Determining a self-employed individuals income is a two-step process.  The first part of the process is to evaluate the historic levels of earnings; this is accomplished by securing

the individuals or the business’s federal tax returns for the last two years.  The challenge is determining the current earnings.


In contrast to a W-2 employee, whose current income can be determined through either a verification of employment sent to the employer or paycheck stubs that include a year to date income, a self-employed person has no similar vehicle to determine current income.  Consequently, the self-employed individual's current income is determined by requiring a year to date profit and loss statement (P&L) for the business.  The only time the year to date P&L is not required is if the application is being taken and completed in the first quarter of the calendar year for the business year.


It is expected the profit and loss statement will be presented in a standard accounting format.  However, it is not required that the profit and loss be audited nor is it required that the business’s accountant complete the P&L.  In most cases, the year to date is drawn directly from the business’s accounting software such as Peachtree or QuickBooks.


That income is compared with the prior year's income.  Further, the current year's income is not considered as part of the underwriting unless the P&L is completed and audited by the business’s tax professional.  The purpose of the current year income statement is to confirm the business’s profitability is on par with prior years.