Being self-employed has its perks. You get to set your own working schedule, enjoy all the profits alone, and most importantly, you become your own boss.
Unfortunately, not being a salaried employee also means you have to file your tax returns and be knowledgeable on how to verify self-employed income.
Proof and verification of self-employed income are needed when applying for a personal loan or mortgage, renting a house, or buying health insurance.
If you’re starting out as a self-employed person and want to learn more about proof of income, this post is for you. We give you a detailed guide on the different documentation you can use to show proof of income.
What Is Proof of Income for the Self-Employed?
Proof of income is any documentation that can be used to verify the amount of income a self-employed person has earned in a given period.
Proof income is often needed in situations such as:
· When filing tax returns
· Purchasing health insurance
· Leasing a car, apartment, or a house
· Applying for mortgage
· When looking for car financing
· Applying for credit cards
· When applying for a personal loan
As shown above, proof of income is often required when trust is required. For instance, when applying for a mortgage, your lender needs to be sure that you’ll honor your payment obligations, and one way of doing this is verifying how much you’ve earned in a given period.
Ways You Can Provide Proof of Income
As a self-employed person, you don’t have W-2 forms or an employment verification letter, often used as proof of income by salaried employees.
Fortunately, some documents are acceptable as proof of income for self-employed individuals, as explained below.
1. Annual Tax Returns
This is the most solid proof of your income as a self-employed individual. It’s an official document recognized by the Internal Revenue Service (IRS). It also shows your total annual expenses and income.
Notably, your annual tax return may not show your total earnings for a given year, as self-employed people don’t need to report income that may be below a given amount.
However, don’t be tempted to report less income than what you’ve earned. Instead, provide additional documentation such as bank statements that can act as proof of unrecorded income.
Also, if you’re a freelancer, you can provide 1099 forms from your clients if you don’t have your annual tax returns.
2. Bank Statements
If your clients pay you through the bank, a bank statement can be solid proof of a stable income.
On that note, consider setting up a business account, so you don’t mix your personal and business finances. A business bank account also makes it easy for you to generate income and expense reports when a given party needs them.
3. Profit-And-Loss Statement
Business owners and self-employed individuals ought to prepare income statements. A profit-and-loss statement shows your business-related revenues, costs, expenses, and profits.
In addition to acting as proof of income, a profit-and-loss statement also helps you make better financial decisions for your business.
If you don’t know how to prepare such a statement, you can always hire the services of an accountant. You can also use online accounting software to generate income statements for your business.
Tips that Can Help You Stay Up-To-Date with Your Proof of Income
Now that you know which documents to provide as proof of income, here are tips that can help you always be prepared when proof of income documentation is needed from you.
Keep Accurate and Up-To-Date Records
It’s easy for you as a self-employed individual to forget to maintain and update your business records.
However, accurate financial records make it easier to prepare documents such as profit and loss statements. Always keep a record of every transaction you make in your business.
Alternatively, consider hiring an accountant if you’re finding it hard to generate and maintain financial records. You can also use accounting software for the same purpose.
Use Pay Stubs
Prepare pay stubs using an online pay stub generator. Paying yourself using a pay stub will help you have solid proof of your income. Pay stubs are also great for record-keeping. Some of the details your pay stub should capture include:
· Gross pay– The total amount you get from your client
· Deductions– These include taxes, social security plus other deductions
· Net pay – This is the amount of money you earn after you remove the deductions from the gross pay
Always Keep Copies of Your Tax Returns
The internal revenue service recommends businesses keep their tax returns for up to seven years.
Tax returns, as noted earlier, are legal documents that provide enough proof of your income. So, don’t be tempted to destroy them even after you’re done with them.
In closing, if you’re just starting your self-employment journey, you may find it hard to keep and maintain business records. However, such records can be of great help when providing proof of income. Stay organized, keep track of your transactions, and always have your proof of income documentation ready.