(Art credit: Andrea Hernandez, "Aguas")
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At first glance, showing “proof of income” as a freelancer can feel daunting. Since you’re not always earning the same amount of money from the same source each month, it requires a little more organization and preparation than it does for full-time employees. However, providing proof of income is actually very easy and is mostly a matter of staying organized and keeping records of your financial activity as a freelancer.
In this post, we’re breaking down everything you need to know about proof of income, including what it is, why you need it, and the documents you can use to provide it.
What Is Proof of Income?
Exactly what it sounds like: some form of documentation stating how much money you earned during a set time period, usually a year. The exact format depends on who is requesting it, and some documents are considered more credible and authoritative than others. We’ll elaborate on the different options below.
Why Do You Need Proof of Income?
As you navigate adult life, there are certain moments when it’s necessary to demonstrate your proof of income. Many of these moments are actually significant milestones, and pave the way for exciting new life developments, like owning a car or moving into a new home.
Here’s a general list of the most common reasons for needing proof of income:
- Filing taxes
- Getting health insurance
- Applying for a credit card
- Leasing an apartment, house, or car
- Financing a car
- Applying for a mortgage
- Other types of personal loans
All of these activities (besides filing taxes) involve someone lending you money or covering an expense for a set period of time. This requires trust — that you’ll make good on your side of the exchange by fulfilling your payment obligations. Banks, insurance and credit card companies, and other types of lenders need to know that you’ll honor whatever commitment you’re making by becoming a customer, a tenant, or other type of borrower.
How to Provide Proof of Income
For employees, proof of income is straightforward. It’s typically a combination of a W-2 form that is provided by the employer and your latest bank statements. The W-2 form is especially accurate since it shows your true income as a factor of your wages plus deductions. Since freelancers don’t receive W-2 forms, they turn to other types of documentation.
Some ways to prove self-employment income include:
1. Annual Tax Return
This is the most credible and straightforward way to demonstrate your income over the last year since it’s an official legal document recognized by the IRS.
Note that you’re only required to pay income taxes on payments over $600, so it’s possible that your tax return will underestimate your total earnings. This is perfectly OK, but you should acknowledge it and include supplemental documentation for income that wasn’t included (such as a bank statement).
2. 1099 Forms
This is a tax form that’s sent to you either electronically or in the mail from anyone who paid you more than $600 throughout the year. The payer is responsible for filling this out and sending it to the IRS, as well as a copy for you to use as reference when filling out your own tax return. So if you don’t have your tax return on hand, you can use 1099 forms.
3. Bank Statements
Need to report self-employment income without a 1099? Bank statements are your best bet. If you only use one account for both business and personal banking, you must clearly highlight the business-related payments and expenses to indicate what’s relevant as income.
This is a great reason to keep a separate account for your business, as it’s much easier to reveal only what’s needed to the requesting party.
4. Profit/Loss Statements
This is a fancy name for documentation that shows the overall revenue, cost, and profit made from your freelance work. It’s best to regularly track your income and expenses as it helps you make better decisions and plan for business growth. You can have an accountant set it up for you, or you can create a spreadsheet on your own.
5. Self-Employed Pay Stubs
It might sound silly, but you can create pay stubs even if you’re self-employed for record-keeping and to demonstrate proof of income. You can create these yourself or use a pay stub generator.
To be considered legally valid, a self-employed pay stub must include:
- Gross pay — The total amount you received for your services.
- Deductions — Social security, Medicare, state and local taxes. Since this is not automatically taken out of your paycheck, you need to proactively calculate your taxes when you generate your pay stub.
- Net pay — The final amount you earned, after factoring in deductions
The longer you work for yourself, the more that providing proof of income becomes second nature. Don’t sweat it, you’ll get used to having the right documents on hand when these moments arise. The most important thing is to stay organized and track your business payments and expenses.