How to Show Proof of Income For Self-Employed People

Are you considering being self-employed and want to learn more about how to show proof of income? Check out this guide of ways to show proof of income as a self-employed person. 

Finding the best job for you can be stressful yet exciting; many prefer to become self-employed. Whether you are self-employed for independence, wealth, satisfaction, or flexibility, proof of income is still vital. Proof of income is essential to obtain loans, rentals, and several other financial transactions. 

Typically, traditional employees obtain proof of income through pay stubs or an income letter from their employers. It is a bit more tricky for self-employed people. However, it is not quite as confusing as you might think. It is relatively simple. 

You can show proof of income as a self-employed person in several ways. Still, similar to buying a house and working with a real estate agent, it is always advisable to work with a professional. Although it is advisable, it is unnecessary, and you'll find that the process is not as complex as it may seem. 

If you or anyone you know is considering becoming self-employed, it is essential that you learn how to show proof of income. Check out this helpful guide to learn how to do so as a self-employed person. 

Keep reading to learn how to show proof of income for self-employed people. 

1. What is Proof of Income?

Proof of income is the documentation or evidence used to show how much money a person earns within a certain period. It is used for several reasons, such as verification of financial stability, the ability to repay loans, fulfill financial obligations, or obtain government assistance. Depending on your employment status, your proof of income may come in several different forms.

If you are buying a home and need a loan, you'll definitely need proof of income, as lenders want to guarantee you will be able to repay the loan. This is why saving up as much as possible before buying a home is essential. 

For self-employed people, you can use various forms as evidence. The process can seem complex, but it is pretty straightforward. All proofs are viable, but some always check which kind of proof is needed for your specific purpose. Banks, for example, usually favor tax documents or payslips from a specific period. 

There are several types of proof of income, including tax returns, bank statements, court-ordered payments, social security benefits, W-2 or 1099-MISC forms, and a proof of income letter. Your proof of income should include your full name, the date, and other identifying information. This could be your social security number or ID number. 

You might have different types of income. There is earned income, which could be from a job like tips or salaries, and unearned income, unemployment benefits, and pensions. Whichever type of proof of income you must show, double-check that all the information is accurate and up-to-date. 

2. 1099 Form

A 1099 form is best for accurate reports of income for the IRS. As self-employed, you'll get these forms from clients or businesses that pay for your services. Typically, these are only used for self-employed people, investors, contractors, and rental income. There are several different types of 1099 forms, so be certain the one you are using is the correct one.

This form is one of the best forms to use as proof of income as it serves as an official document for income. Self-employed people will most likely receive a Form 1099-NEC (non-employee compensation) or Form 1099-MISC, which is used if you have several different income sources.

This form is accepted by many institutions, saving you time and stress. Most landlords, lenders, and government institutions will accept a 1099 form as proof of income. In addition, it'll help you find any discrepancies in your reported income, which is necessary when dealing with the IRS. 

In some cases, not all of your earned income will be reported on your 1099 form, so bring any additional documentation or records of that extra income. This complete record of income is advantageous for providing you with proof of income and financial status. 

3. Profit and Loss Statements

Profit and loss statements are used to convey your business's income and expenses over time. Typically, these are done monthly, quarterly, or annually. In addition, these show your net income after deducting business expenses. 

These are essential for business owners and stakeholders to view the company's financial well-being. In other words, they are used to see a company's strengths and weaknesses. You would use them to make business decisions, plan financial investments, and assess the company overall.

Profit and loss statements are great to use when seeking loans and either own the business or are self-employed. These statements are not usually used as proof of income by people who hold traditional jobs and are not self-employed. However, freelancers do use these statements on occasion. You can either reach out to an accountant or use software to document the information yourself. 

4. Provide Your Federal Tax Return From the Previous Year

Many self-employed people use copies of Federal tax returns from the previous year as proof of income. Usually, these are from the last two or three years. Tax returns depict your income, expenses, deductions, and tax liabilities for a certain period. Typically, your employer will provide these annually.

As a self-employed person, filing your tax return differs slightly from filing your tax return. The first step is to organize your financial records by gathering them up and including your income statements, invoices, bank statements, expense records, and any other important documents about your business. 

Most self-employed people complete Schedule C forms to report income and expenses, and then the net profit or loss is transferred to your 1040 form. Once you have paid your estimated taxes and submitted the return, keep the records, as this is one of the best ways to show proof of income as a self-employed person.

