How to Show Proof of Income When Self-Employed

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The number of freelance workers in the US is growing. From 2019 to 2020 alone, it increased from 57 to 59 million.

The uncertainties of the COVID-19 pandemic have caused employers to be more hesitant about hiring full-time employees. And many workers are finding self-employment to be easier and better than they thought.

Whether you’re a business owner, sole proprietor, or independent contractor, self-employment has its perks. You can set your own schedule and you have unlimited growth potential.

However, it’s not without its challenges. For example, proving your self-employment income is trickier. You don’t have a W-2, pay stub, or an employment contract to help qualify you for an apartment or mortgage. Filing your taxes is more complicated.

So if you’re a freelance writer, an Airbnb host, or you got your real estate license and you’re an independent broker, this article is for you. We’ll go over what you’ll need the next time you’re asked to prove your income.

Annual Tax Returns

If you have annual tax returns from when you were self-employed, this is the most reliable form of proof of income. It’s a legal document by the Internal Revenue Service (IRS) that is regarded by most as highly accurate.

1099 Forms

As an independent contractor, you’re entitled to a 1099 tax from anyone who paid you more than $600 in a year. This form not only makes filing your taxes easier, but it can be used as a form of income proof.

Just note that 1099s will only show the income you made from that particular employer, so you’ll need to gather multiple 1099 forms to reflect your total income.

Bank Statements

Bank statements can serve as another form of proof of income. Most banks make your bank statements available to you online. You can print them out or save them to your computer to be safe. Also, keep any deposit slips or receipts. The more information you have, the better.

And keep a separate bank account just for your business transactions. That way, you can easily distinguish personal from business expenses.

Profit and Loss Statements

A profit and loss statement (P&L) details your business’s revenue, costs, and expenses during a given period. Their primary purpose is to show how profitable your business is (revenue – expenses = profit).

You can use a software service to help you generate P&L statements, or you can keep track of your earnings and expenses manually. Either way, the document is often an acceptable form of proof of income.

Final Tips

Now that you know which documents to use as proof of income, let’s go over what you can start doing now to generate these reports accurately.

  • Keep a Record – Keeping track of every transaction will make life so much easier in the long run. Hunting down missing receipts or bills is a pain. So make sure to hire a professional bookkeeper and accountant. If you can’t, be sure to meticulously track transactions on your own.
  • Pay Yourself – Instead of drawing out money from your business randomly, consider paying yourself a regular monthly salary. You can even use a W-2 and generate pay stubs if you want. This will make proving your income to a lender much easier.
  • Save documents – Sometimes it’s liberating to get rid of old paperwork. But not so in business. You want to organize and save all your bank statements, profit and loss statements, tax returns, and more. You never know when you might need them.

If you can keep up these small habits, you’ll have plenty of documents to prove your income when the time comes. Just remember, the more records you have, the better. So when in doubt, keep it!

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Larry is an independent business consultant specializing in tech, social media trends, business, and entrepreneurship. Follow him on Twitter and LinkedIn.