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If you can’t cut any more expenses from your budget but you’re still falling short of your financial goals, it’s time to make more money. A side hustle can be a great way to earn that extra cash — and it could even turn into a major source of income that helps you achieve financial wellness.

One of the biggest mistakes side hustlers make, though, is not separating their personal and business accounts. I know from personal experience. When I first started freelancing, I didn’t designate a separate account for my business earnings. I learned the hard way why this was a bad call, but you don’t have to.

5 Reasons to Keep Your Finances Separate

When you have a business, best practice dictates separating your business-related expenses from your personal ones, but why is that? Let’s take a closer look at the benefits of keeping your accounts separate:

1. You Might Be Required To

Depending on your business structure, you may be required by law to keep your business and personal finances separate. If your business is set up as a separate legal entity, mingling those finances might get you in hot water.

Even with a pass-through entity, like a sole proprietorship or a limited liability company (LLC), it might be a good idea to keep things separate. I find it best to send all of my business-related income to my business account first, and then I pay myself from that account.

2. It’s Easier to Track Income and Expenses Related to Your Side Hustle

With a separate business account, you can easily see what you’re bringing in and pay for the expenses related to your side hustle without dipping into your personal funds. Separate accounts make it easier for you to operate like a true business, rather than treating your side hustle like a simple hobby.

3. You Can Stay on Track Toward Your Goals

Did you start a side hustle with the intention of paying down debt or saving up for an ambitious financial goal? An additional account helps you stay on top of your progress in that regard. When you make payments toward your goal, they can come out of your business account, rather than getting mixed up with the various expenses coming out of your personal account.

4. It’s Much Easier to Prepare Your Taxes

When I first started freelancing, I didn’t have a separate account for my business. That was a big problem when tax time rolled around, because I had to go through all of my financial activity for the year and highlight the business-related expenses in my bank statements.

Today, with a separate account, I can just print off reports and prepare a simple profit-and-loss statement I can pass along to my accountant. My taxes are done in a fraction of the time.

5. It’s Good to Have If You Get Audited

If you’re audited, mingled finances can be hard to justify to the IRS. You might have a harder time proving which expenses were truly for business and which were for personal matters.

With separate accounts, things are much cleaner, and it’s much easier to resolve an issue with the IRS. By the time I was audited, I had separate accounts, and it was a matter of simply mailing in the requested documentation — which was easy to find because of my good recordkeeping.

How to Set Up a Business Bank Account

Every bank has its own requirements for setting up a business account. I’ve set up two business bank accounts, one in person and one online. In both cases, I needed to provide some basic documentation. Such documentation commonly includes:

Employer Identification Number (EIN)
- Business formation documents
- Ownership agreements
- Business license from my state

If you’re running a sole proprietorship, you might be able to open a business account using just your Social Security number. However, one of the banks I use wouldn’t allow me to open a business account without an EIN and my business organization documents. I could have opened a separate personal account and used it only for side-hustle expenses, but it wouldn’t have been designated as a business account.

Check with your bank to find out exactly what you will need to open a business account there.

Other Ways to Keep Your Finances Separate

In addition to opening a dedicated side-hustle account, there are other means of keeping your finances separate that you may find useful:

  1. Get a business credit card and use it for expenses: You can get a separate business card and use it for side-hustle expenditures. Not only will this prevent you from mingling business and personal finances, but it might also earn you rewards.
  2. Use an online invoicing/accounting tool: There are plenty of applications that can keep track of your finances, generate invoices, and help you manage aspects of your recordkeeping. Take some time to research what’s available.
  3. Educate employees or partners: If you hire employees or have a partner, make sure you teach them how to keep business and personal finances separate. This way, you’re less likely to have any accidents

Before you move forward with your side hustle, think about how you will ensure that your business finances are kept separate from your personal finances. When you draw a clear line between the two, it is much easier to maintain good records and keep yourself out of any unintentional legal trouble.

This article is for informational purposes only and does not constitute legal advice.

Miranda Marquit is a nationally recognized financial expert and journalist.



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