There’s a fine line between business transactions and earning a little money with a hobby. Once that line blurs, you’ll need different types of bank accounts to keep your tax preparer happy.
My freelance work started as a few side projects to help out publishers who called the newsroom where I worked full time. I’d tackle a photo assignment on a day off or pen a column in the evenings. The extra cash was nice, and I enjoyed my craft, so it was a win-win scenario.
Then, the freelance checks started rolling in consistently. The woman who prepared my taxes said I had enough 1099s from contract work to start remitting self-employment taxes to the government. What? That’s when I learned that if you make more than $400 in a calendar year through side projects, you need to claim it on your taxes. I now use a Schedule C form to itemize the income and expenses from my self-employment.
But prepping for taxes is just one piece of the financial freelance puzzle. Managing expenses day to day gets way too complicated when you run a business and need to record if that cup of coffee was for business or pleasure. No income is free, and when that hobby turns into a business, you need to pay your fair share. So, I was told to start separate accounts at my bank to create a clear line in the sand between my personal transactions and the work I was getting paid to do as a freelancer.
My business checking account is the main funnel. It’s where I deposit every bit of freelance income, from checks to automatic deposits. I also pay all my expenses from this account, including office supplies, business conference fees and my bi-weekly pay.
Prior to each payment to myself, I calculate the amount of self-employment tax I’ll owe on the payments that funneled in since my last payment to myself. I tuck away that amount into my business savings account.
This account holds the money I’ll later use to pay my federal self-employment taxes and my state income taxes. I distribute each of these quarterly, based on my financial income level.
At my bank, I have the option of owning a segmented savings account. I created a second sector to accrue money I can use for PTO, vacation time or a sick day. This cushion is a mental stress reliever when I want to enjoy time off with family at the holidays or take a day off for self-care and rejuvenation.
As a freelancer, it’s critical to think about the future. Several years ago, I did a lot of research and determined the best retirement savings option for my situation was a Roth IRA.
Each month, a set amount of money is automatically deducted from my personal checking account and deposited into the Roth IRA fund. It’s super easy, and I don’t have to think twice about being prepared for my golden years. As my freelance business grows, I keep increasing the monthly amount deposited into the IRA.
As you make the transition from doing a little extra work to a part-time, or even full-time, venture as an independent contractor, keeping financial records is more than necessary. Having different types of bank accounts to differentiate your personal banking transactions and those related to your work will reduce headaches for you and your tax preparer.