Working at your own pace is a blessing in the modern cut-throat, competitive economy that wrings out every ounce of your energy. Whether you are a lone wolf, with one or more partners, or part of a cooperative, self-employment is a blessing and a wish for many.
With the many perks and privileges of self-employment, like designing your ideal work-life balance, having flexibility in timing, and self-fulfillment, many individuals want a job that does not overwork them.
In a project conducted by Citrix, it was found that up to 88% of workers look for employment that offers complete flexibility in not only hours but also with the location. Furthermore, self-employment also fosters innovation, improves the quality of employment, promotes an entrepreneurial economy, and heightens self-efficacy.
Yet, there are areas where self-employment can lack, too. With this form of employment, it can become difficult to show proof of income since a fixed salary is not being earned under a single employer and is thus relatively less stable. Salary amounts fluctuate, and self-employed people may find themselves a little hard pressed to secure a lease or financing from institutions.
From renting a house to getting a pre-approval for a mortgage, self-employment can complicate the process slightly. But, with some additional documentation and record-keeping, even this seemingly intimidating process can be made smoother.
What Is Proof of Income, and Why Is it Needed?
Proof of income is any document that shows the amount of money earned by the respective applicants or the number of money applicants receive from any other sources. Applicants can only move on to the next step once the lender, landlord, or institution determines their ability to pay.
As the name itself clarifies, proof of income is confirmation that an individual has the financial means to make payments for what they are requiring.
For example, a landlord needs to make sure that their potential tenant has the financial capability to pay the entire amount of rent on time for the entirety of the lease.
Showing proof of income is a standard and essential step one has to go through in various instances, such as:
- Renting a house
- Applying for a mortgage
- Subsidizing health care insurance
- Applying for an auto loan
The following are four ways a self-employed individual can demonstrate proof of income without much hassle:
Self-Employed Pay Stubs
A pay stub is often a piece of paper handed to an employee with every paycheck given to them. It is a document that indicates the amount of money earned by an individual.
While self-employed people do not receive pay stubs from an employer, it is possible to create your own pay stub.
Self-employed people can create their pay stubs or use a pay stub generator, making the process a breeze. It is imperative to include a few components on a pay stub for it to be considered legal:
- Gross pay, i.e., the total amount earned;
- Deductions, i.e., all amounts of money deducted for a variety of reasons, whether that is health insurance, taxes, or other expenses;
- Net pay, i.e., the final amount of income remaining after factoring out all relevant deductions.
Annual Tax Returns
Although self-employed pay stubs are helpful, annual tax returns are the most credible and straightforward option to show proof of income. No matter what the occupation of the self-employed individual is, be that a business owner or a freelancer, everyone officially receives the appropriate amount of tax returns at the end of the given year by the Internal Revenue Service (IRS), which states the overall annual income.
However, there is a caveat. Self-employed individuals sometimes are not required to report their income below a certain threshold. Accordingly, the tax returns may underestimate the total amount they earned. For example, freelancers earning below $600 do not have to report it. Furthermore, individuals often do not record smaller project fees or off-the-books income on their tax returns.
If that is the case, it is imperative to find a way to acknowledge the earnings and provide additional documentation for income that was not recorded, either through profit and loss statements or bank statements.
Profit & Loss Statements
For a self-employed business owner, in particular, all documentation of the company’s profits and losses should be kept safe and organized to show as proof of income to agencies and institutions. A profit and loss statement is a formal name for a document that lists down overall revenue, costs, and resulting profits over a specific time, usually a year.
However, even for self-employed freelancers and consultants who do not have a particular business, a profit and loss statement can be easily generated. That can be done on one’s own through a spreadsheet, or through credit companies with professional accountants specializing in creating the statements.
A legitimate profit and loss statement should include all of the following with relevant dates that correspond with one’s bank statements as well:
- Total income
- Expenditures
- Business-related deposits
Bank Statements
Bank statements are an excellent resource to use as a show of proof of income because they indicate an individual’s cash flow. When it comes to tracking and proving income, these allow landlords of lenders to track all incoming payments from sales or clients.
It is always best to create a separate account for business-related payments to clearly identify the proof of income. If you choose to use a single account for business purposes and personal banking, it is imperative to highlight the business-related income and expenses to point out relevant income.
Conclusion
Self-employment is nothing short of liberating. Yet, with the standardized procedures of many institutions in today’s world, it can also become a frustrating setback at times. That is especially true when it comes to proving a reliable salary amount to organizations on which your livelihood depends – be that health insurance or a property realtor.
Keep in mind, though, regardless of which type of document is opted for to prove income, the most important thing is to keep that documentation constant. A file where all tax returns, bank statements, business payments and expenses, and monthly income can be compiled and kept organized and safe.
