Proof of Income: A Freelance Problem
If you’re renting an apartment or buying a new home, you’ll probably be asked to provide proof of your income. In some cases, the same goes when starting a new service or opening a line of credit. Before I had health insurance, I even had to provide proof of my income every time I needed to get a doctor to sign for a renewed prescription.
Freelancers can’t exactly present a pay stub, though, making what should be routine paperwork much harder. The fact that the situation isn’t all that common for most of the people you’ll be dealing with just complicates matters more. When you tell an apartment manager that you don’t receive a pay stub, it’s very possible that he or she won’t even know what sort of paperwork can substitute for it.
But you can prepare yourself for these sorts of situations, providing the necessary information. While a customer service rep or a manager may not be able to figure out what to do with you, just by having some sort of paperwork in hand, you can often resolve the issue and move past it.
As far as proof of income goes, your tax return is often your best bet. It clearly shows just how much you earned in the last year, which is generally a good base estimate of how much you’ll earn this year — as far as a service provider is concerned. And it’s a document that just about everyone trusts: no one tries to inflate their income on their taxes and run the risk of paying higher taxes, after all.
If this is your first year freelancing full-time, you may run into some problems with using your last tax return, though. Depending on what you need proof of your income for, you may hear that a tax return for a year when you were employed does not reflect your current income.
Even taking a part-time job can throw things off, in some cases: if you’re trying to get a mortgage in order to buy a house, for instance, you’ll be asked for at least two years’ worth of income tax returns that show your income as a freelancer. Some lenders are willing to at least look at other documents if you can’t provide enough information through your tax returns, though.
Health care providers, especially those providing some sort of subsidized care, seem to prefer bank statements over other documents demonstrating your income. At the very least, it gives them a clear picture of how much money you have — no matter how you came by it.
It may be necessary to bring in several months worth of bank statements, though: many freelancers have an income that varies from month to month, so a single month’s statement may not be enough.
Invoices and Contracts
In most cases when you’re asked to provide proof of income, someone wants to know how much you can afford over the next several months or even years. You have that information at your disposal, through your invoices and contracts, with more detail than either a tax return or a bank statement can provide.
A report listing the invoices you’ve made over the last year or so, along with a list of the projects you’re already contracted to work on that you haven’t invoiced for yet, provides all the information necessary to predict your income.
Unfortunately, since this information is not confirmed by external sources (such as the IRS or your bank), it’s generally not the first choice for someone like a mortgage lender. However, if your other documents don’t clearly demonstrate your financial situation, a list of your invoices can make a major difference.
Note: A few times a month we revisit some of our reader’s favorite posts from throughout the history of FreelanceSwitch. This article was first published August 13th, 2009, yet is just as relevant and full of useful information today.