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Why you need a separate bank account for your side job

One of the first things to do when taking up a side job is to open a separate bank account specifically for it. The point is to create a system to track business and personal expenses separately.

Ridesharing, turning a home into a bed-and-breakfast, posting聽how-to videos, selling one鈥檚 art 鈥� these are easy to do today through the likes of Uber, Lyft, YouTube, Etsy,聽Airbnb and other online platforms that have created聽the 鈥済ig economy.鈥�

Signing up is easy, but handling all聽the financial responsibilities can get challenging come聽tax season.

That鈥檚 why keeping personal and business finances apart is a must. Here鈥檚 why:

A separate bank account makes tax time easier

One of the first things to do when taking up a side job is to open a separate bank account specifically for it. Small businesses and sole proprietors often do this via聽a聽. With something that鈥檚 a little more freelance, you could simply open another standard聽. The point is to create a聽system to track business and personal expenses separately.

There are many advantages to keeping your business and personal finances separate, but the most important one is that it helps simplify your tax-filing process.

Let鈥檚 explore the benefits of keeping a separate bank account:

• It鈥檚 easier to track business expenses and deductions.聽An Etsy shop owner, for example, can monitor and deduct postage, shipping, materials, mileage for trips to the store and more. Keeping business-related expenses in one place makes it easier to visualize whether more money is being spent than is being earned.
• You鈥檙e better prepared for an audit.聽In the event of an audit, a separate bank account provides clear evidence of your income聽and expenses.
• It provides a solid foundation for your bookkeeping system.聽The IRS suggests reconciling your checking account every month to make sure that bank statements and record-keeping systems match. This is easier to do when you鈥檙e not sorting through your own personal expenses as well, and it can minimize human error.

Danielle Bruflodt of Madison, Wisconsin, started her Etsy shop, Thyme is Honey, as a side job five years ago. Today, she is self-employed with many businesses, and she uses separate bank accounts and software to stay organized.

鈥淚鈥檓 horrible with numbers, so to be honest, having separate banking just makes everything so much easier,鈥� Bruflodt says. 鈥淚t becomes a pretty simple process of what is going in and what is going out. It鈥檚 also easier for me to see expenses for each business.鈥�

Common mistakes in the gig聽economy

Opening a separate bank account for business needs is the ideal first step. A聽recent study by the Kogod Tax Center at American University suggests that there鈥檚 a bigger problem. The study found that 36% of people employed through online platforms in 2015 don鈥檛 understand the kind of records of business income and expenses that are聽needed for tax purposes.

鈥淯sually, in the first year, people don鈥檛 realize what they need to do,鈥� says Caroline Bruckner, author of the study and managing director聽at the Washington, D.C., university鈥檚聽Kogod School of Business. 鈥淏ut after they go file their taxes, the next year they figure it out and start filing correctly.鈥�

Veronica Smith doesn鈥檛 keep a separate聽account for her YouTube channel, VeroHoy, but she is still ahead of the curve. The Chino Hills, California, resident and her spouse rely on accounting software to track聽business income and expenses for their three enterprises: her Spanish-language YouTube channel and his real estate and web-based businesses.

Time Warner Cable salesman Jeremy Miller of聽Cincinnati聽drives for Uber in his spare time. For him, a spreadsheet is enough to track his mileage, income and hours.

Find a system that works for you, and stay on top of it from the beginning.

It鈥檚 never too late to start

Bruckner suggests creating a plan before starting a business through a 鈥済ig economy鈥� platform. Figure out how much time you might spend and how much money you could earn, and research the tools that will聽help you keep track of business finances.

And, if you鈥檙e already running a business without a separate account or a record-keeping strategy in place, it鈥檚 never too late to get started.

Melissa Lambarena is a staff writer at NerdWallet, a personal finance website. Email:聽mlambarena@nerdwallet.com. Twitter:.

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