As a self-employed individual, proving your income can be challenging.
There can be several documents you need to keep track of and staying legally compliant isn’t what you normally consider powerful fun.
But it’s essential when applying for loans, renting an apartment or filing taxes.
And can save you the headache of facing any legal issues or fines.
It’s like a method to the madness so as to avoid any litigation with the government.
So to make things simpler, we have compiled a thoughtful method of how to prove your self-employed income.
If you’re ready, let’s get started.
What Is Proof of Income
First off, let’s go over what proof of income is before we dive into the details.
Proof of income refers to a set of documents that show an individual’s earnings and financial resources.
This is typically required when you are looking to rent an apartment, applying for a loan or when you are filing your taxes.
The importance of proving your income is apparent when you need to show legal documents to stay compliant with the government.
Some forms of proof include; pay stubs, bank statements, tax returns and financial statements.
By staying organized, you’ll be able to avoid any fines or legal burdens that may emerge if you can’t provide legitimate documents of your income.
Who Is Considered as Self-Employed
Next, let’s cover who is considered a self-employed individual.
Those who are self-employed are not considered employees of a company. They are typically business owners, freelancers, independent contractors or sole proprietors.
They are responsible for managing their own business operations and are held accountable for any liabilities.
In other words, they’re their own boss and have full control over how their business is run and monitor any problems that may arise.
Types of Proof of Income for Self-Employed
To prove your income as a self-employed person, there are several types of documents that can be used. These documents help verify your financial status and prove your financial stability.
In this section, we’ll go over the main form of proof for self-employed income.
Working with clients as a self-employed individual, you will be sending invoices to collect your revenue. From this, it provides proof of services rendered or product sales — legitimizing your documentation of your finances.
In addition, invoices typically include important details such as:
- Business information of the self-employed individual and their client
- A description of the services or products provided
- The date of the transaction
- The amount charged for the service
- And any other expenses incurred
Annual Tax Returns
Tax returns provide a comprehensive overview of an individual’s financial status, including their income, expenses, deductions and credits. For self-employed individuals, tax returns are an important method of proving their income because they provide an official record of their financial transactions during the year.
Online Payment Records
Thanks to modern technology, you can use online payment methods as proof of income. This is associated with an invoice that contains all the details of the transaction between the client and the contractor. You can use online software like PayPal, Stripe or Quickbooks to create a clear and detailed invoice with online payment methods.
Bank statements are another method of proving income. They provide a clear and detailed overview of all deposits and withdrawals made through the bank account. Account statements also show all fees and charges incurred by the account holder and can be used to reconcile business operations with bank records.
Typically, self-employed individuals don’t receive W-2 forms because they aren’t employees of a business. However, some freelancers who find work on job boards such as Fiverr, Upwork or Freelancer may receive a W-2 form — depending on what regulations apply to that platform.
For tax purposes, a 1099 provides a summary of income from sources other than regular employment, such as investments, rental income or contract work. It is typically issued by the payer of the income and provides important information about the amount of money earned and any taxes withheld. For self-employed individuals, the 1099 may be a part of their proof of income in addition to other sources.
Profit and Loss Statements
Profit and loss statements, also known as income statements, are financial documents that show a person’s revenue, expenses and net income over a period of time.
As a sole proprietor, these statements can be found in Schedule C (Form 1040).
Reasons Why You Need to Prove Your Income
Proving your income as a self-employed individual is essential for various reasons.
Whether you’re applying for a loan, renting an apartment or filing your tax return — proper documentation of your income is critical if you want to accomplish common tasks or benefit from the legitimacy of your financial foundation.
Below, we have laid out key reasons why you may need proof of your income.
- House or Car Loan
- Apartment Rental
- Quarterly Income Tax Returns
- Government benefits
- Business Bank Account
House or car loan
Taking out a loan for a house or a car can be a big commitment, and many banks are reluctant to pay out large sums unless you can prove a solid income. Therefore, proof of income is essential if you want to buy a home or finance a new car.
Providing proof of income for renting an apartment is also required. Landlords regularly deal with bad tenants. So a legitimate source of income is a way to build trust with you to make sure there are no problems when it comes time to pay the rent.
To avoid any fines or legal issues with the IRS (Internal Revenue Service). Verifying your income is a conducive way to stay compliant with regulations. This way you avoid problems with the IRS and make sure you pay the right amount of tax.
When applying for government benefits, such as Social Security or Medicaid, verifying your self-employed income is an important part of the application process.
Providing documentation of your income can help determine your eligibility for benefits and ensure that you receive the correct amount of financial assistance.
Business bank account
It’s common for banks to request documentation verifying your income to open a business bank account. This is done to ensure that you have sufficient financial resources to maintain the account and prevent it from becoming delinquent.
Why proving your self-employed income matters
To wrap up, proving income as a self-employed individual requires a variety of documentation.
And it can be overwhelming to keep track of all the different sources of income. Not to mention all the different forms that come attached to each revenue.
Here at doola, we make it easy for solo entrepreneurs to manage their finances with our bookkeeping services so they can focus on their craft and creativity.
Get started today and book a free consultation with one of our trusted members!
What qualifies for self-employed income?
Income from self-employment means working as an independent contractor or freelancer who derives income from services rendered — from the sale of products or goods and investment income.
Is a 1099 proof of self-employment?
Yes, a 1099 form can serve as proof of self-employment income.
How do I prove self-employment income without a 1099?
Self-employed individuals can prove their income through various other documentation such as invoices, bank statements, profit and loss statements and tax returns.
Do I have to declare all self-employed income?
Yes, self-employed individuals are required to declare all income earned from their business or freelance work on their tax returns and other official documentation.
What happens if you don’t report self-employment income?
Failing to report self-employment income can result in penalties, fines and legal consequences, such as tax audits or legal action from the government.