Self-Employed Proof of Income: 6 Methods on How to Prove It

Self-employed proof of income refers to the financial documents that independent contractors and freelancers use to prove their financial capability when applying for a car or personal loan, mortgage, or apartment rental.

By presenting valid documents to certify your income source, you increase the probability of earning the trust of financial institutions and property owners when you need it. Moreover, if your documents are 100% legitimate and error-free, you also increase your chances of getting approved for a higher loan or a lower interest rate.

So, what are the different methods you can use to prove your income as a self-employed individual? Read this article to find out!

Key Takeaways

• Self-employed proof of income comes in different forms, such as pay stubs, 1099 forms, bank statements, profit and loss statements, and court-ordered payments.
• It is important to record all transactions between you and your clients because you can use these as supplemental documents to prove your income to banks, lending firms, and landlords.
• The capacity to provide proof of earnings as a self-employed individual underscores your financial health and wealth, and it indicates how much you can be trusted to dutifully repay your debts or pay your monthly rent.

What is Proof of Income?

Proof of income is any type of documentation or paperwork that attests to an individual’s income and their capability to repay loans and afford certain expenses, like rent.

Lenders, financial institutions, and landlords use proof of income to gauge whether to approve or reject a loan or rent application. The type of documentation you can present to guarantee your income depends on your employment setup and financial situation.

If you are retired, disabled, or unemployed, you can use your pension statement, retirement benefits, disabled insurance statement, and unemployment benefits to verify your finances.

Similarly, if you are a freelancer, own a business, or work independently, there are alternative documents you can use as your self-employed proof of income. These papers include your 1099 form, self-employed pay stubs, profit and loss statements, bank statements, and tax returns.

Why is Proof of Income Important for Self-Employed Individuals?

Proof of income is important for self-employed individuals since they have very limited ways to confirm their financial capability and credibility, both of which are important when applying for a loan or a lease.

Aside from being used for these applications, self-employed proof of income can also come in handy when it comes to tax filing, as it can help individuals calculate their taxes properly and avoid accuracy-related penalties from the IRS.

7 Ways to Provide Proof of Income When Self-Employed

There are seven proven ways to provide proof of income if you are self-employed. Whether you need self-employed proof of income for a car loan or a mortgage, the following methods should help certify your financial standing:

#1. Generate Your Own Pay Stubs

As a self-employed individual, you don’t have an employer to rely on to create your pay stubs or paychecks every payday. So, it is a good idea to keep a consistent record of the income you receive from your freelancing jobs or projects to ensure you are compensated accordingly for your work.

Using an online pay stub generator is one of the best ways to keep track of all the money you earn, whether it be from part-time work arrangements or multiple full-time projects.

Pay stub generators use ready-made templates with all the important fields like your gross and net income and withheld taxes prepared for you. All you have to do is fill in the blank fields with the needed information.

Banks and landlords consider pay stubs to be one of the most viable documents to prove a tenant's or applicant’s income. After all, paychecks contain complete information about an individual’s earnings, taxes, and deductions.

More importantly, lenders and landlords often check an individual’s annual gross income and compare the resulting amount with the yearly earnings declared on their application form.

#2. Use a 1099 Form

Being able to generate a 1099 form comes in handy in case you are unable to present your tax returns.

This document shows your tax identification number and your Social Security number. At the same time, you can use your 1099 form to provide information and proof of all the money paid to you by your clients.

Meanwhile, employers or clients also use 1099 forms to report all payments made to freelancers and independent contractors to the IRS. In return, you must report all income declared in your 1099 form on your next tax return.

If you’re self-employed or a small business owner and need a more efficient way to draft 1099 forms, then consider using Paystub.org. Our 1099 form generator allows you to craft professional and standardized 1099 documents for all your needs.

#3. Get Bank Statements

If your client did not issue a 1099 form, you can use your bank statements as your self-employed proof of income instead. Bank statements are ideal if you regularly deposit and withdraw money from your bank account since they can provide a clear record of your earnings over the years.

Presenting at least six to 12 months’ worth of bank statements shows landlords and financial institutions that you regularly make transactions through your bank and that you earn money through legitimate work.

When preparing your bank statements, consider organizing them to make them easier to understand. It can also be helpful to annotate them by client or month to present a more accurate representation of your income.

#4. Use Profit and Loss Statements

Profit and loss statements are a type of financial statement often used by business owners. These documents record all of your incurred expenses and earned income from your venture or business.

To create a profit and loss statement, first, you need to list your business’s total income for the month and subtract any variable expenses incurred, such as those spent on materials or inventory, to calculate your gross income. Then, you can deduct your fixed costs, like rent or payroll expenses, and adjust the total for any other fees or sources of revenue.

By taking a closer look at the profit you have gained and the amount of financial loss that your business has had to take since its establishment, banks and landlords get a closer look at your overall financial health.

Understanding where your business stands, particularly whether your operations are thriving or struggling financially, gives an accurate reference to your capability to handle additional payment obligations in the form of repaying debts.

#5. Use Annual Tax Returns

Your annual tax returns are just as direct and concise as your pay stubs in proving you have a stable and life-sustaining income. Tax returns signify your due diligence in fulfilling your tax obligations.

Showing proof of your responsibility as a taxpayer is a huge plus, especially if you are a freelancer or an independent contractor.

It shows that you are trustworthy and have no ties to any shady operations or transactions that may force you to evade your taxes and any other duties mandated by the federal, state, or local government on their constituents.

#6. Present Court-Mandated Payments

If you are obligated by court to regularly provide settlement payments for alimony, child support, existing debts, fines, and restitution, you can use records of your court-ordered payments as self-employed proof of income for rent and other types of loans.

