After you’ve talked to your CPA and set up your entity, you can open your business banking accounts. I strongly recommend getting business checking and savings accounts, and at least one debit or credit card to use for your business purchases. Then, use those accounts for ALL of your business income & expenses, and keep your personal stuff out of it.
Why can’t I use my existing accounts?
Because you’re a business owner, you need to keep the income and expenses from your business completely separate from your personal income and expenses. It keeps your records cleaner for you, your CPA, and the IRS, and will make your life much easier when tax time rolls around. Plus, it is another step to prove that you run a legitimate business and that your work isn’t just a hobby.
But my business income IS my personal income.
This is true for most of us. We essentially pay ourselves for our own work, and it’s expected that you will use your business income to pay for your personal bills. But, instead of mingling the funds, you should transfer the money from your business account to your personal account and mark it as an Owner Draw. You want to make sure your records clearly show how much your business earned and how much it spent. Your personal bills, and any other income you receive that isn’t part of your business, should be tracked separately.
Note: How you pay yourself depends on your business structure. If you are a sole proprietor or single-member LLC, your business income passes through to your personal return, so it’s pretty straight-forward. If you are, or file as, a corporation, you have to set up payroll and give yourself a reasonable salary. Another topic to discuss with your CPA.
How do I open an account?
There are a lot of banks out there, and we all have different priorities and preferences, so find the one that makes sense for you. In most cases, you’ll need your ID, business formation paperwork, EIN, and an initial deposit to open an account.
If you are a sole proprietor and haven’t applied for an EIN, or aren’t able to open business accounts for some reason, you can use regular accounts until you can – the main point is to keep all of your business activity in one place and your personal activity elsewhere.
Credit Card Tips
If you can’t pay your credit card bill in full every month, I don’t recommend getting one. Just use your debit card for purchases.
Avoid annual fees if possible.
Look for a rewards program that is useful to you. There are many options that offer travel rewards, cash back, Amazon points, etc. Make your money work for you by taking advantage of these. It’s like getting free money. But again, it only works if you pay it off in full each month. Otherwise the interest will negate the rewards.
What if I’ve already used my personal accounts for business?
If you accidentally use the wrong card or account, it’s not the end of the world. Just reimburse yourself by making a transfer (or writing a check) from your personal account to your business one, or vice versa.
This applies to payment apps (Zelle, Venmo, PayPal, etc.) as well - keep separate accounts for your business, or at least make sure to transfer funds to/from the correct accounts after each transaction.
How do I know which expenses are business and which are personal?
A lot of new business owners like to start deducting everythingas a business expense. But you need to be honest about it. And know the rules. Being self-employed doesn’t make your entire life a write-off. You should have a basic understanding of what types of expenses are deductible. A good place to start is the IRS website. If you’re not sure, Google it. There are so many resources out there for these types of questions. You can also use your best guess, but make a note to discuss with your CPA to make sure everything is above board.
Home Office Deduction.
Business Expense: If you have a dedicated room in your house that is SOLELY used for your business, you can deduct a portion of your mortgage/rent and utilities.
Personal Expense: If you work from a laptop in your living room, or any space that is also used for other activities, it doesn’t qualify.
Business Expense: Taking a client for lunch to talk about a project.
Personal Expense: Going on a date with your significant other and talking about your day.
Business Expense: Your job requires a specific uniform or costume that is not suitable to wear outside of work.
Personal Expense: Buying a new suit or dress (that you can wear for other occasions as well) for a client meeting or networking event.
I understand that these details can be completely overwhelming, especially in the beginning. But all of this is to help you maximize your potential and set yourself up for success!
I’ll be back tomorrow to talk about the importance of saving.