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What Are the Proof of Income Documents?
At a Glance
- Proof of income is crucial for financial transactions.
- Common documents include pay stubs, tax documents (W2 or tax return), and unearned income documents.
- These documents provide evidence of income and support financial credibility.
- Used when seeking
loans, renting properties, or securing services.
Your income is an important factor to landlords, lenders, and many other institutions and establishments.
It’s a determining factor to many things, from the payment you can afford for your health insurance plan to the amount that you can get from a loan or mortgage.
In other words, it’s vital to be able to prove how much you’re earning since it dictates so many aspects of your life.
In this article, we’ll discuss proof of income, what it is, and what are the different documents that can serve as proof of income.
What is Proof of Income?
Proof of income refers to any document or set of documents that institutions, usually a lender or a landlord, require to confirm your ability to pay.
This is absolutely critical in many scenarios. For instance, if you want to take out an auto loan, the bank has to make sure that you can make the monthly payments. If the auto loan costs $500 a month and you’re only earning $900 a month, it means that your income is not going to be enough to support both the car payment and your other expenses.
Similarly, if you’re only earning $1100 a month and the unit you want to rent costs $800 a month, your proof of income will show the unit owner that they shouldn’t rent out to you since there’s a big chance that you’ll have a hard time making payments.
That’s why proof of income is very important in scenarios where there is a financial transaction involved.
10 Ways to Show Proof of Income
There are a number of documents that can serve as proof of income. In fact, for a document to become admissible as proof of income, it only has to contain your income amount and other income details.
Pay stubs are perhaps the simple and most common way to prove your income. For one, you receive them regularly, and they contain all the details that a financial entity will need to assess your ability to pay.
After all, pay stubs generally don’t just contain the amount you’re earning – they also have the date of payment, the frequency, and the period.
However, individuals who are earning from commissions, are paid on an hourly basis, or have an irregular schedule should refrain from using pay stubs, as they may not be able to paint a full picture of how much you can afford.
Proof of Income Letter
A proof of income letter, as its name implies, can also serve as proof of how much you’re earning.
This letter can be written by anyone, such as your employer, your social worker if you’re on benefits, or even yourself, as long as you can have someone validate it.
It contains details such as your name, where you’re working, what your position is, how much your salary is, and since when you’ve been working there.
Although you can write it yourself, you may have to ask your employer or client to attach their signature to the letter to make it valid.
Tax documents are legal documents that are updated annually. Many lenders with strict requirements will typically ask for this type of document specifically, since it tends to be the most reliable.
There are two types of tax documents that you can submit as proof of income.
- Payroll and Tax Return (W2). If you’re receiving a W2 from your employer or client, you can use this as proof of income. Of course, if you have more than one employer, you should be able to provide your W2 from all of them. This can be requested easily in case you don’t have a copy.
- Last year’s tax return (1040). This document contains all the information about your sources of income, regardless of how many there are. It can be difficult to get if the tax season is already over, so you should always have a copy with you in case you need it for future purposes.
That said, although these documents are very reliable, they may also be outdated. This is especially true if your income increased after the last tax season ended since the additional income won’t be reflected on these documents. You may still be asked to submit supporting documents in that case.
Unearned income refers to income you didn’t get from working, such as benefits or insurance payouts.
These documents are considered reliable and valid, however, they’re typically not a long-term solution. You shouldn’t rely on them alone if your financial transaction involves something long-term.
For example, if you’re receiving workers comp for a recent accident you had at work, your workers comp letter alone may not be enough to assure a prospective landlord that you can afford to rent their unit for the next two years.
They may still ask you to provide additional documents showing that you have enough savings or something similar that you can use even after the insurance payouts run out.
Here are some of the most common documents proving unearned income.
Workers Compensation Letters
Workers compensation letters are usually written and given by the insurance company.
This letter shows the payment amount and medical care benefits that are given to an individual who was injured at work.
A copy of this document can be obtained from your insurance company or the court that heard your case.
Unemployment benefits provide short-term financial support to eligible unemployed individuals.
This document should show how much you’re receiving and until when. In most states, unemployment benefits are only given for a maximum of 26 weeks. This means that if you’re taking out a one-year loan, this document may not be sufficient to prove that you can afford it.
