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.
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Reasons you may need to verify self-employment income
Applying for small business loans and government grants - Loans and grants are great ways to raise capital for your business but to get them approved you need to verify your income.
Government benefits - The government offers various special programs such as subsidized health insurance and affordable housing but, these will depend on how much you are earning.
Buying a home - Self-employed individuals looking to get a mortgage approved must provide very accurate documents proving income. This is necessary to access their ability to pay back the mortgage.
Renting an apartment - Some landlords need to be sure that you can pay your rent and, therefore, require documents showing your income.
How to prove income as self-employed individuals
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.
Income tax returns
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.
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.
Profit and Loss statements
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.
Online payment methods
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.
W-2 and 1099 forms
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?
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