A lot of times when people think about self-employment, they only imagine the good parts. Working on your own schedule, working on things you are passionate about, unlimited ability to scale your income, working from anywhere.
But, it’s not all bed and roses. Self-employment also means filing taxes on your own, balancing your own books, and also assembling a team of workers that you may have to fire if they don’t perform.
And as if that’s not baggage enough, you also need to go the extra mile to prove that your business is a legit and reliable source of income.
There are multiple instances when a person is required to prove their income and unfortunately, a self-employed individual will have a harder time doing this than a formally employed person.
If you have a formal job, your pay stubs are enough proof of income because you are earning a fixed salary every month which makes your income predictable.
On the other hand, income from self-employment may vary from month to month making it less predictable.
That’s why you need a whole different set of documents to prove your income.
In this post, we will look at 5 types of documents that can be used as proof of self-employed income.
But before that here are some instances when you may be required to prove your income.
Note: If you want to organize your business's finances to verify your how much you are making or self-employment income, try Bonsai Cash. It's a hassle-free, no hidden fees or minimum, guaranteed business checking bank account. Stay on top of your taxes and better track your earnings today. Open an account here.
There are several ways you can verify your income as a self-employed individual but, we are going to look at the 5 easiest and most trusted methods. I say easy because these are documents you already have or can generate in a few simple steps.
If your business has been running for a while and you have been following all legal requirements then you should have annual tax returns with you.
The tax returns for a given year will have a record of all your income and expenses for the year and it’s an accepted proof of income. And the fact that it’s a legal document recognized by the Internal Revenue Service (IRS) makes it even more credible.
There are some downsides to using income tax returns though.
The first is that your income tax return may not account for off-the-book income. Also, businesses are not required to declare their income for taxation if it’s below a certain amount and, therefore, these documents may not give the complete picture of your income status.
Not forgetting that you file taxes only once a year which means any changes in your income since the last time you filed will not be reflected on your return forms.
Also, if you have been running your business for less than a year, chances are you don’t have any tax returns to show.
Do you keep a profit and loss report for your business? I’m yet to come across a successful business that doesn’t. It’s critical for measuring the financial performance of a business and also planning expansion.
As it turns out, profit and loss statements are acceptable proof of self-employment income. This is because it contains important financial information including your business income, expenditure, and business-related deposits.
For the profit and loss statement to count, the transaction dates should be accurate and align with transactions from your bank or online banking.
If you use an online payment method for your business it can also be used as legit proof of your income. You just need to use its inbuilt tools or even a third-party tool to generate a report of all payments received or sent using the platform.
The only downside is that it won’t cover payments that were not made online including cash and check deposits. Hence, you need to supplement it with another proof of income.
If you are a freelancer working for an agency or company then chances are you have W-2 and 1099 forms.
A W-2 contains information about the income you have made from an employer including the amount of taxes withheld and other benefits provided by the company or agency. The wage and tax statement (1099), on the other hand, contains information about payments made to you by someone other than your employer if the payment exceeds $600.
Both forms are acceptable proofs of income.
Just like tax returns these forms are filed annually which comes with its limitations.
We saved the best for the last. A bank statement is our top recommended method to prove self-employment income because all the money you earn from your business is almost guaranteed to pass through the bank.
But, for this to work effectively, you need to have a dedicated business bank account that you only use for business transactions.
If you don’t have a separate account for your business then it becomes tricky because you have the added task of separating personal transactions from business transactions. It also makes it harder for you to gauge how your business is performing financially. Not to mention the added hassle it brings during tax season.
Did you know that you can’t claim business expense deductions unless you have a business bank account?
Bonsai cash is an online business checking account that you can use to receive all your payments and pay for your business expenses. Unlike traditional banks, Bonsai cash operates entirely online allowing you to generate your income reports at any time and without much hassle.
It’s also very quick to set up with minimal requirements. You don’t have to provide your estimated business income and, your personal checking account have no effect on your business checking account.
Yes, some banks need to first look at your personal checking account before approving your business checking account.
Other additional benefits include automatic expense tracking and automatic tax deductions.
Bonsai Cash is free to use. No minimum balance is required and there are no transaction costs.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?