Why Independent Contractors Should Open a Separate Business Account
So, you’re an independent contractor (a.k.a. not getting paid on a W-2, a.k.a. no taxes are being withheld from your income). Maybe you’re a musician, a travel nurse, a content creator, or another 1099 freelancer. Congratulations - you’re a small business owner!
The single most important thing you can do for your new business is open a separate bank account. It’s critical to have a separate account for each income stream. This will help you immensely when it comes time to bookkeeping and preparing for taxes.
Why?
You need to clearly see how much you’re earning and spending. If your business income is mixed with your personal income, things get messy.
It is important to only pay for business expenses out of this account. Having personal and business expenses drawn from the same account can lead to confusion when tax time rolls around. If a personal expense is mistaken for a business expense, it can potentially raise a red flag and cause you to be audited by the IRS.
Other reasons to open a separate bank account include:
Legitimizes your business
Makes it easier for bookkeeping
Helps save HOURS during the tax filing process
Creates a clear audit trail
Can help with business planning and income projections
Business Checking Vs. Personal Checking Accounts
A separate account does not necessarily mean it has to be called a business account by the bank. You won’t actually be able to open a “true” business account unless you have an EIN, which is issued if you form an LLC or corporation. Freelancers or independent contractors without an EIN will get by fine with a separate personal checking account dedicated to business expenses only. (Sole proprietors and single member LLCs both file their business on Schedule C of the 1040 individual income tax return.)
Benefits of Opening a True Business Checking Account
If you have an LLC or a corporation, then it's time for the next step- opening a business account. While a business account often requires a fee which is a tax write-off and can be more challenging to set up, it comes with perks you won't receive in a personal account.
Protect Your Personal Identity
It never hurts to have a business account because it allows you to protect your personal identity. Having a business account limits any potential damage that can occur and takes away some of the personal liability.
When making a purchase or paying an employee, the transaction should come from the business bank account rather than your personal account. This means your business name will appear on any financial statements instead of your own.
Moral of the story, if you’re self employed you need to have a separate bank account for your 1099 income. Mixing your business and personal transactions is an IRS red flag. Opening a new account sets the foundation for the rest of your small business and makes bookkeeping much easier in the years ahead. Your future self thanks you.
Need help with your bookkeeping? Contact us!