What is a Proof of Income? - What Documents is Needed

Proof of income is documentation that shows your earnings over a specific period, usually a year. These documents prove that you earn the amount you claim.

Basically, this documentation is required by landlords, utility providers, insurers, banks, and credit card companies to determine your ability to make payments over time.

Hence, to get approved for a personal loan, you need to provide your lender with certain documents. These documents serve as proof of your personal and financial information. They will be reviewed by a lender before they extend an offer.

Despite the unique requirements for their applications and eligibility, many lenders use similar documentation requirements. You can increase your chances of approval by familiarizing yourself with the types of documents you may need.

Some employers may require proof of income in the form of a letter. This letter summarizes and confirms your earnings and employment.

Depending on your situation, this letter could be written by you, an employer, an accountant, or a social worker. To provide a clear picture of your earnings, include your basic income information in this letter.

This figure can include your average workweek hours, yearly salary, or hourly wage, and how you expect this income to be sustained in the future (for example, if you’ve had consistent raises in the past and anticipate future raises).

A lender or renter may request supporting documents in addition to a proof of income letter. They may also request a variety of documents instead of a letter.

Look through this article to see all you need to know about proof of income, the necessary documents.

Why Do You Need Income Proof?
How to Provide Income Proof
What are the Necessary Documents?
What Can Be Used as Proof of Income?
What If You Don’t Get Approved For Your Loan?
References

Why Do You Need Income Proof?

As you navigate adulthood, there will be times when you will need to show proof of income.

Many of these events are significant milestones that pave the way for exciting new life developments, such as owning a car or moving into a new home.

The following is a general list of the most common reasons for requiring proof of income:

submitting tax returns
Purchasing health insurance
Obtaining a credit card
Renting an apartment, a house, or a vehicle
Getting a Car Loan
Obtaining a mortgage
Personal loans of other types.

How to Provide Income Proof

Employees can easily provide proof of income. It’s usually a combination of a W-2 form provided by your employer and your most recent bank statements.

The W-2 form is particularly accurate because it displays your true income as a result of your wages plus deductions.

Because freelancers do not receive W-2 forms, they must rely on other forms of documentation.

Some examples of ways to demonstrate proof of income include:

1. Annual Income 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.

For freelancers, keep in mind that your employer/client is only required to send a 1099 form for payments over $600, so the 1099 forms you receive may not cover your total income for the year.

This is perfectly acceptable, but keep in mind that you must report all of your income on your tax return, so include supplemental documentation (such as a bank statement) for income that isn’t substantiated by 1099 forms.

Also, see SoFi Personal Loans Reviews

2. Forms 1099

This is a tax form that you will receive either electronically or by mail from anyone who paid you more than $600 during the year.

The payer is responsible for completing this form and submitting it to the IRS, as well as providing you with a copy to use as a reference when completing your tax return.

So, if you don’t have your tax return handy, you can use 1099 forms to demonstrate your income.

3. Account Statements

Do you need to report self-employment income that does not have a 1099 form?

Your best bet is to look through your bank statements. If you only have one account for business and personal banking, you must mark the business-related payments and expenses to indicate what is relevant as income.

This is an excellent reason to select a banking solution that allows you to categorize business expenses and generate expense reports, as it makes it much easier to reveal only what is required to the requesting party.

4. Statements of Profit and Loss

This is a fancy term for documentation that shows the total revenue, cost, and profit generated by your freelance work.

It is best to keep track of your income and expenses regularly because it allows you to make better decisions and plan for business growth.

You can have an accountant set it up for you, or you can make your spreadsheet.

5. Pay Stubs for Self-Employed Individuals

Keeping yourself organized can make it easier to prove your income while self-employed. You can use the documents below to prove your self-employment income.

Even if you’re self-employed, you can create pay stubs for record-keeping and demonstrate 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 considered legally valid:

The total amount you were paid for your services is referred to as your gross pay.

Social security, Medicare, and state and local taxes are all deducted. Because this is not deducted automatically from your paycheck, you must calculate your taxes when you generate your pay stub.

Net pay – the total amount you earned after deducting all expenses.

The longer you work for yourself, the more it becomes second nature to provide proof of income.

Don’t worry, you’ll get used to having the necessary documents on hand when these situations arise. The most important thing is to maintain your organization.

What are the Necessary Documents?

It is normal for companies or institutions to provide users with a thorough copy of the documents they need to submit when asking for proof of income.

A proof of income letter is an easy way to determine and confirm a person’s income and employment status that does not even require any special income verification services.

Including workweek hours, annual income, or wage per hour, as well as how you plan to maintain or enhance it, are some of the components of this letter that can be written by a selected party (for example, an accountant or HR manager).

Moreover, a person might have to supply proof in the form of supporting documents.

Typical proof of income documents are:

Paystub;
Bank statement;
Federal Tax return for the previous year;
Wages and tax statement.

However, these documents may vary, considering the type of employment and place of work of the applicant.

Most landlords and renters require proof of income to verify your ability to pay. Documents proving stable income must be used at the very least.

For example, a combination of pay stubs and bank statements can suffice if your landlord accepts these documents.

Here are a few documents your landlord may ask you to produce to prove proof of income.

