Handling Self-Employed Applicants: Income Verification Tips

From freelance designers to e-commerce business owners, more renters are working for themselves than ever before. Approximately 10% of the US workforce is self-employed, with more and more people continuing to go the self-employed route each year.

While it’s perfect for individual flexibility and entrepreneurship, it makes income verification a bit more complicated. Unlike traditional employees, self-employed applicants don’t always have predictable paychecks or standard paperwork to share. 

Income can vary monthly, and documentation often looks different or is missing altogether. This is where it can get tricky for property managers and landlords trying to make informed leasing decisions. 

We’re walking you through how to confidently verify income for self-employed applicants, so your tenant screening process is fair, consistent, and fraud-resistant.

Quick Insights

• Self-employed applicants often have variable income, making verification more complex.

• Request key documents, like tax returns, bank statements, profit and loss statements, and 1099 forms.

• Tax returns provide a comprehensive view of income over time. Focus on requesting forms like 1040 and Schedule C.

• Bank statements reveal cash flow and can confirm regular income deposits.

• Profit and loss statements offer insight into business performance and financial stability.

• 1099 forms can verify income from various clients, suggesting a diversified income stream.

• Look for red flags, like inconsistent information, altered documents, or unverifiable references.

• Third-party verification services can streamline the process and improve accuracy.

• Consistent procedures and thorough documentation help ensure compliance with fair housing laws.

• Using advanced verification tools protects your property and supports reliable tenant selection.

Unique Challenges for Income Verification of Self-Employed Applicants

Verifying a self-employed applicant’s income brings many unique challenges for property managers and landlords. Unlike traditionally employed renters with consistent pay stubs and employment verification, self-employed individuals tend to have ever-changing income streams, making it more complicated to assess their financial stability.

Here are a few challenges when verifying their income:

• Unpredictable income streams
• Complex or missing financial documents
• Higher potential for fraudulent documents
• Lack of third-party verification
• Inadequate financial management
• Tax deductions impacting reported income
• Cash-based businesses with limited documentation

Documents to Request From Self-Employed Applicants and How to Assess Each Document

Due to the variability and complexity of self-employed applicants’ earnings, verifying their income and financial stability can be challenging for landlords and property managers.

To ensure you’re thorough, request a range of documents. Here’s what we recommend.

Tax Returns

Tax returns are one of the most reliable sources of information about a self-employed individual’s income. Make sure to request the last two years of federal tax returns. 

And, if applicable, focus on: 

• IRS Form 1040
• Schedule C (Profit or Loss from Business)
• Schedule E (Supplemental Income and Loss)
• Schedule F (Profit or Loss from Farming)

Compare the tax returns from the last two years to identify any significant changes in income. Stable or increasing income is always a positive indication of their ability to pay rent.

Bank Statements

Bank statements offer insight into the applicant’s cash flow and income consistency. Ask for bank statements from the past six to 12 months. Look for regular deposits and overall financial activity. 

Look for consistent and regular deposits that align with the income reported on tax returns. Sporadic or inconsistent deposits could be a cause for concern. This is also a good time to make sure they have enough funds to cover rent and other living expenses, suggesting good financial management.

Profit and Loss Statements

Profit and loss (P&L) statements summarize the revenues, costs, and expenses collected during a specific period, painting a clear picture of the applicant’s business performance. Request the most recent P&L statements, ideally for the past year or the current year-to-date. 

Review the statements for consistent or increasing revenue over the previous months or quarters. If you spot any sudden drops in revenue, don’t hesitate to ask for further explanation. 

You’ll also want to assess how well the applicant manages expenses. A high expense-to-revenue ratio might suggest poor financial management.

1099 Forms

Self-employed people often receive 1099 forms from clients, which report income from various sources. Ask for these forms from the previous year to verify income consistency and the total amount earned. 

When reviewing, add the amounts on all 1099 forms and compare them with the income reported on the tax returns and bank statements. Multiple 1099 forms from different clients suggest a diversified income stream, which is typically a good sign.

Business Licenses and Registration

Business licenses and registration documents confirm the legitimacy of the applicant’s business. Confirm the company’s authenticity through its licenses and registration documents and check for professional partnerships or certifications that add credibility to the company.

Client Contracts or Invoices

Contracts and invoices can show ongoing work and expected future income, providing additional assurance of financial stability. Ask for recent client contracts or invoices, especially those showing long-term engagements or consistent invoicing.

Credit Report

A credit report offers insights into an applicant’s financial responsibility. First, you’ll need to request authorization to run a credit check. Once approved, review the credit report for payment history, outstanding debts, and overall credit score.

Business Bank Account Statement

If an applicant has a separate business bank account, these statements can further clarify the business’s financial health. Request statements from the business bank account for the past six to 12 months, and make sure you verify a clear separation between business and personal finances. 

Lastly, look for a healthy cash flow, with regular deposits and sufficient balances to cover business expenses.

Why Verifying Income Stability Matters

Verifying how much income a self-employed renter earns is just half the story. Equally important is confirming how stable and consistent that income is.

A constantly shifting cash flow is common in self-employment, especially in industries with seasonal demand, like wedding photography. But that doesn’t necessarily mean the applicant is high-risk.

What matters is that even if their income shifts, it’s predictable and sufficient enough over time. 

How to Evaluate Income Stability

For a more accurate picture of an applicant’s financial reliability and health, don’t just look at self-employed proof of income document totals—dig into the patterns.

