Many people, especially entrepreneurs, will tell you that one of their biggest regrets is not having separate bank accounts for business and personal expenses. I get it-it sounds complicated! But before we dive into the nitty-gritty details on how to manage your money as an entrepreneur.
While you know that it’s a good idea, no one has ever explained why or what exactly to do.
We’re pulling back the curtain on how to keep your finances separate from yours so you can focus on what matters most – running an amazing company!
I have talked to many fellow Entrepreneurs that have said, “I don’t separate my business and personal finances because I am not legally required to do.”
The IRS loves sole proprietors to separate their accounts. If you are audited, they will go through every line item on your statement. They will have more questions about combined business/personal expenses being recorded together in one place. Then if you kept separate accounts.
It’s always a good idea to keep your finances separate from other areas of life. If you ever get audited, having easy-to-read bank statements will make the process much less stressful for you and your accountant!
If you’re an LLC or S-Corp, your business is a separate entity from yourself.
Separation is a necessary step for your business. You have made business separate from yourself and your personal finances!
Benefits of separating your business and personal finances:
- When you separate your finances, it becomes much easier to stay organized.
- You have more confidence in your numbers and few errors when you’re calculating income and expenses.
- The deductions will be there when you are ready to file your taxes. (no more searching)
- You will save money.
- Bookkeeping is a much more positive experience that will help you stay motivated and get it done.
I hope that by now, you are convinced of the importance of separating your business/personal finance. Now we can go over what needs to be separated.
Your business income is not your 9-to five job or W2 employment. It’s the money you make from doing something on the side, like self-employment! You need to separate any earnings that come in due to working for yourself.
This tip is important because it can save you thousands of dollars in taxes. If your W-2 and self-employment income are combined, then the amount you pay could be paying way more than you should be.
Next separate business expenses. Keeping track of everything spent on the company is considered a tax deduction – which means it could save you money in taxes!
The IRS defines this type of expenditure as necessary and ordinary for any entrepreneur looking to start their own venture; these things aren’t just nice luxuries but essential components when running an organization efficiently with growth potential.
The IRS defines an “ordinary” expense as anything that is “common and accepted” to a specific trade or business. A good example is office software. Most companies have software to run their business like Google, QuickBooks, Later, etc.…
What about deductions that are split between business and personal that cannot be separated?
For example, your cell phone, home internet, and home office expense are split expenses, but you will only take a percentage of the bills. Keep track of these expenses and bring them to your tax preparer, and they will figure out the percentage you can take.
Business Loan payments need to become out of your business account. These help keep it easy to track all your interest and principal payments.
Paying your business credit card from a personal account is messy and disorganized, but it can also hurt you financially. This must pay from your business account.
The number one rule for your tax savings is that they should be placed in a business saving account until you owe estimated taxes. If you don’t move to another account you might for getting owe tax money to the government and spend it somewhere else. This hurt your cash flow and through off your budget.
There are two ways to separate your personal and business finances.
Open a Business Checking Account
It is so easy to open a business bank account! You can save yourself the hassle and stress in the later stages of your company’s growth. Just get done and save yourself the bookkeeping nightmare.
Do I have open the business account that my bank offers?
You can just open a personal bank account. Look at credit unions they are low-cost business bank accounts. Novo is a great option also; they have zero fees!
What next after you open your new business bank account?
Use this account only for business income and business expenses. What if I need to pay myself? Simple transfer money to your personal account or write yourself a check.
What if I don’t have enough income to cover my business expenses? What if I’m starting out and there’s not enough money in there? What if I’m using my personal account to pay for my expenses?
We all have been there, no worry! You will need to transfer money back to your account called this owner contribution. This way, it is not counted as income and will not be taxed.
Convert an Existing bank account
What if i have too many accounts already and I don’t want to open another account?
Then turn one of your accounts that you are not using. Into your business account but again needs to stay strictly business account. Make user you update your recurring business transactions come from this account.
This is not my favorite method there is more work to make sure no recurring payment personnel coming out and switch all business expenses to this account.
This week take action by opening your business checking account and start updating your checking account information to all recurring business expenses and payment processors.
So, there you have it. The basics of keeping your business finances separate from your personal ones. This is an important step in protecting yourself and your business down the road. If you want to learn more about this topic or any other aspect of finance, feel free to reach out to me or visit my blog for even more tips and advice.