Self Employed Proof of Income | Quick Guide for Freelancers
Self Employed Proof of Income | How to show you’re legit
When it comes to self employed proof of income, it can be a very confusing and difficult process. Because being self-employed means you don’t receive a W2 and may be sending out W9s instead, it’s not always clear how you might demonstrate you actually have a stream of income.
What is Proof of Income?
Unlike our employee counterparts, we don’t receive a regular paystub, and we don’t even receive the same amounts regularly. This means that proof of income is hard to generate, as we don’t have access to those usual W2s or paystubs and this can cause distrust when trying to obtain or apply for basic services and products. Landlords and companies look for proof of income in order to believe that you can actually afford what you’re applying for or buying.
Fortunately, in this article we will explain some methods you can use to demonstrate that you are just as legit as any employee!
For contingent workers, there are several methods you can demonstrate you actually make the amount of money you are claiming:
Ways to Show Proof of Income When Self-Employed
| Proof of Income Method: | Annual Tax Return | 1099 Forms | Bank Statements | Profit and Loss Statements |
|---|---|---|---|---|
| Rank | Best | Good | OK | OK |
| What | Form 1040 | Form 1099s | Various formats | Various formats |
| How | Downloaded from tax software like TurboTax | Sent to you by each client. | Downloaded from your bank like Chase, Bank of America, etc. | Downloaded from accounting software like QuickBooks Online |
| Rank explained | Most trusted and accessible, only 1 form | You must have accurate records and consolidate all the 1099s separately to get overall income. Some clients have not sent you a 1099 | You must have separated business from personal transactions. | Not everyone has accounting software and understand how to generate an income statement |
How to Provide Proof of Income | Detailed Explanations
Annual Tax Returns
The most accepted self employed proof of income is an official IRS tax return, usually in the form of a 1040. If you’ve been a freelancer for a few years and have filed taxes in past years, you can use those tax returns as proof of income. To obtain these documents, you can login to your tax software (like TurboTax, TaxAct, H&R Block) and download them off your profile. Again, look for the 1040 form.
If you don’t only do freelancing full time, you will also be showing income from non self-employed work, which can help you build more trustworthiness.
1099 Forms
As a freelancer, you should receive a 1099 form from any clients that paid you over $600 over the course of a year. If you can’t access your tax returns, you can use a collection of your 1099s during the year, or in the previous years to demonstrate self employed proof of income. These generally won’t be saved for you anywhere like a tax return, so you must have the diligence to have these stored in your email, in a shared drive, or have physical copies organized.
It’s important to note that not all clients will end up sending you a 1099. Here are just a few reasons you may not have received a 1099 from a client:
They did not pay you over $600 over the course of the year
They forgot to send you the form
They have the wrong address on file
You are technically still supposed to report the income on your 1040 form to the IRS. That’s why an annual tax return would be a better way to prove income as 1099s can be less reliable.
Bank Statements
If you have a business bank account dedicated for business transactions, you may be able to show a history of bank statements to demonstrate cash inflows and outflows. On the bank statement, it will show instances where you received money, and also instances where you spent money. The net summary for each month can be a good indicator of your general income. Generally, individuals will request anywhere from 3-12 months of bank statements to build a track record.
If you choose this method, it’s important that you are able to separate business from personal transactions. It would be ideal if you have a strictly business bank account, but if not, it’s imperative you can separate between business and personal.
Profit & Loss Statements
For many established freelancers or business owners, you may have dedicated accounting software like QuickBooks Online where you keep records of business transactions. These tools often have the ability to generate a Profit & Loss Statement (or Income Statement), which shows all the transactions in their corresponding categories to demonstrate cash inflows and outflows.
Why do you need proof of income?
Unfortunately, society relies heavily on the idea of credit (or “repayment trustworthiness”). This means that being able to prove that you actually make the amount of money you’re claiming is an important part of the process when it comes to certain financial decisions. Here are some examples:
Financing (get a loan for) a big purchase, like a house, a car, or grand piano
Renting/leasing an apartment/house
Getting a credit card
Getting a bank loan for anything
Getting health insurance
FAQs:
How do you prove income if you are self employed?
For self employed individuals, here are some generally accepted forms to prove income:
IRS Form 1040 annual tax return
1099 Forms sent to you by clients over the year
Bank statements with business transactions separated
Profit & loss statement, generated from accounting/bookkeeping software
What can be used as proof of income?
For the general public, here are the most reliable proof of income forms:
W2 form from your employer
Paystubs from your employer
Annual tax return (Form 1040)
Bank statements
1099 Forms
What is a proof of income statement?
An income statement is a form accounting tools can generate that summarizes your income minus expenses that you received and incurred throughout the year. You can download this form from tools like QuickBooks, Freshbooks, Wave, etc.
