- Keeping your personal and business money separate is helpful at tax time and gives you a clearer view of your side hustle results.
- If you plan to grow your side hustle in the future, you should prepare by putting the right accounts in place.
- Visit Business Insider's homepage for more stories .
If you earn money on the side, you are part of a growing community of side hustlers who bring in income outside of their main job. I started writing online as a side hustle in 2008, and eight years later it grew into a full-time income. But if I hadn't treated my business seriously, it would still be a small venture and certainly wouldn't be able to support my family like it does today.
I spent nearly 10 years of my career as a financial analyst and I believe in the value of good financial information for any business. My old job had me focused on product lines with a lot more zeros than my small business earns, but the exact same concepts apply to a side hustle as a giant enterprise.
The term side hustle may conjure up feelings that the business isn't serious. But in the eyes of your customers, the IRS, and the banking industry, a side hustle is as serious as any other small business.
You can open a bank account, credit card , and other financial accounts for your business, even if your business is only part-time. Business bank accounts are very similar to personal ones, but if you're not careful you could find yourself paying unnecessary fees. Even though it may take a little extra work in the beginning, opening a dedicated bank account for your side hustle is probably a good idea.
Preparing for future growth
Many side hustles have a short lifespan. If you plan to keep your side hustle as a small, part-time project and don't want to grow it into a large income source, you may think your business finances are not important. That is anything but true.
Even if your side hustle only makes a few hundred dollars per year, the IRS wants to know about it. You are required by law to report earnings on your income tax return, and that includes trivial amounts you earn on the side. But as a perk, you can also deduct costs related to your business to lower your taxes.
If you plan to grow , a business checking account will eventually become a need. Rather than wait for things to become muddied between personal and business finances, you should start with a business account from the get-go. While you can't go back in time and open one for an existing side hustle, there is no better time than the present to get things set up the right way.
Many side hustlers choose to register an LLC or S-Corporation with their state for a side hustle, but you don't need to do that for a dedicated bank account. If you are a sole proprietor, the default status of a side hustle that isn't registered, you can still open a second personal account that you know is dedicated to the business.
Protecting the corporate veil
Tax benefits of registering your business don't kick in until you make enough to pay yourself a salary in most cases, but there are some legal reasons to register a business with your state. Doing so can protect you from personal liability in the event something goes wrong at your business, including lawsuits.
But just forming an LLC or other business entity does not give you automatic protection on its own. To make it work, you have to keep business and personal finances separate . If you don't, the "corporate veil" that protects your personal assets is worthless. Dedicated business accounts make this work.
If you are concerned about legal issues with your side hustle, consult with a qualified business attorney who can explain how to set up the right corporate protections for your needs. A mistake here could cost you your savings, and, in a worst-case scenario, even your home.
Simplify your bookkeeping and taxes
You should always understand your revenue, risks of too much income coming from one customer, and have a detailed grasp of your costs. Without those and other key metrics, you could be running a risky or money-losing side hustle and not even realize it!
When your business income and expenses all funnel through a single account, using automated bookkeeping tools or even manual software is much easier. I use Quickbooks myself, which links and updates daily with transactions from my business checking, savings, and credit cards.
Those bookkeeping reports are useful for both management decisions and when tax time rolls around. Unlike many business owners who scramble to update their books and file taxes by the deadline, I usually have my final year-end results within a few days of the end of the year. That makes tax preparation much easier.
Find the right business bank account
If you are sold and want to open a business checking account for your side hustle, don't just drive to the closest bank and open an account. Stop and consider what's most important to your business. I don't ever use cash for my company, so I went with an online-only account for my first side hustle checking. These days, I have an account at a big brick and mortar bank, but that may not be right for your side hustle.
Look out for minimum balance or activity limitations to avoid a monthly fee. Make sure you can deposit and withdraw as needed. Read about online and mobile banking if that's important to you. Every business has unique needs, so there is no perfect account for everyone. But there likely is a best account for you. It's definitely worth taking a few minutes to find it.
- Read more about freelancing and side hustling:
- I spent my whole life working for a salary, but now that I'm self-employed I use a 3-part strategy to manage my inconsistent income
- I always thought the idea of freelancing was too intimidating, until I had a realization that completely changed my perspective
- The biggest money mistake I thought I'd ever make didn't turn out to be a mistake at all
- A temporary side job I took for $15 at a time led me to a fulfilling career I never expected