How do lenders calculate income for self-employed borrowers?

Conventional lenders average your last 2 years of Schedule C net income from your 1040 tax returns — after all business deductions. They do not use bank statements or gross revenue. This often results in a qualifying income far below your actual earnings.

What is a Non-QM loan and is it right for self-employed borrowers?

A Non-QM (Non-Qualified Mortgage) bank statement loan qualifies you based on 12-24 months of average monthly bank deposits rather than your tax returns. This is ideal for self-employed borrowers who write off large business expenses. The tradeoff is a slightly higher interest rate (typically 0.5-2% above conventional rates).

Why do my tax deductions hurt my mortgage application?

Lenders use your Schedule C net income — the number after all your business write-offs. The same deductions that reduce your tax bill also reduce the income figure lenders use to calculate how much you can borrow. A freelancer making $200K gross with $120K in deductions appears to earn only $80K to a conventional lender.

SEP IRA vs Solo 401(k): Which One Should You Open?

One of the real advantages of working for yourself: the retirement accounts available to you are significantly better than what most employers offer. The contribution limits are higher. The tax savings are larger. And you are in control.

Two accounts come up constantly for self-employed people: the SEP IRA and the Solo 401(k). Both are excellent. They are not identical. Here is how to think through which one fits.

SEP IRA: the simple one

SEP stands for Simplified Employee Pension. The name is accurate. It is straightforward to set up (open at any major brokerage in about 15 minutes) and requires almost no ongoing administration.

Contribution limit: up to 25% of your net self-employment income, with a maximum of $69,000 for 2024. Net SE income means after the SE tax deduction adjustment, so in practice the effective rate is closer to 20% of gross self-employment income.

All contributions are from the "employer" side (you, in this case). There is no employee contribution component. You can contribute any amount up to the limit, or nothing at all, each year. This flexibility is useful if your income varies significantly year to year.

You have until your tax filing deadline (including extensions) to make contributions for the prior year. Filed an extension to October? You have until October to contribute for last year.

Solo 401(k): the powerful one

The Solo 401(k) (also called an Individual 401(k) or One-Participant 401(k)) is designed for self-employed people with no full-time employees other than a spouse.

It has two contribution components:

Employee contribution (elective deferral)

Up to $23,000 in 2024 ($30,500 if you are 50 or older). This is the same limit as a regular 401(k). The entire amount can be contributed regardless of how much you earn, as long as you have at least that much in compensation.

Employer contribution (profit sharing)

Up to 25% of net self-employment income (same as SEP IRA math). This is on top of the employee contribution.

Combined maximum

$69,000 in 2024 ($76,500 if 50+). At lower income levels, the Solo 401(k) lets you contribute significantly more than a SEP IRA due to the flat employee contribution floor.

Where the Solo 401(k) wins

The math difference matters most at lower income levels. Here is a comparison for someone with $60,000 in net self-employment income:

SEP IRA

25% of ~$56,470 net SE income

~$14,000

Solo 401(k)

$23,000 employee + ~$14,000 employer

~$37,000

Same income. Very different contribution room.

At higher income levels (above roughly $200,000), the SEP IRA and Solo 401(k) employer contributions converge. The employee contribution still gives the Solo 401(k) an edge, but it is less dramatic.

The Roth option

Solo 401(k)s can have a Roth component, allowing after-tax contributions that grow tax-free and are withdrawn tax-free in retirement. SEP IRAs are traditional only (pre-tax). If you think your tax rate will be higher in retirement, the Roth Solo 401(k) option is valuable.

Loans

Solo 401(k) plans can allow loans (up to $50,000 or 50% of vested balance). SEP IRAs do not. This is rarely the deciding factor, but it exists.

The administration tradeoff

SEP IRA: basically no paperwork. Open, contribute, done. No annual filings unless the plan exceeds $250,000 (then a simple Form 5500-EZ is required).

Solo 401(k): slightly more setup. You need to establish the plan by December 31 of the tax year (not your filing deadline). Most major brokerages (Fidelity, Vanguard, Schwab) offer free Solo 401(k) plans with straightforward setup. Once open, contributions and record-keeping are simple.

Which one should you open

Open a Solo 401(k) if:

Your net SE income is under $150,000 (the contribution difference is significant)
You want a Roth option
You want to maximize contributions even in lower-income years
You have no full-time employees (besides a spouse)

Open a SEP IRA if:

You want the simplest possible setup
Your income is high (above $200K) and the contribution difference is minimal
You missed the December 31 deadline to establish a Solo 401(k) for this year
You have employees (Solo 401(k) is only for owner-only businesses)

Both accounts are available at Fidelity, Vanguard, and Schwab with no account fees. If you are not sure, the Solo 401(k) wins for most freelancers under $200K in income. Open it before December 31 if you want to contribute for the current tax year.