How to Show Proof of Income as a Self-Employed Worker

When it comes to their finances, self-employed workers have quite a few more hurdles to clear compared to salaried employees at major organizations. Freelancing opens up the door to flexibility, but it also comes with headaches—especially when you have to prove how much money you make in any given year.

If a bank or potential landlord wants to know that you can pay, they will request your records demonstrating consistent income. This is known as your self-employed proof of income, and it can be frustrating and challenging to collect documentation that banks are willing to accept. 

Here are a few ways you can prove your income and put your best foot forward when anyone requests to see your ability to pay your bills.

What is Proof of Income?

Imagine sitting across the desk from a loan officer, petitioning for financing. It could be for a new car, your first home, or even a business loan to grow your entrepreneurial endeavor to new heights. The problem is that the bank is unable to take you at your word that you will have the capacity to repay them. Instead, they will quickly ask you for your proof of income. 

Proof of income is an important piece of your financial puzzle. It means that you need to round up documentation to prove how much you have made within a specific time, most often showing your average annual income. 

When might you need to show your self-employed proof of income to someone else?

The first and most common scenario is that you are applying for some type of loan. Mortgages, auto loans, and even personal loans all require an indication of how much you make. But your proof of income also comes into play with apartment leases, credit card applications, filing your taxes, and even getting health insurance. 

The more proof you can offer around the stability and consistency of your income, the more likely you are to earn the trust of the bank or individual who is thinking about lending you a line of credit. 

4 Ways to Show Self-Employed Proof of Income

The good news is that you have a few different options for how you can demonstrate your income to anyone who inquires. Some are easier than others, but all require you to keep detailed financial records. If you stay organized from the start of your foray into self-employment, you will have a much easier time proving your income. 

Annualized Tax Returns

The first and perhaps easiest way to prove your income is to share your annual tax return. This is a clear-cut document that lists your gross income for the year in black and white. To lenders, this shows that you have a steady and stable income spanning at least one full year. 

It can give them peace of mind that your self-employment will stick and you will be able to pay the obligation. 

However, there is one downside to annualized tax returns: If you are new to freelancing, you may not have a tax return for the previous year yet. Instead, you will have to use a different proof of income. 

Bank Statements

How much money is flowing into your bank account month after month? Your bank records tell the true story of how much money you are making with deposits and withdrawals showing up in real time. It may feel like an invasion of privacy to have someone scrutinize bank statements, but they are unlikely to be looking for your latte habit. 

One way to keep these bank statements easier to parse through is to keep personal and business finances separate. This can make it less time-consuming for the person requesting the document and gives you some degree of privacy for your personal spending habits. It also makes it crystal clear to the bank or lender just how much is coming in each month and how much liquidity you have in reserve to cover unexpected expenses that could impact your ability to make timely payments.

Regardless of whether you need it to provide self-employed proof of income, separating your personal and business finances is a best practice, as it can help you with solopreneur tax planning and a general understanding of your business’s financial health.

Profit and Loss Statements

Some lenders will be open to reviewing your business finances without access to your bank records. A profit and loss statement (also known as a P&L) is a document that you should be well-acquainted with because it can unlock areas where your business practices may be holding you back. 

Knowing whether you are in the black every month is crucial to self-employed workers—and your bank thinks so too!

Keep detailed records of your revenue and expenses. You can do this on a paper ledger if you don’t have many transactions or you can invest in bookkeeping software that automates it for you. This is a good document not only for proof of income but also for keeping your finger on the pulse of your freelancing business.  

Invoices, 1099s, and Online Payment Records

To prove that you have a steady stream of income flowing into your business, you may need a few receipts from your clients that show where they paid you. A log of your company’s invoices and online payment records can be extremely beneficial and may help to corroborate the picture you started to show with bank statements and profit and loss statements.

In addition to invoices and payment receipts, you may also be able to leverage 1099s from your clients for work that is paid over a certain threshold. These are official tax documents and often stand in for your proof of income with lenders of all kinds. The only sticking point is that you may not be issued a 1099 until the end of the year. 

Think Ahead as a Self-Employed Worker

If all of this work feels overwhelming to you, you’re in good company. Self-employed workers have to think about a lot more than traditionally-employed W2 salaried workers within a larger organization. Not only do you more frequently have to prove your income, but you also have other hurdles to clear. For example, you need to think ahead for your retirement savings. 

Retire4one partners with Voya to help you establish a robust Solo(k) plan in just minutes. In other words, we make it easy to set up and prioritize your future right away! We offer all the bells and whistles that the major companies offer because we pool together our clients into one big group plan.

Reach out to us today to learn more about how we can help you prioritize retirement savings!