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July 9, 2024

Handling Self-Employed Applicants: Income Verification Tips

Daniel Berlind
CEO

The gig economy is thriving, and entrepreneurial ventures have become increasingly popular in recent years. With this trend, a significant number of people are opting for self-employment.

However, for property managers and landlords or other entities requiring income verification, handling self-employed applicants can come with a unique set of challenges. Compared to traditional employees with regular paychecks and official tax forms, self-employed individuals tend to have fluctuating incomes and diverse revenue streams. This new post offers income verification tips for dealing with self-employed applicants the right way.

Unique challenges for income verification of self-employed applicants

Verifying the income of self-employed applicants can present 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 variable income streams, making it more complicated to assess their financial stability.

Here are some of the most significant challenges landlords face when verifying the income of self-employed applicants:

  • Income variability and inconsistency
  • Complex financial documents
  • Potential for Fraudulent Documents
  • Lack of third-party verification
  • Inadequate financial management
  • Tax deductions impacting reported income
  • Cash-based businesses

Documents to request from self-employed applicants and how to analyze each document

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

To ensure a thorough evaluation, requesting a range of documents is essential. Here’s a list of key documents to request:

Tax Returns. Tax returns are one of the most reliable sources of information about a self-employed individual’s income. Request the last two years of federal tax returns. Focus on IRS Form 1040, Schedule C (Profit or Loss from Business), Schedule E (Supplemental Income and Loss), and Schedule F (Profit or Loss from Farming), if applicable. Compare the tax returns from the last two years to identify any significant changes in income. Stable or increasing income is a positive sign.

Bank Statements. Bank statements provide insight into the applicant’s cash flow and consistency of income. Ask for bank statements from the past six to 12 months. Look for regular deposits and overall financial activity. To review, 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 ensure sufficient funds to cover rent and other living expenses, indicating good financial management.

Profit and Loss Statements. These statements summarize the revenues, costs, and expenses incurred during a specific period, offering a clear picture of the applicant’s business performance. Request the most recent profit and loss (P&L) statements, ideally for the past year or the current year-to-date. Review for consistent or increasing revenue over the months or quarters. Sudden drops in revenue will need further explanation. Additionally, assess how well the applicant manages expenses. A high expense-to-revenue ratio might indicate poor financial management.

1099 Forms. Self-employed individuals often receive 1099 forms from clients, which report income from various sources. Ask for 1099 forms from the previous year. These forms can help verify income consistency and the total amount earned. When reviewing, add the amounts on all 1099 forms and compare this with the income reported on the tax returns and bank statements. Multiple 1099 forms from different clients indicate a diversified income stream, which is often a positive sign.

Business Licenses and Registration. These documents confirm the legitimacy of the applicant’s business. Confirm the authenticity of the business through its licenses and registration documents and check for professional affiliations 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, particularly those showing long-term engagements or consistent invoicing patterns.

Credit Report. This can offer insights into the applicant’s creditworthiness and financial responsibility. Request authorization to run a credit check. Review the credit report for payment history, outstanding debts, and overall credit score.

Business Bank Account Statement. If the 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 be sure to 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.

Common signs of fraudulent documents for each one

To protect your property and financial interests, it’s vital to recognize the common signs of fraudulent documents. Here are some potential red flags to be on the lookout for:

Inconsistencies in Information

Mismatched information: Details such as names, addresses, or dates that do not align across different documents.

Discrepancies in Income: Income figures on tax returns, bank statements, and profit and loss statements that don’t match up.

Altered Documents

Erasures and White-Out: Visible signs of erasure, white-out, or overwriting.

Font and Formatting Issues: Inconsistent fonts, sizes, or styles within a document that point to tampering.

Suspicious Blanks or Edits: Blank spaces or uneven text alignment, specifically in crucial areas like income or expense sections.

Unverifiable References or Contacts: Companies listed on 1099 forms or invoices that don’t have an online presence or verifiable contact information.

Fake Client Contacts: References or client contacts that cannot be reached or verified.

Incomplete or Missing Documents

Missing Key Documents: Critical documents like recent tax returns, profit and loss statements, or bank statements are absent, and incomplete sets of documents with key pages or details missing are submitted.

Handwritten Alterations: Handwritten changes or additions to printed documents, especially in essential areas such as 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 is that third-party verification services 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 compile comprehensive financial reports that include 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.

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

Third-party verification services can also authenticate documents to ensure they have not been tampered with or forged. Even better, these services are equipped to identify common signs of fraudulent documents, like inconsistent information, altered figures, or outdated forms.

How to stay legally compliant

Property managers and landlords must navigate a complicated landscape of legal requirements to ensure legally compliant practices when screening self-employed applicants.

Failing to stick to these regulations can result in legal repercussions 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 U.S. 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. This can prevent discrimination claims and ensures fair treatment of all prospective renters.

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 an adverse action notice to potential tenants if they deny an application based on information received from a credit report or other consumer report.

Stay Up to Date on Local and State Laws. Local and state laws may have additional requirements and protections beyond federal regulations.

Be Transparent and Communicate. Honesty and transparency during 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 protect your property and avoid potential legal issues.

Before proceeding, double-check the documents thoroughly to confirm any signs of fraud. Look for alterations, inconsistencies, and other red flags.

You can also seek third-party verification if you didn’t use it the first time around. It’s important to reach out to the relevant authorities or institutions, such as 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.

Conclusion

Handling self-employed applicants requires a nuanced approach to income verification.

By understanding the unique nature of self-employment income, using various financial documents and the latest technology, as well as being mindful of potential risks, you can accurately assess the financial stability of self-employed applicants.

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