In some cases, as a self-employed person, you aren't required to report income below a specific amount, meaning the tax returns might underestimate your total earnings. If this happens, bring additional documentation of the extra income that wasn't recorded. You can use annotated bank statements along with your tax return.

If you run into any problems, consider help from a tax professional or accountant. Similar to buying a house, it is always easier with realty specialists to help you avoid common mistakes. 

5. Receipts and Sales Records

As a business, you'll need records of payments from clients or customers. These can come in different forms, like electronic payment confirmations or receipts. Keep these transactions recorded as documents.

Online payments from clients or customers can be used as legit proof of income. Just be sure to generate a full report of all payments received. Unlike other proof of income documents, receipts and sales records do not account for cash and check deposit payments. Be sure to supplement these with another proof of income to have a complete record.

Keep all receipts and sales records organized, then create a summary or spreadsheet. This should specify the date of sale, the client's name, the type of transaction, and the product or services you provided. 

Once you are prepared to apply for a financial agreement, explain your business and how the receipts and sales records accurately represent income. 

6. Bank Statements

Your bank statements show all the regular deposits from your business activities. It will show all incoming payments from clients or sales. As a self-employed person, creating a separate bank account for business-related transactions is advisable. This way, you won't have to show personal finance details to lenders or landlords. A separate bank account will also speed up the process for lenders or landlords to review your bank statements. 

Before you present bank statements, identify your incoming payments and business expenses correctly. Not only are bank statements used as proof of income, but they will help you with financial planning, resolving discrepancies, and overall record keeping for your company.

As a self-employed person, you can attain a bank statement online or through your bank's website, request one from the bank, or receive a paper statement through the mail. It is about the same process as a traditional employee. Once again, go through and make sure the information is correct and up-to-date so you won't run into any unnecessary issues when using them as proof of income. 

7. Pay Stubs

Generally, pay stubs are used by traditional employees as proof of income. Although, a self-employed person can create their pay stubs to record their earnings. But, the process might be a bit more tricky as you'll need to account for deductions like Social Security and Medicare on your own. 

Always record your new pay and include a data range to prove when the income was earned. There are online generators to make this process a bit easier. Paystub generators will give you the proper format and double-check the information. 

Be careful when using pay stubs as proof of income, and confirm that the entity will accept this as legitimate proof of income. In this case, it is vital to keep other records like bank statements and tax documents. 

FAQ: Proof of Income For Self-Employed People

Here are some commonly asked questions about how to show proof of income as a self-employed person.

How do you get pay stubs if you are self-employed?

Self-employed people create pay stubs through pay stub generators. You can work with professionals or manually input the information using software programs. There are several free pay stub generators available online. 

What is an income statement for self-employed?

An income statement for self-employed people still summarizes income and expenses for a certain period. You can list all revenues at the top and all the expenses after. 

Can I use bank statements as proof of income?

Bank statements are commonly used for income verification for self-employed people and retirees. 

What is proof of income?

Proof of income is documentation of how much you have earned over a specific period. Usually, you'll be asked for this to prove you have a steady source of income through bank statements, pay stubs, tax returns, and other legal documents. 

What is proof of income for a loan?

Typically, to obtain a loan, lenders require proof of income and identity to approve you for a loan. This shows that you will be finally able to repay the loan. The documents you'll be asked to provide include copies of your state or government-issued ID, paystubs, tax returns, or bank statements. 

Proof of Income For Self-Employed People - The Bottom Line

Ensure the information is accurate, up-to-date, and organized whenever you present these documents. Different institutions may differ in their requirements or preferences for proof of income. So verify which documents you must bring, as they may also vary depending on the purpose for which you must prove your income. 

You'll need to show proof of income for several reasons; the most common reason is for a loan. As you search for your dream home, one of the biggest mistakes first-time home buyers make is not getting a mortgage pre-approval. For this, you'll need proof of income. 

Once you have shown proof of income and are approved for a loan, you are all set to find the best home in the best location. Raleigh, NC, is one of the fastest-growing areas in the country and has many beautiful homes for sale; you'll have to act fast if you want to buy your dream home in one of Raleigh's best neighborhoods. 

Before buying your next home in the Triangle, contact one of our helpful real estate specialists, who are eager to help you find the perfect home. We know buying a home can be overwhelming, so ensure you are prepared beforehand.