How to prove your income as a freelancer
It’s no secret that freelancers may need to jump through some extra hoops if they want to rent an apartment, buy a home or take out a line of credit.
Whereas all regularly employed people have to do is show a pay stub, sometimes you have to do a lot more to prove your income as a freelancer.
Why You Need to Prove Your Income as a Freelancer
Before getting into how to prove your income as a freelancer, we need to talk about the why.
Even though more people are leaving full-time jobs to do their own thing, there’s still a bit of a stigma that “freelance” is code for “unemployed.”
And, unfortunately, some people will still try to mask that they are unemployed by calling themselves consultants.
The tides are changing in that regard, but the fact remains that you still need to provide proof of income in order for a landlord or creditor to know you’re good for your money.
Truth be told, if you were in your landlord’s shoes you’d probably do the same. Especially if you’ve been burned in the past.
How to Prove Your Income As A Freelancer
Now that we’ve talked about the why, let’s get into the how.
The good news is the ability to prove your income as a freelancer really isn’t that hard if you’re organized.
The bad news is you may have to go through some headaches before you can actually prove your income. You may also still need to do a little extra to get approved even after proving your income.
Tip #1: Get organized.
If it’s possible, you’ll want to start getting organized long before you plan on buying a house or asking for a line of credit. This will make your life a lot easier down the road when you need to show proof of income.
Here are some of the ways you can start getting organized in anticipation of the day when you need to show proof of income as a freelancer:
- Hire an accountant and bookkeeper so everything financial is kept up-to-date. Just note that at first you may need to find a lot of documents for them until everything is set up. It’s a hassle but it’s worth it.
- Find a secure cloud system to store important documents like tax returns, bank statements, credit card statements and client contracts. Once the system is set up make sure to update it each month with the new documents you receive from your financial institutions.
- Create a budget and stick to it. This will help you save a lot of cash which could be your saving grace. For example, if you’re trying to rent an apartment as a freelancer, a landlord may be more likely to approve you if they see you have savings in the bank.
- Give yourself a paycheck from your company. George Cuevas, long-time freelancer and founder of CollabMiami notes how he’s been able to show proof of income in the form giving himself a paycheck. “Because I can prove I get a consistent paycheck from my company it make these things easier,” he notes.
Cuevas also stresses the importance of staying organized throughout the years. “ I have a lot of years of proof, so maintaining goods records is critical.,” he advises.
Tip #2: Find the documents you will need to prove your income.
The next step in how to prove your income as a freelancer is to find the documents you know you’re going to need.
Here are a few documents that can help you prove your actually making money.
- Tax returns. If you have at least three years of tax returns even better. This can be used to show how your freelance income has grown.
- Bank statements. You may be asked for your account numbers so you may not actually need the statements, but it’s a good idea to have them anyway.
- Pay stubs and checks. You may need to show copies of checks from clients. Or, show that you give yourself a paycheck from your company.
You shouldn’t need any more documents than this. Additionally, since most things are electronic these days, you may just need to sign an authorization form that allows someone to pull up your tax info and financials.
Tip #3: Increase your chances of being approved.
Even if you are able to prove your income as a freelancer, you still may not get approved because your income is variable. You may also have high expenses for a business which reduces your net profit.
The good news is there are things you can do to increase your chances of getting approved. Here are a few things you can do so you’re more likely to get approved:
- Have a nice lump sum of cash on hand.
- Have a personal referral.
- Get a co-signer if necessary.
- Pay off your debts and increase your credit score.
“Having high credit scores and a low debt ratio is something that most creditors cannot argue,” notes Cuevas.
These four things can go a long way in making sure you get approved. Especially if your income isn’t where they want it to be yet.
Final Thoughts
While freelancers may have to jump through some extra hoops to buy a home or get a line of credit, if they know how to prove their income as a freelancer they should be fine. The main things to remember is to stay organized and to go the extra mile in preparing their finances.