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Working as a self-employed business owner or an independent contractor can have enormous advantages. The ability to go your own way and earn money based on your experience and talents is certainly appealing, as is the chance to work from just about anywhere.
But for the self-employed, activities the rest of the world takes for granted can present some extra challenges. From filing taxes to making a budget, many parts of financial life are far more complicated for the self-employed.
Chief among these challenges is proving your income, something nine-to-five workers rarely give a second thought. For the traditionally employed, verifying income can be as simple as giving the bank a couple of pay stubs, but for the self-employed, the process is a little more involved.
Why You Might Need to Verify Your Income
There are several times when a self-employed individual or contract worker would need to verify their income. Circumstances can vary, but here are some examples of when income verification might be required.
• Applying for health insurance through the official Federal government marketplace or various state exchanges – Health insurance is a major consideration for the self-employed, but programs like the Affordable Care Act make it easier. Government subsidies can make buying health insurance more affordable, but qualification is based on income.
• Qualifying for small business loans and government grants – There are loans and government grants available for qualified small business owners, but applying for them typically involves verifying and disclosing your income.
• Applying for government benefits – Many government benefits, from health care to housing subsidies, are income-based. If you plan to apply for any of these benefits, you will need a way to verify your self-employment income.
• Buying a home – Getting approved for a mortgage can be a real challenge for the self-employed, especially if your business is relatively new or your receipts vary from month to month. If you are applying for a home loan, you can expect a vigorous income verification process.
• Getting a car loan – Rideshare drivers who need to upgrade their vehicles may encounter problems during the loan application process, starting with difficulties verifying their income. Everyday drivers may face these issues, so keeping careful records is important.
• Setting up a business bank account – Having a separate bank account for self-employed income and business receipts is important, but the bank may ask about income when you fill out the application.
• Renting an apartment – When you rent an apartment, the landlord will want to know you can pay what you owe. Some landlords are wary of renting to self-employed individuals, so having quality records could be key.
• Making quarterly income tax payments – Advance income tax payments are a way of life for the self-employed, and income verification will make it easy to stay in the good graces of the IRS without paying more than you owe.
Strategies for Verifying Self-Employment Income
Being able to verify income is very important for the self-employed, and there are strategies that can make it easier. If you are self-employed, you need to keep scrupulous records, not only for future income verification but for current taxes and living expenses as well. Here are some strategies you can use to verify your income as a self-employed individual, independent contractor, or small business owner.
• Bank statements – Hopefully, you already have a separate bank account for your self-employment income and business receipts. If not, now is the time to set one up. Once that account is in place, you may be able to use it to document the income you are claiming.
• Profit and loss statements – If you use a small business accounting software package like QuickBooks, you can use the profit and loss statements it generates to verify your income. You should keep these profit and loss statements anyway, so using them for income verification gives you an additional benefit.
• Income tax returns – If you are self-employed or work as an independent contractor, your income tax return probably includes a Schedule C. Depending on what benefits or loans you are applying for, you may be able to use that information to verify your business income.
• Online payment records – Many independent contractors and small business owners are paid electronically through services like PayPal and app-specific platforms. If you get paid this way, it is important to keep records of those payments. Taking screenshots, downloading statements, and taking other verification steps will make documenting your income easier.
A growing number of men and women are ditching the traditional world of work for the flexibility and freedom of self-employment. If you are one of those individuals, you need a strategy for documenting and verifying your income.
Knowing how much you are earning and where that money is going will make budgeting easier, so you can save more money and build a cash cushion against future slowdowns. In addition to those important benefits, having the ability to verify your income can help you qualify for health insurance subsidies, car loans, and even a home mortgage.