Stubs of pay: As previously stated, this can provide the most accurate picture of your earnings.
Letter of Income Proof: A letter like this is especially beneficial to you because it can provide your landlord with additional information about your background.
Tax Return from the Previous Year (1040): This comprehensive document can provide a complete picture of your income from the previous year. Because all of your income streams are recorded in one document, it can make things easier for your landlord.

Your landlord may refuse documents for short-term streams of income because the temporary cash flow may cause you to cannot pay later. When preparing your rental application, double-check with your landlord to ensure you have all the documents.

From Your Employer

Documents from your employer can provide the most up-to-date picture of your income because they account for any changes in your wages over the previous year.

Stubs of Pay

To verify your income, some lenders may require your pay stub to include your pay period and pay frequency.

Provide your most recent pay stub as proof of income to provide a more up-to-date picture of your earnings.

Letter of Income Proof:

Depending on your relationship with your employer, this can serve as both proof of income and a light letter of recommendation.

Tax Documents

Because these are legal documents, copies of your most recent tax documents are sometimes regarded as the most reliable sources.

However, if you don’t keep copies of these documents on hand after tax season, they may be difficult to locate. Because taxes are only filed once a year, these documents are not as up-to-date as a recent pay stub.

Any raises or additional income received since the last tax season are not reflected here, so additional documents such as pay stubs or bank statements may be required to paint a more accurate picture.

Tax Return from the Previous Year (1040):

This is a comprehensive document that lists all of your income sources in one place.

Keep a copy of this form on hand because it is useful for proving income and expenses.

Wage and Tax Statement (W-2):

You’ll need to provide W-2s from all employers to give an accurate snapshot of your income.

You can request this document from your employer(s) if you don’t have a copy on hand.

Unearned Income

A few documents in this category are issued by the government. These are also trustworthy documents for lenders, but you should not rely solely on these sources of income as proof because they are not always consistent.

Unemployment benefits and workers’ compensation, for example, eventually come to an end.

These documents can be useful if you need to demonstrate consistent income for a short period, but keep in mind that when these streams dry up, you’ll need a more stable source of income.

You can print this statement online at socialsecurity.gov/myaccount. Examine the Social Security Administration’s guide to learn how you or a loved one can obtain your benefit verification letter.

You can also learn more about SSI income limits by reading our guide.

Statement of Annuity:

An annuity is a contract between you and an insurance company in which you receive a set amount of money in exchange for a lump sum.

Your insurance agent can provide you with an annuity statement.

Statement of Pension Distributions (1099-R):

Check out this guide to using tax form 1099-R to learn about all of the situations in which this form can be used.

Court-Ordered Settlements:

This category includes agreements such as alimony and child support. The court can provide you with a copy of these agreements.

Unemployment Compensation:

These benefits provide unemployed workers who meet certain criteria with temporary financial assistance. These requirements are imposed by your state. You can get a copy directly from your state’s unemployment office.

Employees’ Compensation Letter:

Workers’ compensation benefits those injured on the job by providing wage replacement and medical treatment reimbursement.

You can obtain a copy of this from your insurance company or the court that heard your case.

What Can Be Used as Proof of Income?

Lenders regard some documents as more authoritative than others. Many employers accept pay stubs, while others may require both a pay stub and a copy of the previous year’s federal income tax return.

The following is a list of documents that may be required to demonstrate proof of income.

Although not exhaustive, this list gives you an idea of what documents you can use, where you can get them, and why some may be more effective than others.

Most them should include the following elements:

Your complete name
Additional identifying details (like your social security number)
Date of receipt of income
Name of the employer (when applicable)

What If You Don’t Get Approved For Your Loan?

If you are not approved for a personal loan, you have a few other options to consider:

Obtain A Cosigner:

A cosigner is someone who adds their name to your loan application. They agree to repay the loan plus any additional fees if you default.

If you have a reliable friend or family member with good or excellent credit, they may be able to assist you in obtaining a cosigned loan.

When you both apply for the loan, your cosigner will most likely be required to provide the same documents as you.

If you choose this option, make sure to repay it on time to avoid causing damage to your relationship.

Choose A Secured Personal Loan:

Most personal loans are unsecured, meaning they don’t require collateral like your house or car.

Secured personal loans, on the other hand, are backed by collateral. If you fail to repay your loan, the lender may seize your collateral.

By applying for a secured personal loan, you can reduce the lender’s risk and therefore increase your chances of approval.

Keep in mind you’ll have to show documentation proving the value of the collateral and the fact you own it.

Also, Check out What is the Average Credit Limit By Income?

Conclusion

Applying for a personal loan does not have to be a stressful experience. Prepare to answer questions and provide the documentation, and you should have an easy time borrowing the funds you require.

But keep in mind that you will owe the lender not only the amount borrowed but also all interest accrued during the repayment period, so shop around for the best lender offering the best interest rate and the lowest fees.

Above all, keep copies of important documents so you can easily produce them when someone asks for proof of income. Lenders and other entities frequently want to see proof of income.

This is the amount reported to the IRS and can be found on tax documents such as your 1040 form. As previously stated, some people are more at ease with this number because it is easily verifiable and usually comes from legal documents.

What is a Proof of Income? – What Documents is Needed

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