Money is good, right? For the self-employed, it may seem advantageous to simply not report cash payments. Freelancers can receive cash payments for all types of self-employment, whether they do landscaping or bookkeeping.
And that can work until you want to get a loan and can’t afford to show proof of income for self-employment.
What is proof of income?
Proving self-employment income is easy to do. Here are some documents that help prove income:
- Tax return
- Corporate credit card report
- Appendix C – Profit and Loss Statements
- 1099, which are also reported to the internal revenue department
- Bank statements from a business account, with statements of company-related deposits (linked to pay stubs)
Why do self-employed people need proof of income?
One of the reasons it’s important for a self-employed person to have proof of income is to get a loan. If you haven’t proven income on your tax returns, you’ll have a hard time qualifying for a loan.
There are other reasons why proof of income for the self-employed is important:
- Apply for health insurance purposes
- Apply for a lease or mortgage
- To purchase equipment
- To get a good business credit card
How to prove self-employed income
As any business owner knows, it’s important to stay organized with documentation and records. Getting them in order are key steps to showing proof of self-employed income.
Proving your income is easy using the right documents as part of your routine as your own boss. Once done, it will be easy to include this proof of income when you file a tax return. Here are some areas of interest:
- Cash deposits – your business bank statements may include statements of cash deposits. You should back up these bank statements with documents, such as bills marked paid, to show a clear picture of proof of income.
- Accounting software – companies such as zoho and Quickbooks facilitate the consolidation of financial information for business purposes. With good software, you can match billing documents with payments and deposits, especially with online banking.
1099 Wage and Tax Declaration Form
the IRS Forms 1099 issued by a payer to a payee are reliable documents proving income. The 1099-misc is issued by an entity that pays you as a self-employed person. This entity also provides this information to the IRS. Any entity that pays you more than $600 in the calendar year is required to provide you with 1099.
Profit and loss accounts
the 1040 Profit and loss account The form is also called Schedule C. The form is a legal document. Examples of business expenses (non-exhaustive list) include vehicle costs, advertising, insurance (not health), equipment depreciation, legal services, office expenses, etc.
Annual tax returns
When calculating expenses, such as those listed above, keep this amount in mind when filing self-employment income taxes: $12,000. This is the standard deduction amount that single people can use when filing tax returns.
For example, let’s say you own a landscaping business. Your gross income was $32,000. You could take the standard deduction and pay taxes on $20,000. If your expenses were over $12,000, you would itemize them on your federal income tax return using the Schedule C profit and loss statement. This is where you will show self-employed people proof of income against to expenses.
You must have a separate bank account for your business and have a business credit card that is only used for your business.
You can ask an entity/customer to provide you with pay stubs. Or you can link customer payments to invoices. Keep meticulous records linking these documents to filings.
Online payment records
You can get paid online through an entity such as Pay Pal or a similar app, or you can get paid by direct deposit to your business bank account (easy to prove using your bank statement).
With all of these methods, you can generate monthly, quarterly and/or annual payment statements.
How do I prove self-employed mortgage income?
A bank or entity that grants mortgages will want to see your tax returns for the past 3 years. Your other financial assets and properties will also carry weight. For example, you may have a 401K, IRA, and/or HSA. You may own business property and equipment. You can own shares. A lender and other potential creditors like this, which show your total income.
Provide all the information you can. A lender wants to know that if you don’t repay the loan, the financial institution has ways to get their money.
What is your credit rating? If you’re applying for a mortgage, you’ll soon learn the score. If it’s low, find out why and take steps to correct any issues that are causing the number to drop.
Can you get personal loans for the self-employed without proof of income?
Yes. But if you have little or no proof of income, lenders may consider you to be high risk. Although you can get a personal loan, it may not be a large amount and you will most likely pay 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.” The phrase implies a secret exchange of money, because… well, it is.
If you get paid this way and want to prove your earnings, you will need to provide some sort of documentation to support your cash deposits. When you file your 1040 Schedule C profit and loss statement, you list your income – and sources of income.
Keep in mind that if you report “under the table” income, the entity that paid you this way may also be questioned. If you were paid more than $600 in a calendar year, why didn’t the entity provide 1099? You should discuss this issue with the entity paying you this way.
If you pay in cash, you can:
- Make bank deposits and match the cash amount to the (paid) invoices you generate.
- You can also get a business credit card that can be “topped up” using cash deposits. Credit card statements will help you prove your income by showing cash deposits. There are several credit companies that issue this type of card, which is a great option for a sole proprietor.