More than 16 million Americans are self-employed. In fact, the total number of self-employed Americans, together with all the people they employ could account for about 30 percent of the nation’s entire labor force.
Proving income as a self-employed American can be hard, especially where you need to fill the self-employment verification form. Being self-employed doesn’t mean that you abscond on your credit responsibility.
Are you wondering how to prove income when self-employed? Read on for solutions.
Why Proving Income Is Important
Unlike with wage earnings issued to employed individuals, self- employed Americans must prove their sources of income for tax purposes. Whether you’re an independent contractor, sole proprietor, or a full-time business owner, you need to understand whether your income-qualifies for automatic tax deductions. But to prove this, you need to justify your sources of income.
First, you’ll need to know whether you’ve got a legal obligation to pay taxes on specified income. Second, you need to devise an accurate way of documenting your income and expenses. Finally, once you have classified and documented your income, you need to understand how to file your taxes where applicable.
Are You Subject to Self-Employment Tax?
Most self-employed individuals grapple with these questions when handling matters related to tax obligations. To get an accurate answer, you need to assess your net profits and losses by subtracting all expenses from your actual incomes. The figure you get is your net earnings.
You should report any amount above $400 or more in net earnings.
Form 1010 is the statutory reporting tool for net profits. However, your business may also incur net losses, which occur where the business expenses are more significant than the income. Such losses are deductible from gross income on Form 1040.
As a self-employed individual, you should file both annual and quarterly estimates on taxes. You may also need to file both self-employment tax and income tax. Given this tax obligation, you need to prove your income to ensure fair tax obligation expectations from the government.
Are you wondering how to go about the process of justifying your income? Here’s some useful information.
Independent Contractor Income
Differentiating between an independent contractor and an employee remains a contested issue. The IRS uses a specific checklist to determine whether your income falls within the category of a general contractor.
One such criterion is the extent of control you have over the performance of the specific work. Independent contractors set their hours, cater to their workspaces, and enjoy a degree of independence compared to employees.
Independent contractors often have specific specialized skills, which companies need. Such capabilities may be necessary where the company requires additional support temporarily. The IRS defines the difference between the employer and the independent contractor to ensure minimal vagueness when categorizing income.
If you do more than $600 worth of work for a company in a given year, you need to receive a 1099 MISC form. You should use the 1099 – MISC form all year round as proof of your employment income. With this form, it’s easy to justify that you are genuine, self-employed as opposed to being an employee.
Small Business Self-Employment Income
Small businesses should file Schedule C tax forms every financial period. If you run a small business, you might need to prove your income for the sake of taxation. Whether your income is represented by your gross receipts or sales, or your net profit or losses, you need to prove income by filing the Schedule C tax form.
You may need to prove your income depending on how you pay yourself from the small business proceeds. The Schedule C tax form has lines that help you list all the expenses, including rent, materials, payroll, or depreciation on fixed assets.
The actual income from your business is the net-profit. You then need to submit the schedule C Form to the IRS as proof of self-employment. However, you may also use the balance sheets or the profit and loss statements as supporting information for your small business.
The bottom line when proving income from a small business is on how you pay yourself. If out of the profits you earn, you opt to pay yourself as an employee, then you need to issue yourself with a Form W-2.
Small business owners may also opt to pay themselves from their owner’s draw. An owners’ draw is the amount of money that you take from the company. This is often the difference between your gross sales and the expenses. With the Schedule C tax, it is possible to show proof of small business income and how you are paid.
In addition, with balance sheets and profit and loss statements, you can also show proof of any other small business income or loss.
Income from Rent and Royalties
They’re people who earn an income from rent and royalties. If you own rental property, your bank balance will reflect the rent deposited. Such bank statements should be enough proof of your self-employment income.
In other cases, you might have published a song or written a book. This means that you’ll be entitled to royalties for such creative endeavors. You can use form 10-99 MISC from the companies that provide you with the royalties, which should act as your proof of income.
All commercial real estate rent is taxable. On the same note, royalties are also subject to taxation as ordinary income. You should report all royalties in Form 1040- SR in Part 1 of the Schedule E. if you want more information on how to prove income when self-employed, please the check stub template.
Did You Know That Not Paying Tax Is a Criminal Offense?
Paying taxes is a statutory obligation that each individual with a source of income should strive to meet. Whether you are an employee or you’re self-employed, filing your taxes after every financial year is mandatory. You, therefore, need to understand your sources of income for you to avoid any conflict with the IRS.
This guide offers you all the information you need on how to prove income when self-employed. With the help of an automated online template, you can now determine how to report and file self- employment income.
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