How To Show Proof Of Income When You’re Self-Employed

Being self-employed means you work 12 hours a day for yourself so you don’t have to work 8 hours a day for someone else. – Oliver Markus Malloy 

There are a lot of benefits that come with being self-employed, from being your own boss, flexibility, and having enough time to spend with families and loved ones. Depending on your skill set and the nature of the jobs you decide to do, you can even work from the comfort of your home.

However, there may be times when you’ll need to show proof of self-employment. Especially when you’re applying to rent a house, subsidized health insurance, or getting pre-approved for a mortgage.

Showing proof of self-employment can be an overwhelming task because you don’t always earn the same amount of money from the same source each month, it takes a little more planning and organization than working full time.

Most financial institutions are satisfied with individuals who earn a set salary from single employment since their finances are predictable. They are less comfortable with self-employed people’s finances since self-employed income is thought to be less reliable.

If you’ve been wondering how to show proof of income when you’re self-employed, you’ve come to the right place. In this article, we’ll look at why you need proof of income as well as how to show proof of income, so grab a seat and let’s journey together.

Before we delve into proof of income, let’s look at what it means to be self-employed.

What Does It Mean To Be Self Employed?

Self-employment refers to a situation in which an individual works at his or her own pace and is not bound or accountable to a company’s employee. 

A self-employed person owns a business and can operate as a sole proprietor or as part of a partnership.

What is Proof of Income?

Proof of income is a type of documentation that shows how much money you’ve earned over a specific period. 

While certain documents are more reliable and authoritative than others, the exact structure of an incoming proof of payment depends on who is asking for it.

Why Do You Need Proof of Income?

As you progress from living as a teenager to living as an adult, there will be times when you will be required to present proof of income. 

These moments can be quite significant since they can pave the way for exciting new life developments such as purchasing a car or moving into a new home.

The following are some of the most prevalent reasons for requiring proof of self-employment:

  • Submitting tax returns
  • Getting a Car Loan
  • Obtaining a credit card
  • Renting an apartment, a house, or a vehicle
  • Purchasing health insurance
  • Obtaining a mortgage
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Now that you know why you need to present proof of self-employment, let’s have a look at how you can show proof of income when you’re self-employed.

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How To Show Proof Of Income When You’re Self-Employed

Proof of income is usually a combination of a W-2 form issued by your company and your most recent bank statements. The W-2 form is accurate because it displays your true income because of your salary plus deductions. 

Employees can easily provide proof of income and, because self-employed people do not receive W-2 forms, they must rely on other proof of income.

Below are ways in which you can show proof of self-employment:

1. Ensure Your Accounting Records Are Accurate

As a self-employed individual, you remember you are running a business despite the independence that comes with being your own boss.

When you’re self-employed, keeping proper accounting records is a critical key for showing proof of employment. Maintain a copy of all receipts and a proper record of all transactions linked to your work.

With the advancement of technology, there are tons of accounting software available to assist you in recording and maintaining your financial data. All you have to do is search online for accounting software for self-employed people, download any of your choices, and set the ball rolling.

2. Use a W-2 and Pay Stubs to Pay Yourself

It may be more convenient to get your pay directly into your bank account than receiving a 1099 form. You should yourself using a W-2 and generating pay stubs. You can present these documents to your lender to establish your income once you have created them.

3. Keep Your Business and Personal Accounts Separate

When you work for yourself, it is always simple to transfer your earnings into your personal accounts. 

As appealing as it may sound, it may not be the best strategy if you want to keep proper and well-accounted proof of income.

Using your personal accounts can limit your deductions and put you in a difficult position in providing proof of self-employment. You should think about opening a separate account for any work-related transactions. 

This approach will make it easy to prove your income using your bank statements. All you have to do is go to the bank and get a copy of your bank statements from your business account.

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However, if you must have one account for business and personal banking, you must highlight the business-related payments and costs to show what is important as income.

4. Create Financial Reports Regularly

You may believe that only large corporations need to worry about preparing financial reports.
Your self-employed business is a brand, and creating records such as revenue statements, balance sheets, and expense reports will assist you in providing proof of self-employment.

To achieve your financial goals, you need to plan well. To get started, you need to know: What Is Financial Planning And Analysis

5. Maintain a Record of Your Profit and Loss Statements

A profit-and-loss statement is a financial statement that monitors your revenue, costs, and business-related expenses over a specific period, such as a fiscal year. 

It’s crucial to keep track of your income and expenses regularly because it will help you make better decisions and plan for future growth.

You can hire an accountant to assist you in creating a profit-and-loss statement, or you can look into software that will assist you in doing so.

6. Keep a Copy of Your Tax Returns and Other Important Paperwork

According to the internal revenue service, save copies of your tax returns for up to seven years. 

You’ll file your state and federal tax returns every year so that you can use them as proof of self-employment.

If you’re unclear, you can talk to an accountant about what records you should maintain as proof of income.

7. Use 1099 Forms

Anyone who paid you more than $500 during the year will send you this tax form, either electronically or via the mail.

The payer fills out this form and delivers it to the IRS, as well as providing you with a copy to serve as a guide for completing your tax return. You can use 1099 documents as proof of self-employment if you don’t have your tax return on hand.

8. Create Self-Employed Pay Stubs

Even if you’re self-employed, you can create pay stubs for record-keeping and present proof of income. You can make these by hand or use a pay stub generator.

A self-employed pay stub must include the following information to be regarded legally valid:

Gross Pay: The total amount they paid you for your services is referred to as your gross pay.

Net pay: The total amount you earned after deducting all expenses.

Deduction: Social security, Medicare, and state and local taxes are all deductible. Because this is not deducted immediately from your paycheck, you must compute your taxes when you generate your pay stub.

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The essence of these is to keep track of your business payments and costs.

Frequently Asked Questions How To Show Proof Self-Employment

What is a proof of income statement?

A Proof of Income Statement is a simple version of your tax assessment that summarizes your income and deductions for the tax year.

Why Do You Need Proof of Self-Employment?

Below are reasons you need proof of income:

Submitting tax returns
Getting a Car Loan
Getting a credit card
Renting an apartment, a house, or a vehicle
Purchasing health insurance
Obtaining a mortgage

What are examples of proof of income?

Here are a few examples of proof of income:

  • Bank statements
  • Pay stubs
  • Tax returns
  • W2 form
  • 1099 form

How do you provide proof of income if you are self-employed?

In providing proof of income, if you’re self-employed, you must show certain types of documents.

The following are types of documents to provide:

Annual tax returns
Bank statements
Profit and loss statements

How do you Calculate a Self Employed Income?

Calculating your income as a self-employed individual may seem complicated, but it is rather straightforward. To calculate your self-employed income all you have to do is, to sum up, all of your earnings, including any sales and receipts from other sources.

To calculate your annual revenue, simply multiply the total at the end of each month by twelve.

Conclusion On How To Show Proof Of Self-Employment

There are a lot of benefits that come with being self-employed. But, when you’re applying to rent a house, subsidized health insurance, or getting pre-approved for a mortgage; you’ll be required to show proof of self-employment.

Most financial institutions are satisfied with individuals who earn a set salary from single employment since their finances are predictable.

They are less comfortable with self-employed people’s finances since self-employed income is thought to be less reliable. Since you don’t always earn the same amount of money from the same source each month, it takes a little more planning and organization to make proof of self-employment.

We hope this article has provided the vital information you need about how to show proof of income when you’re self-employed.

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