Why do I need to provide a 2-year history of self-employed income? What if I can’t?

You usually need to be self-employed for at least two years, but in rare cases 12 to 24 months may also be considered. In those cases, your most recent signed federal income tax returns must reflect the receipt of the same (or more) income in a similar field as your new business. We usually cannot use income from a brand-new business because it doesn’t meet our 2-year requirement.

Income documentation for the last 2 years gives us a more accurate assessment of your earnings. We generally take a 24-month average if your income is stable or increasing, and a 12-month average if your income has decreased, but is stabilizing.

What is Proof of Self-Employed Income?

Proof of self-employed income refers to documentation that verifies your earnings as a self-employed individual. This is typically required when you're applying for a loan, renting a property, or filing your taxes. The proof of income can come in several forms, including tax returns, bank statements, and profit loss statements.

Why Do I Need to Provide Proof of Self-Employed Income?

As a self-employed individual, you may not have a fixed salary or regular pay stubs as proof of income. Therefore, lenders, landlords, and other entities may require a more detailed record of your income to assess your financial stability. Unlike traditional employees who receive regular paychecks, self-employed individuals may experience fluctuations in income flow.

By providing a two-year history of self-employed income, you can demonstrate an earnings pattern despite potential variations in self-employment payments. This documentation helps establish your ability to meet financial obligations, increasing your credibility and likelihood of approval for loans, leases, and other agreements.

The need for proof of income for any income type underscores the necessity for all individuals to demonstrate their financial capacity and stability when engaging in various financial transactions.

How to Provide Proof of Self-Employed Income

Here are some ways you can provide proof of your self-employed income:

1. Tax returns: Your annual tax return, specifically Form 1040, provides a comprehensive overview of your income for the year. It's an official document recognized by the IRS, making it one of the most credible forms of income proof.

2. Bank statements: Your bank statements can show your income from various sources. If you maintain a separate account for your business transactions, these statements can serve as a clear record of your business income.

3. Profit/Loss statements: These documents provide a detailed look at your business's financial health, showing your revenue, costs, and net profit over a specific period. Regularly updated profit/loss statements can help demonstrate a consistent income.

4. 1099 forms: If you've done work for a client who paid you more than $600 during the year, you should receive a 1099 form from them. This form can serve as proof of the income you earned from that client.

Remember, the key to providing proof of self-employed income is staying organized and keeping accurate records of your business's financial activity. The more organized and thorough you are, the easier it will be to provide the necessary documentation when needed.