1099 Income Worksheet — Gross-Up Method

Non-QM 1099 rules are set by individual investors and change without notice. Everything below reflects common investor expectations. Verify every rule against the specific investor's current guidelines before relying on it.

The gross-up concept

1099 earnings are gross — paid before expenses. A contractor's $120,000 in 1099s is not $120,000 of income; there were costs to earn it. "Grossing up" (more precisely, applying an expense factor or subtracting documented expenses) converts gross 1099 receipts into a usable income figure.

Two common methods (investor picks which one applies):

1. 1099 average minus documented expenses — average the 1099s, subtract verified business expenses.
2. Expense-factor method — average the 1099s, multiply by (1 − expense factor). Illustrative: a 20% factor → use 80% of the average. The factor itself is investor-specific — never assume one.

Step 1 — Gather the 1099 history

• 1099-NEC / 1099-MISC for the required period (commonly 1 or 2 full years — confirm)
• YTD 1099s or YTD earnings summary for the current year
• Prior-year federal tax return (many investors require it to cross-check)

Log it:

Step 2 — Check the trend

Compare year to year. A declining trend gets flagged in review — many investors use the lower year or require an explanation, per their guideline.

• 2024 total: $________
• 2025 total (or annualized YTD): $________
• Trend: stable/growing or declining — note which, and write the explanation if declining.

Step 3 — Account for expenses

Method A — documented expenses:

(Year 1 + Year 2) ÷ 2 − documented annual business expenses = Annual income figure

Illustrative example (numbers made up to show the math — not a real file): ($120,000 + $132,000) ÷ 2 = $126,000 average − $18,000 documented expenses = $108,000/year → $9,000/month

Method B — expense factor (illustrative):

Average 1099 × (1 − expense factor) = Annual income figure

Illustrative example: $126,000 × 0.80 = $100,800/year → $8,400/month

Both results are arithmetic for training. Neither is a qualification finding.

Step 4 — Cross-check the three sources

A clean file tells one story three ways. Flag mismatches in writing:

Gaps need explanations (timing, excluded income types, deposits from non-1099 sources). An unexplained gap is a file-stopper — document it, don't ignore it.

Step 5 — Confirm ongoing work

1099 income only counts if it's continuing. Document:

• Current client contract(s) or engagement letter(s)
• Recent invoices / recent payments (work is active, not ended)
• Business license or proof of trade, if the investor requires it

A borrower whose only 1099 client ended the contract has a documentation problem — flag it.

Documentation checklist

• 1–2 years of 1099s (per investor program)
• YTD 1099s or earnings summary
• Prior-year tax return
• Proof of business expenses (Method A) or CPA letter supporting the factor (Method B)
• Current contracts / proof of ongoing work
• Written explanation for any declining trend or source mismatch

Red flags to verify before the file moves

• 1099 income claimed but tax return shows a fraction of it (unreported income can't be counted — flag it)
• Single 1099 payer that just ended the relationship
• Borrower also has W-2 income — keep the streams separate; don't blend them into one average
• Expenses undocumented but large — the gross-up math is only as good as the expense proof

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