It is common for people to seek additional income outside of their full-time job. Often this is through part-time work as an entrepreneur.
Do you need to separate your income and transactions for your side business in a different bank account? That’s what a Clark Howard podcast listener recently asked.
Do entrepreneurs need a separate checking account?
How do I manage my finances if I have a part-time job in addition to my full-time job?
That’s what a Clark listener wondered on the January 3 episode of the podcast.
David in Kentucky asked, “My wife is going to work part-time as a contract employee. Does she need to set up a separate checking account for her business? She also has a full-time job, so that’s right next door.
The only thing the IRS requires for the 1099 job is that you pay the appropriate taxes, as Clark explains.
“That’s what we call concert work. Have a separate checking account? Not necessary,” Clark says. “Have good records of the expenses she has for the business?” Essential.”
In this sense, Clark suggests dedicating a single credit card to contract work. “Every time she buys supplies, [paying for] training, whatever, it will be able to treat them as direct expenses against income and it will be a compensation dollar for dollar which will reduce the tax to be paid.
Tax requirements for 1099 workers
It is important to note that there is a self-employment tax. It is 15.3% in 2023. This takes care of your Social Security and Medicare requirements. David’s wife must therefore keep immaculate records of her income and expenses for her secondary activities.
She can keep these records via pen and paper, an Excel document, or rudimentary, affordable software for small businesses, such as QuickBooks.
Regarding the self-employment tax, Clark has a suggestion.
“She needs to budget for that. And the best way to do that is to make additional payroll deductions at his [full-time] work,” Clark says. “And then she won’t have to file quarterly tax returns to stay on the good side of the IRS.”
Of course, it’s a good idea to consult with a CPA or tax professional to make sure you’re submitting a tax return that complies with IRS rules.
You don’t need a separate checking account just because you’re working in parallel.
You should keep good records of your income and expenses. As you will have different tax requirements for your 1099 employment than you would as a full-time employee, including self-employment tax.