How to Verify Your Income When You’re Self-Employed

How to Verify Your Income When You’re Self-Employed

While the idea of being your own boss can be intoxicating, there are certain things that are just easier if you’re a name on a payroll. One of those things is providing proof of income. Everything from buying a new car to renting an apartment–all essential components of a functional adult life, may require you to verify your income. Here’s what to do if you don’t have those check stubs handy.

What is Proof of Income?

Lenders and landlords are the most common parties that request you to verify your income. However, we’ve heard of other situations like exclusive member-only groups based on personal income. If you want to rub elbows with billionaires in an exclusive group, you’ll probably have to prove that you in fact belong.

Proof of income can come in many different forms, however, payroll stubs are the most commonly accepted form for a quick and current way to verify income. What is acceptable really depends on who is asking for it. A mortgage lender with $200K+ on the line is probably going to have stricter policies than a local landlord with a dozen properties.

Here’s what might be acceptable:

  • Tax Returns

  • 1099 Forms

  • Bank Statements

  • Profit/Loss Statements

  • Self-Employed Payroll Stub

Using Tax Returns to Verify Income

Your annual tax returns are a legal document verifying your income to the Internal Revenue Service (IRS) and that is generally considered credible proof of income across the board. Keep in mind that if you are applying for a mortgage, you’ll generally need two years of tax returns. If you’re brand new to the self-employment gig it might be challenging to secure that mortgage. 

Tax returns are the best choice for income verification unless things have changed significantly since you filed. For example, a separation or divorce that changes your tax filing status or the addition/loss of significant income.

Using 1099 Forms to Verify Income

A 1099 form is how payments in excess of $600 per year are reported to the IRS. There’s a good chance that many of your clients will file 1099s to report what they are paying to you. If you haven’t prepared your taxes yet, 1099 forms can essentially provide the same information with some caveats. For one, it may not provide a complete picture of your income since smaller amounts under $600 may not be reported using the 1099 form. And, two, you may end up with dozens of these forms making it difficult to decipher and verify your income.

A 1099 is a good choice when you haven’t filed your taxes yet and your income comes from one or two sources.

Using Bank Statements to Verify Income

Another way to definitively prove your financial abilities is to provide your bank statements. If they can see money coming in and money going out that corroborates the amount of money you have claimed to make, many institutions will be satisfied.

A bank statement is a good way to add validity to self-prepared documents. Use this option in conjunction with a profit/loss statement or self-employed pay stub.

Using Profit/Loss Statements to Verify Income

It sounds official, but a P/L statement is really just a spreadsheet that shows your financial activity. It’s something that your accounting service can provide or that you can put together yourself. A profit/loss statement should show revenue, expenses, and a net balance of profit or loss.

P/L statements provide a clear picture and are easy to digest. However, you may need to provide support like bank statements for some lenders.

Using Self-Employed Pay Stubs

Is that even a thing? Yes–depending on how meticulous you are in keeping the books for your business or freelance gig, you may choose to create self-employed paystubs. If you do–your income verification problem is solved. Your pay stubs need to include your gross pay, itemized deductions, and net pay to provide a legal document for income verification.

Self-employed pay stubs are another convenient option, especially for newer freelancers and self-employed individuals. Again, some lenders may require supporting documentation like a bank statement.

The Bottom Line on Verifying your Income While Self-Employed

The tides are turning as more and more corporations are shifting to remote or hybrid, however, for many remote working means being self-employed. Accountants, virtual assistants, web designers are all common jobs that are both ‘work-from-home’ and ‘self-employed.’ In fact, going into business for yourself when your service is the business is often a low-overhead way to get started so it attracts a lot of new people transitioning from W-2 employment. 

It can be very exciting, but also confusing. One of the biggest questions that comes up is how to legitimately prove your income when you’re not on someone’s payroll. And that’s easy–tax returns, 1099s, bank statements and any financial document you keep for your business will generally work. There are some lenders with strict rules about what they will accept, but the good news is that self-employment is common so they should have an option for you. Always make sure to consult a tax professional when making these decisions, especially if your income comes from multiple revenue streams.

 Make sure to check out a few of our related blogs to get you started and where the world is headed.

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