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Whatever you earn in your practical life gets documented either by you or your employer. If it doesn’t, you should definitely document it because you’ll need proof of income at various points in your adult life.
If you’re a traditional employee who works full-time or part-time for a company, having proof of income is usually easy because it’s provided most of the time by your employer. For self-employed people, it might be a bit confusing, as freelancers don’t receive a consistent, steady pay like regular employees.
But don’t worry! In this article, we’re going to discuss the ideal ways to prove your income for both employees and freelancers so that you don’t get stuck anywhere. Let’s dive in!
Summary
- ➡ Employees can usually prove income fast with W-2 forms and recent pay stubs. These already show their gross pay, taxes, and net income in a clean format.
- ➡ Freelancers and independent contractors can rely on last year’s 1040 tax return, 1099 forms from clients. They can aslo use their own pay stubs or profit-and-loss records to show what they really earned.
- ➡ If a bank or landlord wants extra proof, clean bank statements, rental income records, and pay stubs from a tool like Paystubscity’s paystub generator can back up your main documents and make the whole process smoother.
What is Proof of Income?
Proof of income is any legitimate document that shows how much you earned in a particular period of time.
A lot of documents can be used as proof of income depending on the nature of the deal and what the other party demands from you. One document might be more important to some agencies than others. Let’s see why and where this proof of income matters.
Why Proof of Income Matters?
Proof of income matters because it shows that you’re trustworthy, financially stable, and credible enough to be trusted for a particular deal, credit, or loan.
You’ll need it in any of the following situations:
- ➡ Leasing a car or house
- ➡ Getting a loan
- ➡ Filing taxes
- ➡ Getting insurance
- ➡ Applying for a mortgage
- ➡ Applying for credit cards
In any of the above situations, the other party, whether it’s a bank or a landlord, is spending on your behalf and you’re supposed to pay that off. That’s why it’s important for you to prove to them that your income can pay off that debt.
Now let’s see what documents employees can use as their proof of income.
Proof of Income for Employees
If you’re an employee, you probably already have most of what you need.
Tax Forms (W-2)
A W-2 form is the most credible proof of income for an employee as it is an IRS-recognized document. At the end of each tax year, your employer must provide you (and the Social Security Administration) a W-2 form, also called a wage and tax statement, that outlines all your income, compensation, and tax deductions.
This is widely acceptable and you’ll rarely get asked for any additional proof of income.
Pay Stubs
Pay stubs are the salary slips you get from your employer each month. A legit pay stub includes your gross monthly salary, tax deductions like Social Security and Medicare, and net income.
It also has your year-to-date salary income and tax deductions, meaning the sum of all the salaries of the year up to the current month and the sum of all the tax deductions up to the current month.
Proof of Income for Freelancers
For freelancers, independent contractors, or gig workers, proof of income can be a few documents.
Annual Tax Return (1040 Forms)
This is the best and most credible document that freelancers can submit as proof of income because it’s officially recognized by the IRS. If you have been freelancing for a few years and have filed taxes in past years, you can use last year’s 1040 form and submit it as proof of income. The bank or landlord will hardly require or demand any additional form once they have your 1040.
1099 Forms
1099 forms are the information return forms that a business you worked with sends you at the end of the year if they paid you more than $600 throughout the year. This is an IRS-recognized document that you can use as proof of your income. It won’t show your total income, of course, but it would be just fine to serve the purpose of proof.
You’ll have to reconcile all the 1099 forms you have received over the year. So it’s better to organize them in your email or a folder as you get them. Clients might send you a 1099 form with wrong details or might forget to send one to you at all.
Profit and Loss Statements
Freelancing is a business model after all, and ideally you should be tracking all the business income and expenses that you make in a year. If you track all of your money consistently, you can have detailed proof of income at the end of the year.
Tracking your income has benefits way beyond serving as proof. It actually helps you manage your money in a better way as well.
If you have a big system and cash flow, you can also hire an accountant to manage things for you.
Create Your Own Paystubs
No, it’s not fancy. It’s quite a common and incredibly easy and efficient way to keep track of your monthly income. Not only do you have nice, clean documents that lay out your gross and net incomes, but it’s also a great way to calculate your tax deductions like Social Security, Medicare, and other federal and state taxes. They also make it super easy to file your tax returns at the end of the year.
If you’re working solo or have a small team and aren’t ready to invest in expensive accounting software or hiring an accountant, you can easily and efficiently generate your own accurate pay stubs with tax calculations and everything using Paystubscity’s paystub generator.
Accounting Software and Record-Keeping
If you have an established freelance system and you treat freelancing as a business, you can use accounting and bookkeeping software like QuickBooks. These tools help you keep track of your business income and expenses, and you can download reports in full detail.
Supplementary Proof of Income Documents
Sometimes, banks or lenders might ask you to submit additional documents for verification of your income proof. You can use the following documents as supplementary documents.
Bank Statements
Bank statements are your best bet if you don’t have a more credible document like a W-2 form or 1040 forms. They work for both employees and freelancers. They work as supplemental proofs along with the main document if the primary document isn’t enough or additional proof is required.
Bank statements can serve as a pretty good proof of income as long as you’re not using one single account for both personal and business transactions. Having a separate business account is also a smart move in general for freelancers, as it helps you file taxes and request business services as well.
Rental Income Records
If you have any rental income, you can use the agreement with your tenants and the records of payments as proof of income.
Conclusion
You need proof of income in numerous dealings like leasing a house, getting insured, or even applying for a credit card. If you’re an employee, the best proof of income you have is your W-2 form and your pay stubs.
If you’re a freelancer, you can use your 1040 form as your proof of income. It’s also important to have a complete record of your income and taxation. For this purpose, you can use bookkeeping software, get professional help, or generate your own pay stubs using Paystubscity’s paystub generator.
