Money is good, right? For the self-employed, it may seem advantageous to simply not report cash payments. Self-employed people can get cash payments for all types of freelance work, whether it’s landscaping or accounting.
This method may work until you need to apply for a loan and find yourself unable to provide proof of self-employment income.
What is Proof of Income?
Proving self-employment income is easy to do. Here are some documents that help prove income:
- Tax return
- Business credit card report
- Schedule C – Statements of profit and loss
- 1099’s, which are also reported to the Internal Revenue Service
- Bank statements from the business account, and records of business-related deposits (linked to pay stubs)
Do Self Employed People Need Proof of Income?
One of the reasons why it is important for a self-employed person to have proof of income is to get a loan. If you haven’t been reporting income on your tax returns, you’ll be hard-pressed to qualify for a loan.
There are other reasons proof of self-employment income is important:
- Applying for health insurance purposes
- Applying for a lease or loan
- Buying equipment
- To get a good business credit card
How To Prove Income If You Are Self-Employed
As any business owner knows, it’s important to stay organized with documents and records. Getting that organized is the key steps to showing proof of income as a self-employed person.
As a self-employed person, putting together the necessary documents to provide proof of self-employment income to your plan is straightforward. Once you’ve established this habit, you can easily include that proof of income when you file your tax returns. Here are a few key areas to consider:
- Cash deposits – your bank statements may include cash deposit records. You should back up those bank statements with documents, such as invoices marked as paid, to show a clear picture of proof of income.
- Accounting software – companies like Zoho and Quickbooks make it easy to compile financial information for business purposes. With good software, you can match invoice documents with payments and deposits, especially with online banking.
Form 1099 Income Statement
The IRS 1099 forms that the payer issues to the payee serve as reliable documents to show proof of self-employed income. Form 1099-MISC is issued by any business that compensates you as self-employed, and that business is also responsible for reporting this information to the IRS. If you receive more than $600 from any organization during a calendar year, they are obligated to issue you a 1099.
Profit and Loss Statements
The Profit and Loss statement form 1040 is also called a Schedule C. The form is a legal document. Examples of business expenses (not an exhaustive list) include car expenses, advertising, insurance (not health), depreciation, legal services, office expenses, and more.
Annual Tax Returns
As you write off expenses, like those listed above, keep this amount in mind when you include taxes on self-employment income: $12,000. That’s the amount of the standard deduction that single people can take when they file their tax returns.
For example, let’s say you own a landscaping business. Your net income was $32,000. You can take the standard deduction and pay taxes on $20,000. If your expenses were more than $12,000, you would write them off on your federal tax return using a Schedule C statement of profit and loss. This is where you will show self-employment proof of income versus expenses.
Bank Statements
You should have set up a separate bank account for your business and a business credit card that is used only for your business.
Self Employed Pay Stubs
You can request pay stubs from the business or the client. Alternatively, you can link client payments to invoices. It is important to keep detailed records linking these documents to your deposits.
Online Payment Records
You may receive payments online through platforms such as PayPal or similar applications, or you may be paid by direct deposit into your business bank account, which is easy to verify with your bank statement.
With all of those methods, you can generate monthly, quarterly, and/or annual payment records.
Read more: How Self-Employment Taxes Are Filed
How Do You Prove Income For A Self Employed Home Loan?
A bank or mortgage company will want to see your tax records for the past 3 years. Your other finances and properties will also weigh. For example, you may have a 401K, IRA, and/or HSA. You can own business property and equipment. You can own a stock. Lender and other potential creditors like all that, which shows net income.
Provide all the information you can provide. The lender wants to know that if you default on the loan, the financial institution has a way to get its money back.
What is your credit score? When you apply for a loan, you will get your score immediately. If it turns out to be low, investigate the reasons behind that and take action to resolve any issues that may be affecting the number.
Can You Get Self Employed Loans Without Proof Of Income?
Yes. However, if you have little or no proof of income, lenders may consider you a high risk. Although it is possible to get a loan, the amount may be limited, and you will likely face a high interest rate.
How Do You Prove Income If You Are Paid Under the Table?
There’s a reason it’s called “under the table.” This expression refers to a secret currency exchange because ……well, that’s what it is.
If you are paid that way and want to prove your income, you will need to provide some kind of documentation to support your deposit. When you file your 1040 Schedule C statement of profit and loss, you will list your income – and sources of income.
Remember that if you receive income “under the table,” the company that paid you this way may also be subject to scrutiny. If you were compensated more than $600 in a calendar year, why didn’t the business issue a 1099? It is recommended that you take this matter up with the compensation organization in this way.
If you are paid in cash you can:
- Deposit money into the bank and link the amount to the (paid) invoices you generate.
- You can also get a “reloadable” business credit card using a cash deposit. Credit card statements will help you show your income by showing your deposits. There are many credit companies that issue this type of card, which is a great option for a single owner.
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