The Challenges Freelancers Face When Proving Their Income – and How to Overcome Them

Being a freelancer carries a number of important benefits, from the ability to make your own hours to the freedom to work from virtually anywhere. But being your own boss also comes with some serious challenges, including how to prove your income to a skeptical mortgage lender or reporting your income accurately when filing your taxes.

Not reporting your income accurately or failing to report your income can trigger red flags and get you into trouble with the IRS. This can lead to you owing back taxes if the IRS thinks your income is different than what it might actually be.

With COVID-19, you’re likely working remotely and maybe in the market for a new home. So when it comes time to borrow money, whether it is to purchase a new car for your freelance ride-sharing business or buy a home for yourself and your family, you may have difficulty documenting your income. That is because lenders are used to asking for pay stubs and W-2 forms, and they may not understand that independent contractors are paid in other ways.

This is where having complete tax returns for past years is important.

So how can you overcome these challenges? Here are some strategies for documenting your freelance income and avoid getting a surprise bill for back taxes owed to the IRS or State.

Note: If you owe back taxes and need tax relief, our firm can help! We specialize in resolving complicated self-employed and small business back tax problems. Contact our firm today! 

Use an Online Payment Service

It can be hard for freelancers and other independent contractors to document their income, but using an online payment service can make it easier. Online payment providers like PayPal keep careful records of who they pay, how much money is disbursed, and where the money is coming from.

If you receive your freelance income through such a service, proving your yearly income could be as simple as printing off a report or emailing it to the lender. You may still need to provide additional documentation to your tax professional or the IRS, including bank statements but the payment report will be a good start.

Ask Your Bank for an ACH Report

For freelancers who are paid directly, an Automated Clearing House (ACH) report can serve the same purpose as a ledger from an online payment service. The ACH report will show when payments were made, along with the amount of each payment.

If you know you will need to prove your income, be sure to keep copies of your bank accounts for at least the past 12-24 months. Maintaining paper copies of bank accounts and saving electronic copies to your computer will ensure those critical documents are available when you need them.

Keep Your Past Years Tax Returns

As a freelancer or other self-employed individual, you have a responsibility to report all of your income, whether or not you receive a formal 1099 form. It is important for freelancers to keep careful track of their income and expenses, as this will make tax filing season much easier.

Once your taxes have been filed, you will want to keep copies of your returns for at least the last three years, but having more documentation is always better. Keeping copies of your tax returns is a great way to make sure your income is reported accurately year in and year out.

If you have years of unfiled tax returns, call our office. We can help file multiple years of returns.

Keep Your 1099 Forms

A single freelancer may have dozens of clients over the course of a year, and keeping track of all those payments can be a real challenge. If you want to make your life easier, setting up a filing system for all those 1099 forms is a good place to start.

Scanning each 1099 form as it is received and saving it to your computer or cloud account will make accounting a lot easier, but it will also simplify the process of applying for a loan or mortgage. Having this information at your fingertips will make it much easier to prove your income, so you can qualify for the loan you need.

Average Your Monthly Income

For freelancers, life is often feast or famine, with tons of work one month and nary a lead the next. That can make their income highly volatile, further complicating the loan qualification process.

These peaks and valleys in freelance income can be disconcerting, but over time experienced freelancers may detect a pattern that underlies the chaos. Freelancers who hope to qualify for a loan or mortgage should track their monthly income carefully, averaging out the numbers to reflect their true annual earnings.

This income averaging can be very useful when talking to lenders, especially when accompanied by documentation to back up those earning claims.

It’s Your Responsibility

Life as a freelancer can be wonderful, but it does make proving your income a bit more difficult and it can make tax season more complicated. One thing to always remember as a freelancer is that it’s now your responsibility to file and pay your taxes on time. We’ve helped freelancers who find themselves behind on their taxes because they failed to plan properly. We hope this article will help you stay on track but if you need help with back taxes, want tax relief, or need to file past years of tax returns, contact us today!

Our firm specializes in tax problem resolution. We have CPAs, EAs, and attorneys who can represent you before the IRS. We serve clients virtually so don’t hesitate to reach out. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to our firm and we’ll schedule a no-obligation confidential consultation to explain your options to permanently resolve your tax problem.