What is Proof of Income: When It’s Needed & How to Show it
August 16, 2023
Providing valid proof of income is a must if you want to secure a loan, rent a decent apartment to live in, or purchase a home or car. Conversely, lenders use evidence of a debtor’s income source to protect themselves from potential fraud and financial losses.
Fortunately, there are a variety of legal forms that you can use to verify your financial ability to repay debts, afford rent, and own properties.
This article will discuss the different proof of income documents accepted by lenders and property owners from employed, self-employed, freelancing, and even unemployed borrowers.
- Proof of income is often required by banks, lenders, and property owners from borrowers seeking to apply for a loan, rent an apartment, or purchase a house or car.
- Pay stubs, W-2 forms, bank statements, tax returns, social security benefits, and unemployment benefits are examples of valid documents used as proof of income.
- Self-employed individuals and freelancers can submit Schedule C, Profit or Loss from Business, annual tax declarations, and collaterals to verify their income.
When Do You Need to Provide Proof of Income?
Providing proof of income is often necessary when you purchase expensive property or want to borrow a large sum of money from a bank or lender.
Let’s explore all the other instances where showing solid evidence of your earnings is imperative:
Renting an apartment. Providing proof of income for apartment rental means submitting valid documents to your landlord to confirm you can pay the rent. The lack of stable employment is one of the main reasons why some tenants are unable to make timely payments for their rent or lease.
Applying for a personal loan. Lenders assess your capability to repay the amount you plan to borrow. They use your proof of income to determine the amount they can lend you, including the interest rates.
Opening a credit card account. When it comes to opening a credit card account, banks need to check that you have a stable income source. This is to certify that you are qualified for the possible rewards and incentives that come with obtaining a credit card.
Purchasing a car. Buying a car or a vehicle is a major purchase that requires sufficient finances. Verifying your income applies when you buy an old or new car.
Getting a mortgage. Just like when you purchase a vehicle, it is necessary to show proof that you have more than enough finances to repay the mortgage.
10 Different Types of Proof of Income
There are various proof of income documents that you can present to serve as evidence of your legitimate and stable income source.
These documents are as follows:
#1. Pay Stubs
Pay stubs or pay records contain key information about a borrower’s income and are, therefore, at the top of the list of lenders' and landlords’ loan and rent requirements.
These are documents issued by employers to their employees, whether they are paid hourly or at fixed rates. They contain all information about an employee’s regular rates, withholding taxes, benefits and contributions, and gross and net earnings.
Lenders typically require copies of pay records from the last 3–4 months. They use the information in a borrower’s pay stubs and compare the resulting values with the annual salary declared on their loan application.
#2. W-2 Form
A W-2 form, also called Form W-2 or Wage and Tax Statement, is an IRS form used by employers to report all income or wages paid to each of their employees or their annual earnings.
W-2 forms also contain a summary of all the state and federal taxes withheld from employee salaries throughout the year. This IRS form is more commonly submitted by debtors who receive regular salaries from their employers.
#3. Bank Statements
Bank statements are outlines of all the transactions made by a bank account holder. Banks issue statements to each account holder detailing the monthly withdrawals and deposits in their accounts.
An account holder’s bank statement comes in handy when securing a loan, opening a credit card account, or purchasing properties. Specifically, when a borrower receives their salaries through direct deposits, their bank statement affirms the income information on their pay stubs.
At the same time, bank statements can also show whether a borrower has deposited money with service providers or institutions to pay their bills and utilities. Debtors who can regularly pay their utility bills and manage their monthly expenses are likely capable of repaying their loans.
#4. Court-Ordered Payments
Also called assessments, court-ordered payments are a type of compensation that the court mandates an individual to fulfill.
Court-ordered payments can either be fines resulting from specific offenses, service fees for medical emergencies, payments to individuals who offered witness services, child support, alimony, outstanding debts, or restitution for victims of heinous crimes.
Although it may not be the ideal type of proof of income to present, assessments imply that a borrower must have a stable income source to fulfill their payment obligations.
#5. 1099 Misc Form
The 1099-MISC form is used to report all payments and transactions made by a business to other entities. Also, individuals who receive payments worth more than $600 are allowed to submit the 1099-Misc form.
