The average college graduate has $37,172 in student loan debt. With an increasingly competitive job market, many people are struggling to find work. Finding a job that pays enough for them to keep up with their bills and payments is difficult.
The debt to income ratio is so high that many people are turning to side-hustles to supplement their income. From Uber to Amazon Flex, there are many opportunities available to help you bolster savings and pay down debt.
The gig economy is growing in popularity and rapidly expanding. There are currently over 14.3 million people in the United States working side gigs in addition to their full-time jobs.
But despite how common it is to have a side gig, many workers do not understand how having a side-hustle can complicate taxes. Your freelance job can end up causing a lot of headaches at tax time if you aren’t prepared. One of the best things you can do for yourself is to open a business bank account — here’s why.
Side gigs and taxes
Amanda Kendall, a licensed enrolled agent and the president of True Resolve Tax Professionals, says most people do not realize how complicated side gigs can be at tax time.
“When it comes to people having small businesses on the side,” says Kendall, “most people don’t understand how or what to track to ensure they are reporting items properly on their tax returns.”
For example, some don’t realize that all income earned in a side gig is taxable, even if you do not make enough to get a 1099-MISC. Companies only issue 1099s if you make over $600 with them in a year. But if you make under that threshold, you still have to report your earnings. The burden is on you to report your income without a 1099.
Your side income can add up fast. If you don’t prepare, you could end up with a huge bill at tax time. Setting aside 20 to 25 percent of your earnings in a separate savings account will ensure you have the money you need to pay your taxes.
Why you need a business bank account
Using a business bank account to manage your side-gig income and expenses can be a great way to streamline your finances and prepare for your taxes.
“A separate business account is always advised for any type of small business venture, even if it’s attached to your personal bank account,” says Kendall. “Tracking income and expenses is going to be much easier with a bank account dedicated towards the side business.”
Opening a separate business bank account for your side hustle is not required by the IRS or any other entity. However, it makes reporting your profits and expenses much simpler.
If you have an account for your hustle, you can just look at your bank statements to see all the income you earned and the expenses you had. The best business bank accounts will provide a neat snapshot of your business, which also makes it much easier for an accountant or CPA to help you, should you choose that route at tax time.
How a business bank account can protect you in an audit
Besides making taxes easier, having a business account also offers other benefits.
“If you get audited on the Schedule C (the profit or loss from business form) portion, the IRS cannot view your personal bank statements during the audit without specifically requesting them,” says Kendall.
Having a clear line between your personal and business expenses in the form of a bank account can provide a level of protection.
Other tips for managing your side hustle
In addition to opening a business bank account, Kendall also recommends you take other steps to manage your income and expenses.
“Tracking income and expenses is going to be much easier with a bank account dedicated towards the side business,” explains Kendall. “However, it does not hurt to go the extra step and use something like QuickBooks online or even just a spreadsheet to keep track of income and expenses by category. It makes tax filing time much easier.”
Additionally, if your side hustle is bringing in a good amount of money, you may have to pay estimated quarterly taxes.
“I suggest you talk with your tax professional to determine if you need to make quarterly estimated payments to not have a tax bill when you file,” says Kendall. “With the right planning and guidance throughout the year, a tax bill can be avoided very simply.”
Having a side hustle is a great way to pay down debt faster or to bulk up your savings. Spending a little time organizing your finances and expenses is worth the effort in the long-term. Open a business bank account to simplify your side-gig management and prepare for tax time.
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