From freelance writing to selling artwork to curating a YouTube channel to photography, there are a lot of ways to make money on the side of your “actual” job. But the question is — do you need to have a business account for the side job?
If your side business is incorporated or an LLC, the answer is a cut-and-dry “yes, you need a business bank account.”
But if it’s a hobby that you work on during your spare time to pick up some extra cash, then the answer is more along the lines of “you don’t have to, but you should.” Here’s why!
The Benefits of a Business Bank Account
There are many benefits to opening a bank account for your business but they essentially boil down to these two main points: business accounts make it easy to monitor profitability and help you keep clear records for your taxes.
Related: Keeping Your Small Business in Check
Easily Monitor Your Side Hustle’s Profitability
Opening an account for your business is a great way to stay on top of your income and expenses. This is important, because keeping business and personal expenses separate is an essential first step for any small business owner.
For example, if you’re using your personal checking account to buy supplies for your woodworking side job, it’s going to be difficult to monitor how much you’re spending on business-related expenses. Every time you want to evaluate your profitability, you’ll have to sort through grocery bills and cell phone payments to get to the stuff that actually applies to your business.
Business accounting software can help with this, but if you’re working on something that’s more of a side job than a startup that you’re hoping to turn into a full-time job, it might not be worth the investment. A business checking account, then, is an easy alternative for keeping track of profits and expenses.
Keeping business and personal separate isn’t just good for monitoring profits, though — it’s also good for taxes. That brings us to the next benefit of opening a business banking account.
Keep Clear Records of Your Business for Tax Time
If you make money from your side job (and hopefully this is the case), then you’ll need to report it to the IRS when it comes time to file your taxes.
Having a clear and separate record of your business expenses and income will be enormously helpful during tax season. This is especially true if you’re going to be filing as a business (rather than a hobby; see below for more info on that).
There are certain expenses that you can deduct, such as mileage or equipment purchases. Having a clear record will make it easy to tally up your deductible expenses.
A separate account is also beneficial in the event that you get audited. Knock on wood that never happens, but it’s always best to be prepared.
When Is a Side Job Considered a Business Rather Than a Hobby?
This is an important distinction to make when it comes to taxes because it affects which forms you’ll need to file. However, it can be difficult to determine whether or not the IRS considers your side hustle a hobby or a business, as Jim Wang writes for U.S. News & World Report.
“The IRS doesn’t have a clear set of rules for determining whether your activity is for profit or a hobby, but it does publish guidelines,” he says. He recommends that you use these 9 questions to distinguish between a business and a hobby.
Essentially, it comes down to whether or not you make a regular profit at your side hustle. If you do, the IRS is more than likely to consider it a business as opposed to a hobby or “other income.”
If it does meet most of the criteria of a business as opposed to a hobby, you’ll likely need to file Schedule C. If you have questions specific to your side project, you should consult a tax professional.
Opening a Business Checking Account
In the end, it’s a good idea to have a business bank account for your side job, no matter how small the venture.
At Mercer Savings Bank, opening an account is a hassle-free process. We’ve also streamlined our business accounts to make them as easy to use as possible, so you can focus on pursuing your passion. In fact, they’re as simple to use as personal checking accounts.
We hope this was helpful! However, remember that this blog is for informational purposes only and shouldn’t be considered financial or tax advice. You should talk to your financial advisor or a tax professional if you have any questions.