Income verification for a small business sole proprietor, independent contractor or a freelancer doesn't have to be any more difficult than it is for a person who receives a regular wage or salary. Although a self-employed person can't provide pay stubs like a regular employee, a combination of tax returns, profit and loss statements, bank statements and third-party verification are common alternatives.
Tip
Protect individual privacy by asking that everyone black out Social Security numbers on all income verification documents.
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Federal Tax Returns and Business Documents
Request federal tax returns and 1099-MISC forms for the previous two or three years. Self-employed sole proprietors must file IRS Form 1040 and Schedule C Profit or Loss from Business, so request and review both. For those not required to file Schedule C, profit and loss statements -- documents that identify annual sales and expenses -- provide the same information.
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Bank Statements
Checking and savings account statements can help you determine how well an applicant manages day-to-day finances. Depending on your needs, request statements from the previous 3 to 6 months. Look for things like frequency of deposits, the source of each deposit, average daily balance and overdrafts.
Third Party Verification
Third-party verification is a way to support -- not replace -- other types of documentation. Some people use third party verification to authenticate the existence of the business. For example, you might request 1 to 3 notarized letters from customers specifying the type and dates of service or sales and then cross-reference these with invoices or sales receipts. Another option is to request a notarized verification letter from a Certified Public Accountant that verifies the business's existence and ownership.