How to Show Proof of Income When Self-Employed
Posted by Frank Gogol in Taxes | Updated on June 20, 2023
Anyone who wants to rent a place, get a credit card, or take out a home or auto loan needs to present proof of income documents.
For employed individuals, getting copies of your pay stubs or asking your employer to sign a proof of income letter shouldn’t be too difficult. Even individuals who can only show proof of unearned income don’t encounter a lot of hassles.
Unfortunately, proving your income when you’re self-employed may not be as easy.
In this article, we’ll tell you how you can show proof of your income when you’re self-employed!
Quick Overview: How to Show Proof of Income When Self-Employed
If you’re self-employed, you can show proof of income in the following ways:
- Use a 1099 form from your client showing how much you earned from them.
- Create a profit and loss statement for your business.
- Provide bank statements that show money coming into the account.
- Provide your federal tax return from the previous year.
- Show pay stubs if you regularly pay yourself.
What is Proof of Income?
Proof of income refers to a document that shows the total wages you make within a given time period.
It’s an essential document for many financial institutions, establishments, and organizations. That’s because your income can determine your ability to pay for something, such as loans, rent, or even tuition fees.
The specific proof of income needed usually depends on whoever making the request. Additionally, although every document we’ll be discussing on this list is acceptable, there are some documents that are considered more reliable than others. Choosing to submit those as proof of income can make your transaction go much faster and hassle-free.
For instance, banks and government agencies will typically prefer tax documents and payslips as opposed to other types of proof of income documents.
Why Do You Need Proof of Income?
If you’ve ever taken out a loan or rented an apartment before, you’ll know how important it is to be able to prove your income.
Lenders and landlords, among many others, look at this document to determine whether you can afford to pay.
Here are some of the other instances where proof of income documentation is required:
- Renting an apartment
- Applying for mortgage
- Car installments
- Other forms of personal loans
- Securing your health insurance
- Getting your own credit card
- Filing taxes
Think of it this way. If an individual doesn’t present proof of their income, how will the other party know if they can truly afford a product or service?
Let’s say you want to purchase a car and the payment costs $450 a month for 60 months. The dealership would understandably want to know if you have a stable source of income and how much you’re earning first before they let you take out an auto loan because if they don’t, you may not be able to pay it back.
Ways to Show Proof of Income When Self-Employed
That said, while providing proof of income documentation may be easy for employed individuals, self-employed people may have a harder time.
For one, self-employed individuals cannot produce a regular pay stub. Two, many self-employed people don’t make the same amount each month. Some months are better, while other months may fall behind.
This can make many lenders and landlords feel less secure about lending or renting out to self-employed individuals.
On the other hand, it can also give self-employed people an unnecessarily hard time when all they want is to be able to get basic services and products.
Luckily, it’s not a hopeless case. As long as you’re consistently earning money, even if the amount may not be exactly the same per month, you can still provide documentation that will prove your ability to pay.
Here are some documents that you can use as proof of income when you’re self-employed.
1099 documents can serve as proof of your income. These documents are given to “employees” who are considered freelancers or independent contractors.
If you get a 1099 document from your client, this means that they filled out a 1099 form and forwarded a copy to the IRS. You’re required to report this income on your next tax return.
1099 documents contain the self-employed individual’s tax identification number or social security number as an identifier. They also contain the amount paid to you by your client, which is why they can serve as proof of income. If you don’t have your annual tax return on hand, you can use these instead.
Profit and Loss Statements
Profit and loss statements show your total income, expenses, and profits from your self-employed operations.
Although it may seem like a hassle to maintain, the benefits of keeping them far outweigh the benefits. Not only can you use them as proof of income, you can also use them to make better business decisions.
You can create a spreadsheet containing all this information yourself or you can also hire an accountant to do it. The perk of hiring an accountant to audit your finances is that it will also make this document more credible in case you want to use it as proof of income.
If the lender or landlord just wants to make sure that you have a regular source of income, you can also just show your bank statements, provided that you have regular deposits and withdrawals.
Bank statements with plenty of movement will show the other party that you’re regularly getting money from your freelance work. This is especially true if you can show 6-12 months’ worth of statements.
If you don’t feel comfortable sharing your personal bank account with other entities, it’s a good idea to set up a bank account specifically for business purposes.
Annual Tax Returns
A federal income tax return is conclusive proof of all your earnings within the year. This legal document, which shows your total income for the year and is filed at the IRS, is perhaps the most credible proof of income documentation you can show if you’re self-employed.
Take note, only payments over $600 are required by law to have a 1099 form and be submitted to the IRS. This means that if you’re receiving payments below this amount, it may not be reflected on your 1099 forms. Make sure that you still report them on your tax return to avoid possible legal issues in the future.
Self-Employed Pay Stubs
Self-employed individuals can create their own pay stubs to serve as a record of their earnings.
At the same time, these pay stubs can also be used like any other pay stub: as proof of income documentation for a financial transaction that requires it.
However, keep in mind that your self-employment pay stub has to contain some things to be considered legally valid.
The first one is gross pay (or the total amount you received for the service you rendered). The second one is the deductions like Medicare, social security, and state and local taxes. These aren’t automatically deducted from your salary, so make sure you calculate them properly. Lastly, you’re also required to include the net pay, which is the total amount after subtracting the deductions.
If you’re new to this – don’t worry, you’ll get used to it over time.
How to Show Proof of Income if Paid in Cash Without Pay Stubs
If you don’t receive pay stubs or are paid in cash, it’s still possible to show proof of income. You have a few options, including:
- Create your own paystubs. If your client doesn’t provide you with paystubs, you can still create your own. Every time you are paid, create a paystub that includes who paid you, the date of payment, the amount paid, and what work you did.
- Use bookkeeping software. You can also track cash payments in most bookkeeping software such as Quickbooks. The software should ask you for all the relevant information you need to prove you have income.
- Maintain an income-tracking spreadsheet. If you don’t have bookkeeping software and don’t want to pay for it, you can manually track cash payments. Be sure to include who paid you, the date of payment, the amount paid, and what work you did.
- Deposit the cash into your bank account. If you deposit cash payments to your bank account, they will show up on your bank statements which you can use for proof of income.
- Create receipts for those paying you in cash. Another great option is to give your clients receipts for their cash payments. You can buy a receipt book online or use an online tool to produce receipts.
- Show your tax returns. If you filed your tax returns correctly, they should show how much income you made in the previous year. These can be used as proof of income when you’re paid in cash.
How to Show Proof of Income When Self-Employed: Conclusion
Now you know what type of documents you can show as proof of income when you’re self-employed.
Piece of advice: if you’re self-employed, it’s always a good idea to keep accurate and up-to-date records of your income just in case you need it someday.
This way, you get all the perks of working for yourself while eliminating one of the few downsides, which is providing proof of your income.