Self-Employed Income Calculator: Calculate Your Qualifying Income the Way Lenders Do
Self-employed income for loan purposes is your net profit plus allowable add-backs like depreciation, averaged over two years—and our free calculator computes it in seconds using the exact methodology lenders use.
According to the U.S. Bureau of Labor Statistics (2024), approximately 10 million Americans are classified as self-employed. Yet research from the Urban Institute shows the mortgage market fails to meet this segment's lending needs. The core problem: tax returns that minimize taxable income also minimize qualifying income.
Why Your Tax Return Income Doesn't Match Your Qualifying Income
Lenders don't use the income you report to the IRS. They use a recalculated figure that adds back non-cash expenses and adjusts for business sustainability.
"We require income information and documentation for all applicants, so in that respect, there's no difference for self-employed borrowers. The variation would be in the type of documentation involved with those who don't have a pay stub."
That documentation difference is significant. Where W-2 employees simply provide pay stubs, self-employed borrowers must submit two years of tax returns—and lenders recalculate income using specific rules outlined in Fannie Mae's Selling Guide and SBA underwriting standards.
The most common surprise: depreciation, depletion, and amortization are added back to your net profit because they're non-cash expenses that don't reduce your actual cash flow.
How Lenders Calculate Self-Employed Income (Step-by-Step)
The calculation methodology depends on your business structure. Here's what lenders actually do:
For Sole Proprietors (Schedule C)
- 1. Start with Line 31 (Net Profit or Loss)
- 2. Add back Line 13 (Depreciation)
- 3. Add back Line 12 (Depletion)
- 4. Add back Line 30 (Business Use of Home—depreciation portion only)
- 5. Add back amortization and casualty losses
- 6. Average over the most recent two years
For S-Corporation Owners (Form 1120S / K-1)
- 1. Start with W-2 wages from the S-Corp
- 2. Add your share of ordinary income from Schedule K-1, Box 1
- 3. Add back depreciation and amortization (based on ownership %)
- 4. Subtract mortgages/notes payable in less than one year
- 5. Verify business has adequate liquidity for distributions
For Partnership/LLC Members (Form 1065 / K-1)
- 1. Start with ordinary business income (K-1 Box 1)
- 2. Add guaranteed payments to partner (K-1 Box 4c)
- 3. Add net rental real estate income (K-1 Boxes 2-3)
- 4. Add back depreciation and depletion
- 5. Apply your ownership percentage
The Two-Year Averaging Rule
If your income increased year-over-year or stayed stable, lenders average both years.
If your most recent year is lower by more than 10%, they typically use only the lower (most recent) year—no averaging allowed.
What Can Be Added Back to Your Income?
Not all deductions hurt your qualifying income. According to Fannie Mae guidelines (Section B3-3.3-03), these non-cash expenses can be added back:
| Deduction Type | Can Add Back? | Why |
|---|---|---|
| Depreciation | Non-cash expense | |
| Depletion | Non-cash expense | |
| Amortization | Non-cash expense | |
| Business Use of Home (depreciation portion) | Non-cash expense | |
| Casualty Losses (non-recurring) | One-time event | |
| Vehicle Depreciation (via mileage) | Partial | Only if reported on Schedule C |
| Meals & Entertainment | Real business expense | |
| Utilities & Insurance | Real business expense | |
| Contractor Payments | Real business expense |
This is where many self-employed borrowers discover good news: aggressive depreciation deductions that lowered your tax bill can actually help your qualifying income.
Who Uses This Calculator?
Self-Employed Borrowers
- • Estimate qualifying income before applying for mortgages, SBA loans, or commercial financing
- • Understand why lenders calculate a different income than expected
- • Plan tax strategy to balance tax savings with borrowing power
Loan Officers & Brokers
- • Quickly pre-qualify self-employed applicants
- • Verify income calculations before submission
- • Explain the calculation methodology to borrowers
Real Estate Investors
- • Calculate qualifying income across multiple entities
- • Prepare for Personal Financial Statement (PFS) requirements
- • Plan acquisition financing around documented income
What Loan Types Accept Self-Employed Income?
Self-employed borrowers can qualify for virtually any loan program—the requirements are documentation-based, not exclusionary.
Conventional Mortgages (Fannie Mae/Freddie Mac)
- • Two years self-employment history required
- • Full tax returns with all schedules
- • Credit score typically 620+, DTI below 43%
FHA Loans
- • More flexible on credit (580+ with 3.5% down)
- • Two years self-employment or one year plus related experience
- • DTI ratios accepted up to 50% in some cases
SBA 7(a) and 504 Loans
- • Net income under $5 million (after taxes) required for eligibility
- • Tangible net worth under $15 million
- • Business must meet SBA size standards
Bank Statement Loans (Non-QM)
- • 12-24 months of bank statements instead of tax returns
- • Higher rates but qualifies on gross deposits
- • Good option when tax returns understate true income
According to the FDIC's 2024 Small Business Lending Survey, 76% of banks can approve a small business loan within five business days—but only if documentation is complete and income is clearly calculated upfront.
Common Mistakes That Reduce Your Qualifying Income
Mistake 1: Forgetting mileage depreciation
If you use the standard mileage rate, a portion is depreciation that can be added back—but it must appear on Schedule C Part IV, not just Form 4562.
Mistake 2: Counting declining income incorrectly
If year two is lower than year one, lenders use only the lower year. Don't assume they'll average.
Mistake 3: Mixing personal and business accounts
Lenders analyze cash flow from the business. Commingled funds create underwriting headaches.
Mistake 4: Missing the liquidity test
For S-Corp and Partnership income, lenders verify the business can actually distribute the earnings you're claiming. Low cash reserves can disqualify income that shows on your K-1.
Key Takeaways
- Lenders recalculate self-employed income using tax returns—not the net profit you reported, but an adjusted figure with depreciation and other non-cash expenses added back.
- The two-year average applies only when income is stable or increasing; declining income defaults to the lower recent year.
- According to BLS data, over 10 million Americans are self-employed, yet Urban Institute research shows this segment faces disproportionate barriers to mortgage access.
- This calculator uses the same methodology as Fannie Mae's Selling Guide and SBA underwriting standards.
- Knowing your qualifying income before you apply saves time, prevents surprises, and strengthens your negotiating position with lenders.
Calculate Your Qualifying Income Now
Stop guessing what lenders will see. Use the calculator above to determine your self-employed qualifying income in seconds—then generate a complete Personal Financial Statement with StatementsReady.
Frequently Asked Questions
About the Author
Garrett Pierson is the founder of StatementsReady and a commercial real estate professional with firsthand experience navigating lender documentation requirements. Having completed dozens of commercial transactions requiring Personal Financial Statements, he built StatementsReady to eliminate the hours of manual work that self-employed borrowers and investors face when applying for financing.