How Self Employment is defined for international investors
By Milo • 7/29/2021
When international investors are purchasing U.S. real estate, they’ll need to be clear about the different categories of income that’s reviewed during the transaction process.
If you buy your home with a mortgage loan, you will need to prepare your documents to apply for financing. Your various income streams will be evaluated at this stage to determine your overall financial standing and, therefore, borrowing potential.
Since the distinction between income generated from self-employment and employment may differ between countries, foreign clients will want to be aware of how their income will be considered when buying an investment property in the U.S.
To help you prepare for your U.S. property investment, let’s review self-employed income, as well as what is and is not officially considered self-employed income in the United States.
What Is Self Employment Income?
In the United States, the difference between self-employment income and employment income is designated by the IRS. Self-employment is technically considered any business activity that is pursued by an individual, where the primary goal is to generate a profit. Self-employment income is any money earned through a trade or business carried out by a sole proprietor, independent contractor, or some form of partnership.
Self-employment is not necessarily determined by the location you work in. For example, you can be self-employed as an independent contractor for a company even if you work in the office. On the other hand, you can be a remote employee contracted to a company in which your income would be filed with a W-2 tax form and considered employment income in the U.S. In these situations, the income would be filed through a 1099-MISC tax form and considered self-employment income.
At this stage, the lender reviews the financial information and runs a quick credit check. However, the lender does not check the accuracy of the information claimed by the borrower on their application.
According to the IRS, employers are given tasks with completion dates by employers. An independent contractor is either fully self-operational, being their own boss, or has flexibility in how, when, and what they work on. Self-employed individuals may be paid hourly or based on project fees.
Examples of Self Employed Income
Here are some examples of what can be considered self-employed income in the U.S.
If you work for a larger company or corporation as an independent contractor, you must claim your income as self-employed. Since the distinguishing characteristics of an independent contractor may vary between countries, here are two tips to keep in mind:
#1. Independent contractors typically do not get taxes taken out of their paychecks by their employers.
#2. Independent contractors typically do not gain access to benefits, such as retirement or healthcare.
If you own real estate and rent it out for profits, you can claim that income as self-employment income. This would technically be considered property income, whether the home is rented out as a short-term vacation rental or through traditional year-long leases. If the lender has a different option for qualifying with property income, this income stream would be filed.
Investment income generated from sources other than real estate properties can typically be considered self-employed income, but speak with your financial advisor about the details.
Small Business Income
Suppose you run and operate a small business, either as the sole proprietor or as a group of partners owning an LLC. In that case, the income generated will be considered self-employed income.
What Does Not Count as Self Employed Income
These are examples of things that cannot be claimed as self-employment income in the U.S.
Earnings from a U.S. Company
Earnings from work done under a U.S. company cannot be considered as self-employment income. This money would be classified as employment income when you are preparing to buy a home in the U.S.
However, having an LLC used to receive rental income from U.S. property can be counted as self-employment income if the investor purchasing the investment property is the owner of the LLC.
Income Gained from a Source Considered a Hobby by the IRS
Finally, some income streams that cannot be filed as self-employment income even if they are not involved with a company. This is the case if the income stream is considered a hobby by the IRS, which is anything pursued for reasons outside of generating profits. If you are doing something that does generate income, but the main purpose for doing so is personal motives, it would be considered a hobby.
Speak With Your Financial Advisor For More Help
International buyers will want to speak with a trusted financial advisor regarding their income streams. Understanding how your income will be classified in the U.S. when purchasing a real estate investment property will prepare you to finance the transaction on personal or business income. If you have specific questions about how your income is considered in the U.S, talking to a professional can give you the answers you need.
Consider a Loan with Milo
When you are ready to start working with your mortgage loan, get in touch with your friends in the mortgage industry, Milo. While we cannot provide help or advice on taxes and income filing, we can help you finance your U.S. property purchase with a mortgage.
Milo understands international clients and their income revenues. We will work with you to find the best way to qualify your income to prepare for your U.S. property investment. When it’s time to get pre-approved, borrowers working with Milo will be able to choose the correct income qualification option. Milo leverages cutting-edge digital technologies to qualify borrowers for their best loans.
Our easy application process is fully online, meaning it can be pursued at your convenience. If you’re ready to get pre-approved, click here.