loan. If the income cannot be proven with a tax return, then, in the eyes of the lender, it doesn't exist.
If you get paid under the table, you will run into these issues as well if you are under reporting your earnings. In both cases, this may leave you with only one option: to buy a very cheap and unreliable car from a private seller.
How to Improve Your Situation
- If you are having difficulty keeping track of your actual earnings, you can use IRS Publication 1244, Employee's Daily Record of Tips and Report to keep an accurate record of earnings.
- Try to budget as best as you can. We know that it may be hard to plan ahead, but it will help you not only live within your means, but also stay on time with upcoming bill payments.
For a more extensive look on how accurate tax reporting can benefit you, refer to "Tips on Tips: A Guide to Income Reporting," available on the IRS website.
If you are having trouble getting approved for a car loan because of your financial situation, Drivers Lane can help. We have a nationwide network of dealers that specialize in helping car buyers with less than stellar credit get financed. All you need to do to get started is complete the free, secure and easy online application. Get back on the road today.