CH 3 QUICK GUIDE TO SAVING AND BUDGETING FOR FREELANCERS
CHAPTER THREE OF TEN - CH 3. Separate Business and Personal Finances
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CH 3. Separate Business and Personal Finances
Why It’s Important. For freelancers, to keep business and personal finances separate is critical for several reasons.
Clear Financial Picture of your Business.
Separating your finances allows you to clearly see how your business is performing. You’ll know exactly how much money you’re making, what your business expenses are, and whether you’re profitable. This clarity is essential for making informed decisions about your business.
Simplified Tax Preparation.
When your business and personal finances are intermingled, tax preparation can become a nightmare. Separating them simplifies the process of tracking deductible expenses, filing taxes, and preparing financial statements. It also reduces the risk of errors and makes it easier to provide accurate records if you’re ever audited by the IRS.
Professionalism and Credibility.
Having a dedicated business account helps present your freelance work as a legitimate business, not just a side hustle. It also looks more professional to clients and can make it easier to apply for business loans or credit.
Legal Protection.
If your freelance work is structured as a legal entity, like an LLC, separating finances helps maintain the legal distinction between you and your business. This can protect your personal assets from business liabilities, as it reinforces the “corporate veil” that separates personal and business entities.
How to Implement
Open a Separate Business Bank Account
Choose a Bank. Select a bank that offers business accounts with features that suit your needs. Some banks offer free or low-cost accounts for small businesses, while others might have higher fees but offer more comprehensive services.
Account Setup Set up a business checking account in the name of your business, even if your business is not a legal entity. This account will be used exclusively for all your business income and expenses. Get your check card, and use a sharpie to put a big “B” on the back so you won’t confuse it with your personal card. My tax people tell me a business expense is deductible at the time of purchase, not the time you pay a credit card, so a business check card can help you at tax time.
Linked Accounts Consider opening a business savings account as well, where you can set aside money for taxes, large expenses, or future investments in your business.
Use the Business Account for All Income and Expenses
Income Deposit all payments from clients directly into your business account. This keeps your income organized and makes it easier to track.
Expenses Pay all business-related expenses, such as software subscriptions, office supplies, and professional services, from this account. This ensures that your expense tracking is accurate and comprehensive. There are great paper AND software programs for accounting, but they aren’t free.
Pay Yourself a Salary
Set a Salary Decide on a fixed amount to pay yourself regularly as a “salary” based on your average income and budget. This helps you maintain personal financial stability even when your business income fluctuates. I generally used the smallest amount I could live on.
Transfer Funds Transfer this salary from your business account to your personal account at regular intervals (e.g., monthly or biweekly). Treat this as your paycheck, which covers personal expenses like rent, groceries, and leisure activities. Most accounting systems call it “Owner”
Adjust When Necessary If your income significantly increases or decreases over time, adjust your draw/salary accordingly. However, aim to keep it consistent to maintain financial stability.
Track and Reconcile Regularly
Record Keeping Use accounting software like QuickBooks, FreshBooks, Wave or hard copy systems like Dome, to track your income, expenses, and account balances. This helps ensure that all business transactions are recorded correctly.
Monthly Reconciliation At the end of each month, reconcile your bank statements with your accounting records to ensure everything matches. This practice helps catch any errors or unauthorized transactions early.
Keep Personal Expenses Separate
No Personal Expenses Avoid using your business account for personal expenses. If you accidentally charge a personal expense to your business account, document it and reimburse your business promptly. Easier always to keep separate.
Personal Purchases Use your personal account for all non-business-related purchases. This clear distinction is crucial for accurate financial tracking and tax reporting.
Why This Works. Separating business and personal finances streamlines financial management, reduces stress during tax season, and enhances your ability to manage and grow your freelance business. It not only helps in understanding your business’s financial health but also ensures that you are compliant with tax laws and best practices. Over time, this approach builds a financial discipline, helping you maintain both business and personal financial stability.