To many Americans, a side hustle is indispensable. Americans with a side hustle earned $810 a month on average from it, according to Bankrate’s recent side hustle survey, which means a year-round side hustle could bring in almost $10,000 in additional income.
Launching a side hustle can help you achieve your financial goals, such as paying down debt or saving for a down payment on a home. But if you’re not careful, it can cause you problems later on — especially at tax time. That’s where a business bank account can help.
Most people don’t realize that their side gig is more than something they do in their extra time. Filing taxes and reporting your extra income can come as a real surprise. Your side hustle might be a real business, requiring additional work on your part and a separate business bank account.
But how do you know when it’s time to open an account for your side gig? Here are six signs that you need a dedicated business account.
Key side hustle statistics
More than a third (39 percent) of U.S. adults have a side hustle. (Bankrate)
Of those who have a side hustle, 33 percent say they need the extra money to pay for day-to-day living expenses. (Bankrate)
The other reasons cited for having a side hustle are to have money for discretionary spending (27 percent), more savings (25 percent) and paying off debt (12 percent). (Bankrate)
Many Americans are in for the long run with their side hustles: 28 percent think they’ll always need a side hustle to make ends meet, and 19 percent want their side hustle to develop into their main source of income. (Bankrate)
Those who are self-employed are required to file an income tax return if their net earnings for the year total $400 or more. (IRS)
How to open a business bank account
A business bank account is a specialized bank account designed for individuals who engage in business activities, including those with a side hustle. It enables them to separate their personal finances from their business finances, making it easier to track income and expenses related to their side hustle.
Side hustlers can use a business bank account to maintain accurate financial records, simplify tax filing and display a professional image to clients and customers.
Opening a business bank account typically involves the following steps:
Research different banks: Compare business bank account offerings from various banks. Consider factors such as fees, transaction limits, digital banking options and customer service. It’s beneficial to choose a bank that offers services tailored to small businesses or entrepreneurs.
Gather required documents: Different banks have varying requirements, but commonly requested documents include personal identification, business documentation (such as a business license), a Social Security Number (SSN) or Employer Identification Number (EIN) and proof of address.
Visit the bank or apply online: Once you’ve gathered the necessary documentation, you can either visit the bank branch to complete an application form or apply online through the bank’s website.
Deposit initial funds: Some banks require an initial deposit to open a business bank account. The amount varies depending on the bank and the type of account you choose. Transfer the required funds to the new business account to activate it.
Await verification and account activation: The bank will review your application and documents. Once approved, you will receive confirmation of the account opening, along with details such as your account number and any additional steps required to set up online banking.
Pros and cons of a business bank account
Keeps personal and business finances separate
May come with additional fees
Simplifies record-keeping, making it more efficient to generate reports
Typically involves more documentation and stricter criteria to open
Offers access to business banking services, like business loans
More limited options than for personal bank accounts
Adds professionalism and credibility to a side hustle
Money in the account is still under the same FDIC insurance limits as personal accounts
Contemplating a business bank account
A business bank account can help you establish a more organized, professional and growth-oriented approach to your side hustle. If you find yourself in the following circumstances, then that may be a sign it’s time for you to open a business account.
1. It’s more than a hobby
One of the biggest indicators you need to separate your finances is when your side gig becomes more than just a hobby.
If you’re consistently making money, that’s a sign you have a business, says Joshua Zimmelman, managing partner of Westwood Tax & Consulting. But that’s not the only factor, since many businesses aren’t profitable until after a few years of operation.
To tell a business apart from a hobby, the IRS recommends asking these questions:
Is the activity carried on in a businesslike manner?
Is your side gig profitable, or do you intend the activity to be profitable and do you possess the expertise to make it so?
Are you dependent on income from the hobby for any part of your livelihood?
Are losses due to circumstances outside your control, or are they normal business startup expenses?
Do your methods vary to increase profitability?
Have you previously made a profit from a similar activity?
Can you expect to make a profit in the future from the appreciation of assets used for your side gig?
Bankrate’s take:Example: If you knit and occasionally sell the items you create — recouping just enough to break even when you consider the cost of materials — you likely have a hobby, not a business, because you don’t bring in a profit and don’t expect to in the future. But if you are completing several transactions a month and are actually making a profit, you may need to take extra steps.
“If your side hustle is actually making any considerable amount of money, you should open a business bank account,” Zimmelman says.