Compare year-over-year income. Reviewing two years of tax returns (typically Schedule C Form 1040) can highlight trends. Are earnings increasing, decreasing, or staying constant? Consistency in self-employment income over multiple years is a good indication of long-term financial health.

Look for seasonal changes. Some businesses have regular slow seasons. If you spot income dips at certain times of the year across bank statements and P&L reports, it’s not necessarily a red flag, as long as it’s predictable and balances out with higher-earning periods.

Assess monthly revenue trends. Use recent P&L statements to assess how revenue flows from month to month. A small business with a dip one month followed by much better income the next might still be on solid ground. But if income is unpredictable without an explanation, it could suggest instability. Ask questions if you’re unsure.

Check any diversified income streams. Multiple 1099 forms from different clients might indicate that the renter doesn’t rely on just one income source. This diversification can act as a buffer if one client slows down, and can be a green flag of financial resilience.

Remember, the goal isn’t to look for a perfectly consistent income—it’s reliability. A stable income doesn’t have to be a flat line. It just needs to show a pattern that suggests the applicant can comfortably pay rent.

Common Signs of Fraudulent Documents

To protect your property and finances, it’s vital to recognize the common signs of fraudulent documents. Here are some potential red flags to look out for.

Information Inconsistencies

Mismatched information. Includes details like names, addresses, or dates that don’t match across different documents.

Discrepancies in income. Look for income figures on tax returns, bank statements, and profit and loss statements that don’t align.

Altered Documents

Removals and white-outs. Visible signs of erasure, white-out, or overwriting are a big red flag.

Font and formatting issues. Look for inconsistent fonts, sizes, or styles within a document that suggest tampering.

Suspicious blanks or edits. Blank spaces or uneven text alignment, specifically in crucial areas like income or expense sections, can spell trouble.

Unverifiable references or contacts. Companies listed on 1099 forms or invoices that don’t have an online presence or verifiable contact information might suggest fraud.

Fake client contacts. Verify references and client contacts—if they can be reached or verified, it might be a fake document or reference.

Incomplete or Missing Documents

Missing key documents. Critical documents like recent tax returns, profit and loss statements, or bank statements may be missing, or incomplete sets of documents may have absent key pages or details.

Handwritten alterations. Handwritten changes or additions to printed documents, especially in areas like income figures or dates.

Unprofessional edits. Signs of unprofessional editing, like handwritten notes or crossed-out sections, on official documents.

How Third-Party Verification Services Can Help

Traditional employment verification methods often fall short, given the variability and complexity of self-employment income.

The good news? Third-party verification services like Snappt can be invaluable resources to landlords and property managers. They offer a streamlined, accurate, and dependable way to analyze the financial health of self-employed applicants.

For starters, third-party verification services can automatically collect comprehensive financial reports, self-employed proof of income, and all sources of income, expenses, and net profits. They can also accurately analyze and verify tax returns, ensuring the reported income is consistent with IRS records.

They can also verify bank statements for regular deposits and consistent cash flow, giving a clearer picture of the potential tenant’s financial stability. These services ensure the verification process complies with all relevant legal and regulatory requirements.

Third-party verification services authenticate documents to ensure they haven’t been tampered with or forged. These services can often identify common signs of fraudulent documents, like inconsistent information, altered figures, or outdated forms.

How to Stay Legally Compliant

Property managers and landlords must understand the requirements to ensure legally compliant practices when screening self-employed applicants. Disregarding these regulations can lead to legal consequences and discrimination claims. 

Here are some steps you can take to stay legally compliant while handling self-employed applicants:

Understand fair housing laws. Fair housing laws, enforced by the US Department of Housing and Urban Development (HUD), prohibit discrimination based on race, color, national origin, religion, sex, familial status, and disability.

Use consistency in applying screening criteria. A consistent screening process can prevent discrimination claims and ensure fair treatment for everyone.

Stick to privacy and discrimination laws. Protecting applicants’ personal and financial information is critical to avoid identity theft and maintain trust.

Provide adverse action notices. The Fair Credit Reporting Act (FCRA) requires property managers and landlords to provide potential tenants with an adverse action notice if they deny an application based on information received from a credit or other type of consumer report.

Stay up to date on local and state laws. Local and state laws may have additional requirements and protections beyond federal regulations––make sure to check yours.

Be transparent and communicate. Honesty and transparency throughout the screening process help build and develop trust and minimize misunderstandings or accusations of unfair treatment.

What to Do If You Spot Fraudulent Income Documents

Addressing fraudulent income documents immediately is critical to protecting your property and avoiding potential legal issues.

Before proceeding, double-check all documents thoroughly to confirm any signs of fraud. Look for alterations, inconsistencies, and other red flags. You can also use third-party verification if you didn’t use it the first time around. 

You should also reach out to the relevant authorities or institutions, like the IRS for tax returns or banks for statements, to verify the legitimacy of the documents. Be sure to contact the applicant and ask for an explanation. This step allows them to explain the discrepancies—there could be a reasonable explanation for the inconsistencies.

Lastly, seek legal counsel to understand your rights and obligations should you have any questions. They can guide you on the best course of action to prevent any legal hiccups.

Verify Self-Employed Applicants with Snappt

Verifying income for self-employed applicants isn’t one-size-fits-all. It takes a little more digging, some flexibility, and the right tools to spot inconsistencies and confirm financial reliability.

But with the right approach––and a solid understanding of how self-employment income works––you can screen tenants confidently and safely without slowing down your leasing process. Want help spotting fraud and verifying income faster? Snappt makes it easy.