The gig economy: it’s not new. We’ve had books and thinkpieces and millions of tweets about the independent contractor life. So much of indie publishing— authors, writers, designers, etc.—are by now used to figuring out benefit-less personal finance. But there remain many wrinkles to this economy that are under addressed. And as someone who actually loves reading about personal finance and playing with my weird, small accounts, I am surprised! Most articles continue to make certain assumptions. Even twitter chatter about the one really bad things about being a freelancer is rare—though I did see someone talk about this the other day, prompting this either utterly boring or incredibly useful, depending upon who you are, personal finance newsletter.
I am at once both an independent contractor and not. I am the majority owner of a small business, so I get a K-1 tax form for the work I do for Belt (and 1099s for any non-Belt freelance work). But, also, Belt pays me like an independent contractor (-ish—not going to go into those details here). Suffice to say—there are so many aspects of owning a small business that are similar to being an independent contractor; the two overlap more than not. For today, think of me as a 1099’er.
I started filing taxes as a wholly independent contractor about 5 years ago. At the time, I owned a home; it was my second. I never made a late mortgage payment on either. I had excellent credit. Both mortgages were with the same small, locally-owned savings & loan. When I decided to sell that house, I applied to that same bank for pre-approval for a new mortgage.
They turned me down.
I was shocked. 100% unprepared. It wasn’t my credit score. It wasn’t how much I made.
It was my lack of a W-2. Banks assume anyone who applies for a mortgage has a W2. If you don’t, you can show them two to three years of prior tax returns—which is already placing you in a “less desirable” bucket— and they will look at your adjusted income and make a decision. But if, like me, your taxes show a perilously low adjusted income (because you are a business owner and your business shows a loss —not hard to do think Amazon for their first decade or so—your income is going to be really low. Which is great because you pay less in taxes!) Which means the bank is going to turn you down. Even if your checking and savings account show that you would have no trouble paying that mortgage (it’s Cleveland from Christ’s sake).
Since the, I have tried twice to get a bank to preapprove me for a mortgage; I’ve been turned down both times. It’s just frigging hard for anyone in the “culture not riches” gig economy (not married to someone else who receives a W2) to get a bank to give them a mortgage. My options are to buy in cash (in Cleveland that might be possible, but still not realistic), keep renting (which I’ve been doing for 3 years and do like, actually), or, a third option, which I’ve considered: change how I do my taxes for two to three years to I show a LOT more income, to qualify me for a mortgage. But it would probably be at a higher interest rate than I should have to pay, and to get this I would need to be pay more in taxes than required to to show that income for 2-3 years first. Which, maybe I would consider if this whole 1099/K-1 situation was going to be an issue for me overall, but here’s the thing: a mortgage it is the only thing in the world I would need to do this for. I wouldn’t need this to buy a car, or get a personal loan, or get a new credit car. Everyone else just looks at your credit score, and mine is great. So there is no other possible financial reason to do this: there no other area in which a lack of a W-2 is an obstacle.
It is really, really, really hard for the average (“culture not money”) gig worker to get a mortgage. While I might have considered marrying for health insurance before the ACA passed, now I wonder about doing so for that sweet, sweet,W2.
As I said at the jump: the gig economy is not new! I don’t understand why this isn't discussed more. We should at least have had more bad takes! (Feel free to borrow this take, personal finance writers).
For now, a renter I shall stay.
But let this not just be a bummer newsletter. It’s a new year, after all! Here are two *good* tricks I have learned about, hidden financial perks of K-1/1099 living. So in hopes it helps some of you, here are some exciting things I’ve been doing:
I was shocked when I discovered HSA accounts, because I read so many Kiplinger-esque articles. If you buy your health insurance on the ACA, and you purchase a plan with a high deductible that is labeled “HSA eligible”, you can put up to 4,000/year into an HSA account. This money is tax deductible, and can be used for medical expenses (another benefit), AND if you don’t use the money by the time you turn 60 you can access it for anything at any time (tax free!). It’s basically like an IRA, so it de facto increases the annual amount you can contribute, and also lowers your taxes (which, of course, makes it harder to get a mortgage…)
Solo 401(k). I’m not talking about IRAs here—we are doing advanced personal finance today kids! I’m assuming you have maxed out those contributions, and also maybe have a SEP or SIMPLE/IRA as well (I have all three—more lowering of taxes to prevent house buying!). After you have maxed out those and also and your shiny new HSA account, did you know you can *also* set up your very own 401(k). I did not know until very recently! Now I have one. (I use Vanguard for all retirement accounts and highly recommend them. They’ll walk you through opening up all of these)
I hope this money talk has been useful for some of you and interesting for others. Here’s hoping that enough gig workers start complaining about the whole mortgage thing and that becomes easier for more of us.
Next week: less money more books!
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