How to Prove Income as Self-Employed: 6 Methods Explained
October 16, 2023
Self-employed proof of income is a crucial requirement for independent contractors and freelancers who are 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!
- 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 Do You Need a Proof of Income?
You need proof of income to confirm that you earn moneylawfully and to demonstrate your financial stability.
In this day and age, technology has unfortunately made it easier for scammers to forge documents and steal the identities of their victims in an attempt to qualify for loans, mortgages, and rent.
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.
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.
6 Ways to Provide Proof of Income When Self-Employed
There are six 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
A 1099 form comes in handy in case you are unable to present your tax returns.
Your 1099 form 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.
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.
Take note that your clients can only send you a 1099 form if the payment sent to you in exchange for your work amounts to $600 or more.
#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.
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.
#4. Use Profit and Loss Statements
Profit and loss statements are often used by business owners. These documents record all of your incurred expenses and earned income from your venture or business.
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.
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. How to prove income if I get paid in cash?
If you get paid in cash, you can prove your income by preparing pay stubs and invoices for every income your client pays in exchange for your services. You can also request that your clients send their payments through your bank account. In this manner, lenders and landlords will see that money is regularly deposited and withdrawn from your bank account.