What You Need to Know About Proof of Income
Consumers who need to lease a car or rent an apartment need to prove the income that they earn. The party leasing the car or renting the apartment needs evidence that you can afford to make the payments. If you’re applying for a mortgage loan, or refinancing a loan, you’ll also need to prove your income. Business owners often need to prove company income, in order to rent or purchase assets.
Paystubs and Other Documents to Prove Income
Third party evidence is the most reliable way to prove your income. Here are three common methods to confirm income:
- Pay stub: Your pay stub is the most popular way to prove income paid by your employer.
- Employment Verification Letter: An employment verification letter verifies income or salary and dates of employment
- Bank statements: Your bank statements document all of your incoming deposits, including payroll deposits, and the checks and debits coming out of your account.
- Tax forms: W-2s, 1099s, and other tax forms document the income you earn in a particular year.
- Tax returns: Taxpayers use W-2s, 1099s and other documents to complete a personal tax return. Each line item in the income section of the tax return is supported by documentation that proves income.
Larger dollar amount transactions, including mortgage loans and mortgage refinancing loans, may require you to provide all of these documents to the lender. Smaller transactions require less documentation.
Understanding Documents that Report Income
A lease, rental agreement, or loan may require you to provide these documents:
Reviewing a Pay Stub
Most businesses are required to issue pay stubs to employees. When you enter into a small transaction, such as an apartment lease, the landlord may simply request a pay stub for proof of income.
The pay stub lists the details of an employee’s pay for the most recent pay period, and totals year-to-date. The document lists your salary or your hourly wages earned, including overtime, tips, and commission pay. Pay stubs list all deductions from pay, including income tax and FICA tax withholdings.
Reviewing a pay stub is helpful, because the form reports the net pay earned for the pay period after all deductions. The reviewer will see how much payroll income you have available to make rental or loan payments.
Filling Out Form W-4
Employees complete a W-4 when they are hired, or when they have a pay increase or a change in family status (child). The W-4 is used to calculate allowances, which help to determine the dollar amount of taxes withheld from pay.
An employee with five children, for example, has more exemptions on the personal tax return than a single taxpayer. Adding more W-4 allowances for children means that more taxes are withheld from pay.
Understanding Form 1099-NEC
Form 1099-NEC reports taxable income paid to independent contractors (freelancers). Keep in mind that income taxes and FICA taxes are not withheld from payments to independent contractors. The contractor is responsible for tracking his or her income, and determining the tax liability on earnings.
Businesses who pay contractors must send all 1099s to the IRS each year, so that the IRS can verify that the contractor reported the payments as income. If a contractor is paid less than $600 during a particular year, a 1099 does not have to be issued. However, the income is still taxable to the contractor.
Information on Form W-2
Form W-2 documents the wages and tax withholdings paid to an employee during a tax year. Employers must issue W-2 to workers, so they can include the W-2 income on a personal tax return. Workers compute the tax liability and subtract the taxes withheld on the W-2 to determine the remaining taxes due for the year.
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