What Are the Proof of Income Documents?
Posted by Frank Gogol in Taxes | Updated on June 20, 2023
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.
- 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.