Why You Need a Separate Checking Account for Your Side Job
Creating an extra income stream is the wisest financial decision anyone can ever make. It could be anything from getting a second job, turning your second home into a vacation rental, sharing your expertise on YouTube, or even starting a ridesharing business. Anything to bring you an extra coin and ease the tension on your regular paycheck!
With a side job in place, the next thing you have to worry about is how to handle the finances. Many people opt to keep finances from all income streams in the same account. What they fail to appreciate is that their “side jobs” are technically business entities while their regular paycheck falls under personal finances. Mixing business and personal finances becomes a problem later when doing taxes and tracking profits.
If you have a side job, you need to consider separating your personal account from your side hustle’s checking account. Here are more reasons why you need to have a separate checking account for your side job:
1. Legal liability issues
Being a business on its own, your side job can attract legal action from its customers, employees (if any), suppliers, regulators, or even local authorities. Your personal finances and assets can easily be entangled in legal issues if there’s no clear separation between them and the side job’s assets and finances. Separating business checking accounts from personal finances, therefore, is a way of protecting your hard-earned personal finances and assets.
2. Insurance issues
You will need insurance coverage for your side business at some point. When that time comes, your insurance provider will require you to list the business name and account information. The name and financial information must be consistent in all your lease agreements and supplier contracts for you to get insurance coverage. You don’t want to have your personal accounts and insurance covers intertwined with business insurance and other business-related financial obligations.
3. Tax audit preparedness
Revenue authorities or service providers (such as IRS in the US) require businesses to submit bank statements to them for audit. Submitting your personal financial information will only attract unnecessary inquiries that could land you into legal or financial headwinds. Separate finances for a smooth and clean tax audit.
4. Building business credit history
You can use your personal finance as starting capital for your business, but it is important that you allow it to grow its own financial credibility henceforth. You need to allow it to gradually build its own credit history for its future financing needs. Business creditors and future investors will want to audit the financial health of the business, not your personal finances.
5. Building business credibility
Establishing a separate checking account for your side hustle boosts its image, reputation, and credibility as a business entity. Its name and account details appearing on invoices and credit cards gives clients the feeling that they are transacting with a real and authentic business establishment. Some clients won’t trust you with their money if they see your personal account details on an invoice.
6. Easier financial management
Mixing your side hustle finances with your personal finances means there’s no clear separation of business and personal expenses. You can’t efficiently account for your personal money or business cash flow. You can’t even gauge business growth with all the mix-ups and confusion. Opening a business checking account online to separate business and personal accounts improves cash flow management, budgeting, tracking, and business forecasting.
7. It is easy and convenient
Electronic money institutions (fintech companies) have made it easy for small businesses to operate checking accounts. You now can manage your hard-earned business income in a business checking account online securely, affordably, and conveniently. You don’t have to worry about costly fees, delays, and bureaucracies that are synonymous with traditional business banking. Fintech companies give you full access to your money anytime and anywhere. Some will even give unlimited fee-free bank transfers across the world. What’s more, it is easy to integrate your online checking account with digital wallets such as Google Pay or Apple Pay to create a convenient checkout process for your clients.
It is common for budding entrepreneurs to keep their personal and business finances tied up together when they’re starting out in business. There are many risks and limitations associated with this, notably complexities in legal, tax, and financial management. Decoupling your personal and your side job’s finances will put your side hustle on a path of becoming a fully-fledged business entity.