It is also used by self-employed debtors because the said form contains their tax identification number and reports any federal income tax withheld by a company or individual in their stead.
#6. Proof of Income Letter
A proof of income letter or salary verification letter is prepared by employers to certify that a debtor is currently employed in their company and is compensated regularly.
Salary verification letters also serve as proof of income for students, particularly those who juggle a part-time job with their studies.
Proof of income letters are considered official documentation and must contain the names and contact information of both the employer and the employee seeking to apply for a loan or rent a residential property.
The letter must also describe the debtor’s specific job role in the company, their hourly, monthly, or annual rates, their tenure in the business, and the employer’s signature.
#7. Tax Returns
Lenders prefer the latest copy of a debtor’s income tax returns. Tax returns report all types of income received by a borrower in a given tax year.
Submitting copies of tax returns effectively affirms a borrower’s income source and the consistent fulfillment of their local, state, and federal tax responsibilities.
#8. Social Security Benefits Letter
This document is an official document issued by the Social Security Administration. The Social Security benefits letter provides an estimated summary of a contributor’s earned credits.
These earned credits are the accumulated percentages withheld by employers from employee salaries to pay their FICA taxes.
#9. Unemployment Insurance
Not all loan and rent applicants are employed or have a stable source of income in the form of a business or a freelancing gig. Some borrowers have recently been laid off from work as a result of the recession.
Others are forced to quit their jobs due to medical reasons, location, or other important obligations in their lives that they must prioritize at the given time. Fortunately, the federal government, along with select state authorities, offers unemployment insurance or benefits.
Unemployment insurance is a type of financial assistance offered by the government to eligible beneficiaries who lost their jobs. The program generates funds from FUTA (Federal Unemployment Taxes) and SUTA (State Unemployment Taxes).
While FUTA is mandated by employers across the U.S., SUTA is not required in all states. As such, if you are unemployed but are in need of acquiring a loan, consult with your local government and check your qualifications for unemployment insurance.
#10. Retirement Account Withdrawals
Retirement account withdrawals are valid proof of income for retirees and are applicable to most types of retirement plans, such as 401(k), Roth IRA, traditional IRA, or SIMPLE IRA.
They work in the same manner as bank statements and tax returns do—affirming a borrower’s stable income source that enables them to continuously contribute funds to their retirement accounts.
Self-Employment Proof of Income
Self-employed proof of income refers to an alternative set of documents and forms that non-regular employees submit to banks and landlords to prove their income:
Annual tax declaration. Business owners often use their annual tax declaration to showcase their financial readiness to pay their taxes, keep their businesses up and running, and settle debts. Presenting annual tax declarations is also a sign of trustworthiness because it signifies that a business is not guilty of evading taxes or participating in illegal transactions.
Collaterals. These are assets or valuable properties pledged by a debtor to secure or extend a loan. Acceptable types of collateral depend on the type of loan that a borrower wishes to secure. For instance, the vehicle that a debtor wants to purchase serves as collateral for a car loan.
When a debtor fails to repay the loan in full, the assets pledged by the borrower automatically become the lender’s property. Other examples of collaterals include investment accounts and real estate properties.
IRS Schedule C, Profit or Loss from Business. Freelancers and self-employed borrowers do not use W-2 Forms because they do not earn income as regular employees. As such, they must fulfill Schedule C of the IRS Form 1040 to report their income and losses incurred from their profession or venture.
Schedule C helps lenders determine whether a debtor is capable of sustaining financial growth in the coming years. Otherwise, if a lender finds that a borrower has an exceeding amount of debt to repay that ultimately outbalances their profit or makes money through unstable or inconsistent sources, then they may not approve the loan application.
Submitting proof of income can be quite tedious and time-consuming, especially when lenders take extra care to scrutinize every loan or rent application. Regardless, you must always seek legal and acceptable means to support your financial status.
When in doubt, secure the most commonly requested documents, such as pay stubs, W-2 forms, and bank statements. If you are self-employed, make sure to secure documents that affirm your tax responsibilities and profit.
You can also try to check your eligibility for unemployment insurance or ask your last employer, if you have been laid off recently, to provide copies of your pay stubs from the last three months of your employment.