Requirements to receive unemployment benefits are set per state and may therefore vary. However, here are some of the common requirements to become eligible:
- Partially or totally unemployed
- Became unemployed through no fault of theirs
- Physically capable of looking for another job
- Available or at least willing to work immediately
- Meet the salary requirements to qualify
You may directly connect with your county’s unemployment office if you wish to get a copy of this document.
Court-ordered settlements include dependent allowances and child support.
Since these are considered long-term payments, legal documents containing the details of the agreement can be used in scenarios where you need to be able to prove that you can afford something for years.
A copy of these documents can be requested from the court.
Pension Distribution Statements
If you’re a retiree receiving a monthly pension, you can also use your pension distribution statement as proof of income. For many senior citizens, this is perhaps the easiest proof of income document to procure.
An annuity refers to a contract, typically with your insurance company, that is made to help you invest your money for the long-term and grow your retirement funds.
There are many different kinds of annuities, such as variable annuities and fixed indexed annuities, but annuity statements typically contain the same thing: how much interest you earned and received over the past year or period.
Annuities typically last for life, so this type of document can be used to prove your long-term income.
You can ask for a copy of your annuity statement from the company that you got it from.
Social Security Proof of Income Letters
Also known as Benefit Verification Letter, a Social Security Proof of Income letter refers to the document that proves you’re receiving disability, retirement, Medicare, or Social Security Income (SSI) benefits.
This contains details such as the amount you’re receiving, how often you’re receiving them, and until when you’ll be receiving them. It’s a very reliable document since it has plenty of security identifiers to prevent fraud and misuse.
You can find a copy of this document online at the official Social Security website.
Frequently Asked Questions (FAQ)
What are proof of income documents?
Proof of income documents are official records or forms that verify your income. They are used to demonstrate your earnings to lenders, landlords, government agencies, or other entities requiring proof of your income.
What are common types of proof of income documents?
Common types include:
- Pay Stubs: Show your earnings from an employer, including gross pay and deductions.
- Tax Returns: Federal and state tax returns detail your annual income.
- W-2 Forms: Issued by employers annually, showing total earnings and taxes withheld.
- 1099 Forms: For freelance or contract work, dividends, or interest.
- Bank Statements: Show incoming payments or deposits.
- Social Security Benefits Statements: For those receiving social security income.
- Unemployment Benefits Statements: For individuals receiving unemployment compensation.
- Worker’s Compensation Letters: Document income received through worker’s compensation.
- Court-ordered Agreements: Alimony or child support documents.
Why is proof of income important?
Proof of income is important for verifying financial stability and ability to pay. It’s often required for loan applications, renting properties, obtaining insurance, or qualifying for government assistance.
Can a letter from an employer serve as proof of income?
Yes, a letter from an employer can serve as proof of income, especially if pay stubs are not available. The letter should include details like salary, position, and employment duration.
How do self-employed individuals show proof of income?
Self-employed individuals can show proof of income through tax returns, 1099 forms, profit and loss statements, and bank statements reflecting business income.
Are proof of income documents required for a mortgage application?
Yes, proof of income documents are typically required when applying for a mortgage to demonstrate your ability to make monthly payments.
How recent should proof of income documents be?
Proof of income documents should be recent, usually within the last 30 to 60 days. For annual documents like tax returns, the most recent completed year is typically used.
Can I use digital or electronic proof of income documents?
Yes, digital or electronic proof of income documents are generally acceptable, especially if they are official electronic statements or documents from an employer, bank, or government agency.
What if I don’t have traditional proof of income?
If you don’t have traditional proof of income, alternative documents might be accepted depending on the situation. These could include letters of employment, client contracts, or payment invoices.
Is personal information safe on proof of income documents?
When providing proof of income documents, ensure that your personal information is protected. Only provide such documents to reputable and trustworthy parties and inquire about their data protection policies.
- Why Was No Federal Income Tax Withheld From My Paycheck?
- Why Do I Owe Taxes?
- Why Do I Owe State Taxes?
- Are You Exempt from Federal Withholding?
- How to File Taxes With No Income
- Can You File Taxes Without a W2?
- H1B Taxes: Everything You Need to Know
Proof of Income Documents: Conclusion
As you can see, there are many documents that can serve as proof of income.
To make it easier for you, always be diligent in organizing your important files, especially when it comes to legal and financial documents.
That way, when you finally decide to take out a loan, rent an apartment, or buy a house someday, you won’t have a hard time finding your proof of income documents.