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.
Tax Returns
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.
Bank Statements
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.
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Thanks for this post. This is something I’ve been constantly brushing up against. And just to add to your great advice, I recently contacted a lender about buying a house and she said that the two years of freelancing income usually applies, but there could be exceptions in two cases:
1.) Your pre-freelance income was from a job with the same or a very similar job description
2.) If you have a spouse or other collateral, the bank/lender to agree to accept just one year of freelance income no matter what you did before
The timing is ridiculous. I’m actually going to see a Realtor today.
Thanks!
Great post! I’m too young to worry about this, but such things will come up for me.
Thanks for this post! I have not run into problems with this yet, but I suppose it is only a matter of time before I do. Good things to know.
I’ve really been wondering/worrying about this lately. I’m just starting to freelance and I’ll be moving soon, so this information is very relevant. Thanks
Good article, I was just thinking about this situation lately as my lease is up this year and I’m looking to move elsewhere.
I’ve been thinking about this a lot lately. Would it be more effective to just register myself as an LLC and write myself paychecks?
Great Article
If you a recurring client base then you can use standing orders and fixed term contract arrangements. i.e. if you tie someone in for 12 months get them to sign something to that effect.
An accountant (yours if you use one) is usually a good person to have as a reference. They will use disclaimers but can provide effective management figures and projections.
Great post! I’m also planning on moving next year and have been paying close attention to my record-keeping for this same reason. I’ve found in the past a tax return usually does the trick, though I’ll definitely be printing out a record of invoices to drive the point home.
This is something I have only just stumbled across myself. I work Full time as a computer engineer but also spend most of my spare time freelancing.
I am currently in the process of buying a new house and in order to get the mortgage I require, i needed to provide evidence of my extra income.
The only information I was currently able to provide were banks statements and invoices, this seemed to have worked so far.
I ran into this problem last year when I was trying to rent an apartment with my fiance. He was about to open the doors to a business he’d been working on for about a year and a half. During that time, he’d been living off his savings and hadn’t generated any income. No apartment managers understood the situation. They asked us to provide paycheck stubs and he explained his situation, saying he had no paycheck stubs. Their answer was usually, “Okay, no problem, just give us the income returns for your business.” They didn’t seem to grasp that a business that wasn’t open yet wasn’t generating income. In the end, luckily, my income was enough to satisfy them that we could pay the rent, but if it hadn’t been, I don’t know what we would have done.
Before the economic collapse it was simple to get a loan. Just show some bank statements as a proof of income stream, and provide your credit score.
Right now its almost impossible to get a loan for anything, unless you have a secure job. If you want to refinance your existing home it is better not to pay for the house first (another words have your credit partially ruined) then the bank starts working with you, else the bank won’t work with you. It sounds funny, but thats how it works. It worked for me.
Tax returns are good. That’s why if you’re a freelancer, even though it might seem like a good idea to urm, save money, on your taxes, it also might be worthwhile paying a decent amount. It’s solid proof to institutions that need it that your business is legit and you’re profitable. Not to mention you’ll finally have something to show Aunt Doubtful at Christmas so she’ll lay off the whole ’so when are you going to get a real job’ thing.
This is one of the most frustrating and unfair parts about being self employed. Our economy and financial system is really set up to reward corporations and encourage people to work for them. Getting health care is another example of how freelancers are discriminated against. Hopefully policies will change for the better as more people transition to being self employed.
An amazing post. This is such an important issue and you covered it in a very understandable way.
Thank you
there are new rules now for independent contractors when buying a house. if you’re thinking about buying one (or even refinancing) check with lender before you get to far into it. even tho i make much more than my paycheck shows (thus saving on employent taxes, etc), and even tho i have a great credit score, it was still difficult to get approved.
Excellent post! For my first apartment last year I used a bank statement. I use a bank statement for everything where I need to provide proof of income and this has generally worked well for me. Then again, it depends upon where you live. Fortunately for me, I am a healthy young woman so I can go without health insurance until finances will allow. There’s helpful information in this post though. As I had difficulty the other day when applying for college, I am under 24 and I freelance. Have not had my yearly taxes come up yet so I can’t get into the local college as I have only been in my own apartment for 8 months and they want identification that is a year old! Then they want proof of independence in two forms and I only have one. Hopefully someone can email me some information about a good online college for journalism? Thanks for the post!
An amazing post. This is such an important issue and you covered it in a very understandable way.
Thank you
Great post! I”m new at freelancing and actually never thought about that untiI I read this post.
thank you!
I work virtually as a freelance bookkeeper for several companies. In several circumstances, I have been asked to simply write a letter on my letterhead to the bank, verifying that the self-employed person was my client and did, in fact, have an ongoing, viable income stream. So, if you’re working with an accountant or established bookkeeper, a letter from them might carry some weight with the bank.
Thanks for this great post! I tried to apply for a credit card and didn’t know what to show as my proof of income. These tips will help out a lot!
Thursday, this is an excellent post. I might have to take by the assertion I made on Freelance-Zone.com earlier today that taxes, and the ins and outs of personal finance in the freelance world are under-represented topics. Care to do a guest blog post on finance-related matters for FZ? I’ll drop you a line off-blog to discuss
It can’t apply to everyone, but incorporating (here in the US) lowered my taxes and gave me verifiable income. Plus, I can say “inc” at the end of my business name. The first year I was incorporated I saved several thousands over the cost of having incorporated. It’s worth looking into in your state…
I am self employed and used http://www.IncomeDocument.com to print CUSTOM proof of income/employment FAST! Print past/future pay check stub, w2 and 1099 for yourself and every employee! http://www.IncomeDocument.com Add a Comment
Good topic! I just recently bought a house, just before doing some freelancing on the side, so I haven’t had to deal with this YET but I KNOW I will be in the future.
I just recently switched from a full-time office job to a part-time job and freelance work on the side. I know questions such as the amount of income to file taxes on AND how to prove income. Thanks for clearing some things up!
@Joseph Rooks had a good question! Would it be easier to form an LLC and just pay yourself?
Proving your income is always going to be difficult. If you are an online freelancer then the chances are your income is going to go into a savings account. You will need to make sure this income has been steady for around 12 months then you should not have much of a problem applying for a mortgage.