A Guide to Showing Proof of Income for Freelancers and Self-Employed Workers
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Being employed on your own terms is one of the many advantages of being a freelancer. While being an independent contractor nets you a lot of freedom, having to find proof of your income can put the breaks on it. Unfortunately, you can show proof of income with an invoice.
Without a pay stub, getting a loan, mortgage, or credit card can be difficult. But don't give up hope just yet; there are plenty of ways you can show proof of income when you need to.
3 Ways Freelancers Can Show Proof of Income
Showing proof of income as a freelancer isn't as difficult as it seems. However, you will need to file your self-employment taxes for at least 2 years before you can take out certain loans.
1. Show Your Tax Returns
Most freelancers don't have biweekly checks, but they can pay themselves by learning how to make a checkstub. Since your clients often pay you by using unpredictable schedules, a pay stub can offer a sense of normalcy, which eases the bank's fears when you want to get a loan.
However, some establishments may not take your checkstubs as proof by themselves. If that's the case, you'll need to bring something else to the loan office: your tax returns.
Your tax return is firm proof that you make an annual income. A potential landlord is more likely to rent to you if you show your yearly income rather than your most profitable months.
Freelancers have to use form 1040 to report their self-employment income, not form 1099 as you did in the past. While showing your tax returns is the most reliable way to check for income, you'll need to be a freelancer for over a year to use it. If you weren't, keep reading.
2. Show Your Bank Statements
Bank statements are your next best option after a tax return. You'll need to bring multiple bank statements to prove how much you make over time. Otherwise, they may think your income is too sporadic. It's recommended that you show at least 6 months worth of taxable income.
If this is your first year freelancing, it may be difficult for you to separate your business and personal expenses. This could skew how much you actually make, so be careful.
Freelancers who plan to stay self-employed in the long term should open a business account to separate their expenses. Keep in mind that most banks and landlords will deny your application if you've only been an independent contractor for less than a year, so hold off moving if possible.
3. Show Your Profit and Loss Statements
Regardless of whether they're self-employed or a part of an LLC, business owners should make a profit and loss statement. This document can help you determine the amount of money your business incurs and losses over a year, allowing others to see the total financial picture.
If you don't have a profit and loss statement, it could signal to banks that you don't take business ownership seriously. For this reason, it's important to bring this document with you.
Profit and loss statements must include income, expenses, and business-related deposits. You'll need to show all relevant dates and back them up with your online or physical bank statements.
While the process of making a profit and loss statement sounds intimidating, it's something you need to do when you're filing your taxes. As in, you need to declare your business transactions, any deductions, and your income on your 1040 anyway, so you should have access to it.
All you'd need to do at that point is transfer that information into a spreadsheet. Make sure everything is clearly labeled to avoid any hiccups when you're filing paperwork.
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