In a court-ordered type of financial settlement, the person required to fulfill their obligation must have a stable source of income to adhere to their assessments.

These assessments are the conditions and circumstances that the court reviews and takes into consideration when determining a reasonable amount to require for their settlement.

#7. Show Invoices and Contracts

Lastly, you can use the self-employed invoices you issued to clients or a copy of your contract to prove that you are earning income or are currently employed.

Keep in mind, however, that invoices are not contracts, and if the landlord or financial institution that you are applying to requests a contract on top of your invoices, you would need to provide a separate document.

This is usually done to prove the validity of the invoice and verify your claims, such as your employment status and the hourly rate stated on the document.

Why and When Do You Need a Proof of Income?

You need proof of income to confirm that you earn money lawfully and to demonstrate your financial stability.

It can be particularly useful in the following situations:

• Applying for a loan. Lenders and financial institutions also typically deal with large sums of money when granting car loans and even personal loans. As such, mistakenly approving a loan application from a regular employee or a self-employed individual with no proof of income potentially leads the business to bankruptcy and unwanted entanglement with fraudulent activities.

• Filing for financial assistance. If you are looking to get approved for financial assistance, you would need to prove that you are actually eligible for it through proper self-employed proof of income.

• Leasing property. Landlords often use rent as their main revenue source; hence, they need to investigate thoroughly and ensure their tenants can commit to paying their monthly rent.

• Applying for a mortgage. When trying to secure a mortgage for a home purchase, showing proof that you can afford the monthly payments through your financial documents will help you get approvals.

3 Effective Ways to Prove Income When Paid in Cash

There are several ways to prove income when paid in cash, such as:

• Generating paystubs. Employers who pay in cash usually don’t bother creating financial documents to record the transaction, but that doesn’t mean that you can’t create a record of it for yourself. You can use Paystub.org’s paystub generator to detail your earnings and ensure that you have concrete proof of your income.

• Creating a financial trail. Another way to prove income when paid in cash is to create a financial trail by depositing the money in your bank account. This can be especially useful for individuals who have irregular income or receive tips since you can’t really create a paystub or invoice for the latter.

• Asking for an employment contract. Even if your employer doesn’t provide any invoices, be sure to ask for an employment contract stating your exact role and hourly rate. You can use this to supplement your paystubs and bank statements when applying for a loan.

4 Best Practices for Self-Employed Proof of Income

Providing proof of income can be trickier for self-employed individuals than traditional employees, but here are some best practices you can follow to make the entire process easier:

Keep Your Records Organized

Consider creating a self-employment ledger to keep your invoices, receipts, and bank statements organized and accurately monitor your income and expenses. Doing so will make it easier for you to find the necessary documents to verify your income when needed.

Use Online Tools

When creating self-employed proof of income, you can use online tools like Paystub.org to streamline this process while maintaining quality. While paystubs and invoices aren’t legally binding, they are still official financial documents and require a certain level of professionalism.

Our generators provide you with standardized templates you can customize and edit to create professional-looking invoices and pay stubs in seconds.

Always Plan Ahead

Regardless of actively applying for a loan or securing a lease, it’s crucial to plan ahead and prepare any documents you may need in advance. We recommend keeping both digital and physical copies of your self-employed proof of income so you won’t have any problems in case they get lost or accidentally deleted.

Seek Professional Services

While you can definitely handle your finances yourself, it can be quite overwhelming for individuals managing multiple jobs, so it may be best to leave it to the professionals.

An accountant can efficiently prepare your financial documents, like profit and loss statements and tax returns, that you may need as self-employed proof of income. This will help you save time and ensure that your documents contain all the necessary information to avoid any delays in your application.

Final Thoughts

Self-employed proof of income differs slightly from the documents used by W-2 employees to ascertain their earnings. The key is to know the total amount you earn on a regular basis and check the appropriate type of document you can use based on the nature of your work.

If you own a business, you can use your tax returns and profit and loss statements. On the other hand, if you receive payment from multiple clients, earning at least $600 or more from each will allow you to expect a 1099 form.

Lastly, make it a habit to record all transactions and payments carried out while operating your business or fulfilling your job. Doing so helps guarantee you have more than enough documentation to verify your income.

Self-Employed Proof of Income FAQ

#1. Why is proof of income important for self-employed individuals?

Self-employed proof of income is important for self-employed individuals because it affirms their capacity to repay whatever loans they apply for and consistently pay rent or lease.

#2. How to prove income if it’s irregular and inconsistent?

Some of the best ways to prove irregular and inconsistent income include maintaining a good credit score, paying off other existing debts, and getting a co-signer with a good credit record.

#3. How many documents should I provide as proof of income?

The number of documents you should provide as self-employed proof of income depends on your employment status and the type of loan you are applying for. For instance, if you receive income from multiple clients, you can generate your own pay stubs and combine them with 1099 forms to further prove your earnings.

If you are applying for a car loan, lenders may require additional documents apart from your self-employed pay stubs and 1099 form, especially if you plan to purchase an expensive car.

#4. What is an income statement for the self-employed?

An income statement for the self-employed is a financial document that details an individual or business owner’s income and expenditures in a specific timeframe. It can show whether a business has incurred any profits or losses during that period, allowing business owners to make strategic financial decisions.

#5. What if my income is inconsistent?

If your income is inconsistent, as is sometimes the case for self-employed individuals, you can prove your income by providing the previous year’s tax returns or profit and loss statements. You can also offer a longer history of your bank statement instead of the typical six months.

#6. Who is considered self-employed?

You are considered self-employed if you are a sole proprietor, an independent contractor, or part of a partnership operating a business. Individuals who own and operate a business solely for themselves are also considered self-employed.