How to Prove Self Employment Income

When you are self employed, borrowing money for a home or car is tougher than if you had a "real job" with a real salary. And why is this? A self employment income is unpredictable and hard to verify, with no guarantee of a future income.

With loan companies tightening up the requirements for home and auto loans, your best guess of self employment earnings is no longer enough to qualify for a loan. Loan companies now want proper documentation along with at least two to three years of tax returns.

Having been self employed for most of my adult life, I've run the gauntlet of self employment income verification a few times. Here's how I furnished proof of my income when we refinanced our home last year.

Year-to-date balance sheets. In lieu of a pay stub which shows year-to-date earnings, some lenders will ask for a year-to-date balance sheet instead. A balance sheet is a record of all your earnings and invoices typed up in an easy to read format. My banker accepted a self-prepared balance sheet supported with Paypal invoices and my bank statements for our refinance; other lenders may request a balance statement that has been professionally prepared by an auditor or accountant.

Since I use Quicken to track monthly and year-to-date self employment income and expenses, it was easy to compile these records into a report form that was acceptable to my lender. If you don't have a bookkeeping program on your home computer, Provident Planning is one resource where you can find a free business spreadsheet for tracking business expenses and income.

Schedule Cs and Tax returns. Tax returns are reliable proof of self employment earnings for prior years. Most lenders require at least two years of tax returns as proof of income, though my bank asked for three years. What this means for the newly self employed is that typically you must be self employed for at least two full tax reporting years to be eligible for a loan.

Proof of future earnings. While apartment managers and credit card companies seem to care more about a payment history rather than future earnings, many lenders and banks are now asking for proof that you will be able to make monthly loan payments. My banker wanted copies of my contracts and royalty agreements to verify that my income would continue in the years ahead. Other documents that can verify future self employment income include invoices, rental leases (for rental income), and records of accounts payable.

More articles by this contributor:

Home accounting system setup for the self employed.
Home office deduction for the self employed.
Invoice basics for home businesses.