When you’re self-employed, proving your income to the IRS can be challenging. The IRS may require you to prove your self-employment income if you ask for a payment plan on back taxes owed, or as part of a routine audit. Self-employed individuals often mix their personal income and expenses with business transactions in the same bank account. If this is the case, you’ll have to do some digging to separate your true self-employment transactions from your personal affairs.
The IRS requires two main types of documents to prove your income. These include a receipt or invoice to document a sale or expense as well as a bank record to show the deposit or payment.
Gather Your Documents
Gather your sales invoices and bank statements for the period in question. Match invoices paid by your customers to deposits made to your bank. In some cases, you may have batch deposit amounts shown on your bank statement.
Batch deposits occur when you include more than one customer payment in your deposit. In this instance, you may be required to obtain proof of deposit instrument from your bank to prove what was deposited to your bank. A proof of deposit instrument is a bank copy of your deposit slip and each item deposited, such as check images or money order copies.
List Your Expenses
Document your expenses. Materials are items you purchase that are directly related to the sale of your service or product, such as lumber, packaging and parts used to assemble goods. Depending on your business, you may or may not have this expense.
Gather invoices from vendors and match the invoice total with debits on your bank statement to prove the expense was paid. If you made payments by check, obtain a copy of the canceled check from your bank.
Collect Vendor Invoices
Prove your inventory and supplies expenses. Inventory includes goods you purchase for resale, while supplies include items you purchase for general business use, such as office supplies. Gather vendor invoices and receipts for your purchases, and match the invoice totals with payments made through your bank account.
Prove Wages Paid
Create a payroll log that shows the name of each employee, the dates and number of hours worked, the gross pay for each employee and an itemized list of taxes and deductions withheld for each employee. Your work sheet should also include the net pay for each employee. The net pay equals the amount of the check you issued to your worker.
The log must cover each pay period for the required date ranges. Match net check amounts to your bank statements and obtain canceled check images for each payroll check that cleared your bank.
Gather Vehicle Expenses
Prove vehicle expenses. If you claim actual vehicle expenses for gasoline, repairs, maintenance and insurance, gather receipts for your expenses. You’ll have to prove noncash payments by matching the receipts with your bank transactions.
Prove Regular Operating Expenses
Prove regular operating expenses. Regular operating expenses include rent, utilities, insurance and tax payments. These expenses generally occur once per month, so locating the documents to prove your payments are easier than other categories. Obtain your monthly billing statements and match the statement with payments made through your bank account.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.