2. You want to protect yourself in an audit
One of the biggest benefits of opening a separate business account is the protection it can give you in case of a tax audit.
A business account is helpful if you ever get audited because there’s a clear line between your business and personal expenses.
— Joshua Zimmelmanmanaging partner of Westwood Tax & Consulting
An audit is basically a thorough examination of your tax returns to ensure all expenses, sales and income reported are accurate. An audit can be random, or it might be triggered by discrepancies or red flags in tax reporting. If any errors are found, you may have to pay a penalty fee.
Small businesses tend to get audited at a higher rate than nonbusiness returns, with 1.3 percent of businesses making between $25,000 and $100,000 a year audited, according to the IRS.
If you get audited for your business profits and losses, the IRS can view only your business bank statements. The IRS would have to specifically request access to your personal accounts to review them, giving you an additional layer of defense.
3. Filing taxes would benefit from streamlining
Those consistently bringing in income from a side hustle will likely need to pay estimated taxes. If your side hustle is functioning as a business, you’ll likely need to pay both personal income and business income tax. Paying your quarterly taxes can be a hassle if all of your income and expenses go through your personal account. That’s because it can be difficult to figure out exactly how much you earned or spent. A business account helps to streamline things.
“A separate business account makes tracking income and expenses so much easier,” Zimmelman says.
When it comes time to pay your taxes, you can just look at your business bank account statements for a snapshot of your earnings and expenses. You can also easily find expenses that can qualify for tax deductions.
4. You want to earn rewards for business expenses
In your side hustle, you’re probably always looking for ways to cut costs and boost your earnings. A business credit card can help you snag discounts and rewards that you wouldn’t otherwise get with a personal credit card. For example, business cards often offer discounts on office supplies, shipping expenses and even travel.
Some other advantages of having a credit card for your business include:
A line of credit you can tap into when needed
The ability to earn cash back, points or miles
Detailed monthly statements of expenses
Access to business-specific features, like business expense management tools
A buffer for cash flow
A business credit card is also a great way to help transition from a side hustle to a small business. Using a business credit card responsibly can help you establish and build your business credit history. A strong credit history can enable you to access higher credit limits, better loan terms and other important financing opportunities as you expand into a larger business.
Bankrate has reviewed hundreds of small-business credit cards to help you find the right one.
5. You’re ready to accept debit and credit card transactions
More and more people are solely using debit or credit cards to purchase items, rather than cash or check. As of 2021, credit and debit cards accounted for 57 percent of all purchases, according to the Federal Reserve. If you don’t have the ability to accept plastic, you could lose out on sales.
There are tools you can use that sync to your personal account, but they often take out a hefty fee for the privilege.
Many banks and credit unions offer discounts on credit or debit card processing fees to account holders with business checking accounts. For sales-based side hustles, the ability to accept credit and debit cards can help boost your sales and profits.
6. You want to look more professional
Having a separate bank account with checks specifically designed for your business creates a more polished and professional image than writing checks from your personal account and can help your business to be taken seriously. Sending funds to a bank account with a business name rather than a person’s name can feel more legit for your clients or customers.
Side hustle FAQ
How to start a side hustle?
If you’re interested in starting a side hustle, first identify your skills, interests and hobbies and see if there’s a way you can turn those into a way to make money. You might want to consider using an app to help you find a side hustle. Set aside dedicated time each week to work on your side hustle and establish a routine. As you start to accrue more expenses and revenue from the side hustle, you can open a business bank account to manage its finances.
What is a good side hustle?
There’s no one-size-fits-all for side hustles. Instead, you’ll want to find something that fits your specific interests and skill set. Look into some of the most popular side hustle ideas and consider which sound most appealing to you, given your time and resources.
How to save money fast?
Having a side hustle or taking on gig jobs is a great way to save extra money. Some other examples of ways you can save money fast include canceling unnecessary subscriptions, selling unwanted items or switching to a high-yield savings account.
How do I set up financials for my small business?
When organizing finances for a small business, you’ll want to begin by creating a separate business bank account to track income and expenses. Develop a budget to outline expected expenses and revenue. Make sure to keep track of all receipts and invoices, and regularly review your financial statements. You may also want to consider consulting with an accountant or financial advisor to ensure that your business complies with tax regulations and to maximize efficiency.
Note: Bankrate’s Matthew Goldberg and Kat Tretina contributed to a previous version of this story.
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