Understanding Income Verification Documents

March 4, 2024 by Stacy Stiber

Income verification is essential for establishing the origins of particular funds or assets. Lenders, landlords, and many other entities use income verification documents to determine if someone is eligible for a loan, a service, or a rental. Income verification is equally important for financial institutions and lenders, allowing them to have an accurate overview of applicants’ financial status.

As income verification usually precedes major life events like buying a house, renting an apartment, or applying for a loan, it is essential to understand income verification documents and the process of verifying income, especially as employers may frequently receive verification requests for their employees.

Common Income Verification Documents

When asking for income verification documents, companies or institutions usually clarify what documents applicants need to submit.

One of the common ways to prove income is to provide a proof of income letter, which determines and confirms applicants’ income and employment status. This letter should clearly state basic income information, including working hours, annual income, or wage per hour. Proof of income letter should also demonstrate how applicants expect to maintain or enhance their income in the future.

In addition to this, applicants might need to provide supporting documents as proof of income. Typical income verification documents are:

Pay Stubs

Pay stubs are given out to employees at the end of each pay period and in many cases are a sufficient income verification document. Pay stubs from at least the last two months can determine how often applicants are paid, what their gross and net income is, and if it fluctuates.

Wage and Tax Statement

Wage and tax statement or Form W-2 provides information about applicants’ annual earnings. While this kind of income verification document is reliable, it may not give an up-to-date picture of applicants’ income since it does not reflect raises, job changes, or promotions.

Last Year’s Tax Return

Last year’s tax return or Form 1040 details all the sources of income that applicants have earned over the tax year. This form is very comprehensive and does not overstate applicants’ income. However, it only proves income from the previous year, thus making it necessary for applicants to provide additional income verification documents.

Social Security Proof of Income Letter

If prospective applicants receive Social Security benefits as their source of income, they can request a letter that demonstrates their monthly payments. Given that such income comes from the government, this income verification document can be easily verified.

Annuity Statement

An annuity statement shows the income that comes from an agreement that applicants have with an insurance company. These statements show the exact amount of money applicants earn as well as the payout schedule. However, it is important to check the date of expiration when it comes to this type of income verification document.

Pension Distribution Statement

A pension distribution statement or Form 1099-R includes retirement benefits like pensions and annuities. If applicants receive a pension that serves as their income, they can provide this statement to show their yearly pension distribution income.

Court-Ordered Agreements

If applicants receive compensation from an agreement such as alimony or child support, applicants can demonstrate this income in a letter detailing the agreement. However, it is important to note that court orders can be appealed or stalled for a significant amount of time, preventing applicants from receiving a steady income.

Unemployment Compensation Letter

Applicants can provide a government document generated by the state unemployment office if they receive unemployment benefits. When unemployment compensation letters are used as income verification documents it is important to check their expiration date even though this money is guaranteed income from the government.

Workers’ Compensation Letter

Workers’ compensation is distributed in cases where an employee is injured on the job. Workers’ compensation letters are issued by either the insurance company or the court awarding the compensation and can be used as income verification documents.

Interest and Dividend Income

If applicants are paid out dividends, this is reported on Form 1040 and can account for some or all of their income. While this income is very reliable, it usually does not make a significant difference in the applicant’s income level.

Severance Statement

Depending on the job, applicants may receive a severance package that can serve as their income. Severance statements can be used as proof of income. However, it cannot be used as a reliable income verification document since this is usually a one-time payment.

Use this detailed guide to help you understand income verification and how important it is to verify applicants’ finances and make an informed decision.

Income Verification Documents for Self-Employed Individuals

Self-employed income is usually considered less stable, thus requiring additional efforts in the process of verification. Self-employed individuals can provide some or all of the following income verification documents to prove their income.

Annual Tax Returns

The wage and tax statement for the self-employed, Form 1099, proves the wages and taxes of a self-employed person. It is one of the most reliable income verification documents since it is a legal document, officially recognized by the Internal Revenue Service.

However, self-employed individuals are not always required to report income below a certain amount, so tax returns may underestimate total earnings. In this case, they can provide annotated bank statements to prove any income that was not recorded.

Bank Statements

Bank statements can serve as income verification documents as they prove a stable flow of income if self-employed individuals have a history of steady deposits. At the same time, bank statements can misidentify certain expenses or deposits. This is why it is advisable to keep a separate account for business purposes only.

Profit and Loss Statements

Profit and loss statements track income, expenses, and all business-related deposits for the year. As such, they can demonstrate the income of self-employed individuals. In this case, relevant dates should match banking statements, whether physical or online.

Many self-employed individuals are paid electronically through different services and app-specific platforms. If so, it is important to keep records of those payments and take other verification steps to make documenting income easier.

Simplifying the Process of Income Verification

In order for income verification to be successful, it is necessary to provide appropriate income verification documents. Thus, mortgage companies, rental companies, or government agencies can determine if applicants have a steady income, are able to make monthly payments on time, and make informed decisions.

As documents that can be used in this process serve different goals, the best approach is to gather multiple income verification documents, especially from applicants who are self-employed. After this, it is important to investigate and confirm that applicants receive the compensation they reported.

Finally, automated employment and income verification can be vital for helping different companies and organizations to get current and precise information instead of relying on the honesty of applicants to accurately reflect their sources of income. Also, such tools make the confirmation process less risky as it is done in real-time. At the same time, applicants benefit from a speedy and efficient employment and income verification process as well because there is no more waiting for documents, manual verification, or working with other people’s timelines.

Simplify income and employment verification with Experian Employer Services to enhance the entire process and get data that is up-to-date, verified, and delivered in real time.

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