What’s the easiest step to simplify my finances?
This one is easy, and with technology that offers online banking at our fingertips we should have no excuse for this one; separate bank accounts!
Every sole proprietor, self-employed, business-owner (whatever you want to call yourself) needs to separate their business transactions from their personal transactions!
Why do I need separate bank accounts?
- Business tax deductions! Having a business means you get tax deductions on purchases that you will not get if you include them on your personal return.
- Profit and Loss reports: If you ain’t makin’ mula at your side hustle or main hustle, it’s just a hobby. That’s not just philosophical, that’s the legal requirement to continue recording deductions as business expenses….. PROFIT MUST BE SHOWN.
- Know how much to pay yourself: you got into this business for a reason and it’s not a bad thing. Making money is the right thing to do for your family, so if you don’t know how much you have available to pay into your personal account then you don’t know if you are doing the right thing.
- Your accountant can use bank statements for Schedule C form or business tax return if they are separate from your personal bank statements.
How do I get separate bank accounts?
- Set up the business bank account
- The big online banks offer both personal and business checking accounts. Capital One and Wells Fargo are just a few that my clients are currently using. If you are operating as a sole proprietor or your personal name then you don’t actually need a business banking account. You can have two personal accounts and nickname your business account with your DBA. It’s up to you to keep good records and use the right debit card or bank account at the right times. Never mix and match them.
- Deposit business income into the business account only:
- All to often a customer will pay by check with your personal name on it. That’s okay, just deposit that money into your business account. Remember, that bank statement is the official record and will prove what entity the income belongs to.
- If you are using a third party payment system like paypal, just attach that account to your new business account to receive income and move money back and forth. Software systems like QBO will even link to some payment accounts like Venmo so all transactions will record to your register automatically.
- Charge all business expenses out of the business account:
- You can use ACH debit, debit cards, checks or cash. The method doesn’t matter as long as the money comes out of the business account in order to pay your vendors.
- Pay yourself a salary from the business net income:
- Paying yourself is the fun part, and the scary part. The goal is to write yourself a check out of the business account and deposit it into the personal account. This is recorded as a distribution on your business general ledger for most entities. Why? Most small-business entities are pass-through entities, which means all net income will be taxed on your personal 1040 anyway. But you need money in your personal account so a distribution out of the business account is the best way to get it there.
- Be sure you leave enough in the business bank account to pay the next month’s expenses
Is this making you think about creating a business budget? GOOD! It should, and don’t worry. We will teach you how to do that as well in an upcoming mini eBook on budgeting.
A few last words…..
Remember, you want a bank with great online features and debit card accessibility. If you follow this simple rule, separate banks accounts, you have just done 50% of the work for simplifying your personal finances and your business finances.