Cash is great, right? For self-employed individuals, it may seem advantageous to simply not report cash payments. Self-employed individuals may receive cash payments for all types of self-employment, whether they’re doing landscaping or accounting.
And that may work until you want to get a loan and don’t have the means to show proof of income for self-employed jobs.
What is Proof of Income?
Proving self-employed income is easy to do. Here are some documents that help to prove income:
- Tax return
- Business credit card report
- Schedule C – Profit and loss statements
- 1099’s, which are also reported to the internal revenue service
- Bank statements from a business account, with records of business-related deposits (linked to pay stubs)
What do Self Employed Individuals Need Proof of Income for?
One reason it’s important for a self-employed individual to have proof of income is to get a loan. If you haven’t been proving income on your tax returns, you’ll be hard-pressed to qualify for a loan.
There are other reasons proof of income for self-employed is important:
- Applying for health insurance purposes
- Applying for a lease or mortgage
- To purchase equipment
- To get a good business credit card
How to Prove Income When Self Employed
As any business owner knows, it is important to stay organized with documentation and records. Getting those in order are key steps to show proof of income as a self-employed person.
It’s easy to make proof of income using the right documents part of your routine as your own boss. Once you do that, it’ll be easy to include that proof of income when you file a tax return. Here are a few areas of focus:
- Cash deposits – your business bank statements may include records of cash deposits. You’ve got to back up those bank statements with documentation, such as invoices marked paid, to show a clear picture of proof of income.
- Accounting software – companies such as Zoho and Quickbooks make it easy to consolidate financial info for business purposes. With good software, you can match invoice documents with payments and deposits, especially with online banking.
Wage and Tax Statement 1099 Form
The IRS 1099 forms issued by a payer to a payee are reliable documents to show proof of income. The 1099-misc is issued from an entity that pays you as a self-employed individual. That entity also provides that information to the IRS. Any entity which pays you more than $600 during the calendar year is required to provide 1099 to you.
Profit and Loss Statements
The 1040 Profit and Loss statement form is also called Schedule C. The form is a legal document. Examples of business expenses (not an exhaustive list) include vehicle expenses, advertising, insurance (not health), depreciation of equipment, legal services, office expenses, and more.
Annual Tax Returns
As you’re tabulating expenses, such as those listed above, keep this amount in mind when filing taxes on self-employment income: $12,000. That’s the amount of the standard deduction that single people can use when filing tax returns.
For example, let’s say you’re a business owner of a landscaping business. Your gross earnings were $32,000. You could take the standard deduction and pay taxes on $20,000. If your expenses were greater than $12,000, you would itemize them on your federal tax return using the Schedule C profit and loss statement. That’s where you’d show self-employed proof of income versus expenses.
You should have set up a separate bank account for your business, and have a business credit card that is only used for your business.
Self Employed Pay Stubs
You can ask an entity/client to provide you with pay stubs. Or you can link payments from clients with invoices. Keep meticulous records linking those documents with deposits.
Online Payment Records
You may be paid online into an entity such as Pay Pal or a similar App, or you may be paid via direct deposit into your business bank account (easy to prove using your bank statement).
With all of those methods, you can generate monthly, quarterly, and/or annual records of payments.
Read More: how to file self employment taxes
How do you Prove Income for Self-Employed Mortgage Loans?
A bank or entity that provides mortgage loans is going to want to see your tax return records for the past 3 years. Your other financial holdings 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 may own stock. A lender and other potential creditors like all of that, which show your total income.
Provide all the information you can. A lender wants to know that if you default on the loan, the financial institution has ways to get its money.
What’s your credit score? If you apply for a mortgage, you’ll soon learn the score. If it’s low, find out why, and take steps to rectify any issues that are knocking down the number.
Can You Get Personal Loans for Self-Employed With no Proof of Income?
Yes. But if you have no or low proof of income, lenders may consider you to be high risk. Although you may get a personal loan, it may not be for a high amount and you’ll most likely be paying 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 expression implies a secretive exchange of cash, because……well, that’s what it is.
If you are paid that way and want to prove income, you’ll have to provide some sort of documents to support your cash deposits. When you file your 1040 Schedule C profit and loss statement, you’ll list your income – and the sources of income.
Bear in mind that if you report “under the table” income, the entity which paid you that 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 that pays you that way.
If paid in cash you can:
- Make bank deposits and link the cash amount to (paid) invoices that you generate.
- You can also get a business credit card that can be “refilled” using cash deposits. The 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.