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Separate Business and Personal Expenses

There is a lot of paperwork associated with owning a business of your own. When you set up your small business, don’t forget to include a budgeting plan. This budget should include an amount that you pay yourself as the owner of the business. Also be sure to separate business and personal expenses.

With a small business it is easy to mix business and personal expenses. Maybe the business started out as a hobby or a way to make a little extra money on the side. There wasn’t much thought to profit or a permanent enterprise at the time. All of the money funneled into one account.

Then, things began to snowball and soon you were making money hand over fist. As a sole proprietor working for himself, the government categorizes you as “self-employed” for tax purposes. Now that you make well over $400 in a year, you have to pay taxes on your business profit. That one account is going to make things more confusing for you and your tax accountant.

Personal expenses are items that you spend money on for your own use. When you get a paycheck from an employer, that is money that can be used for anything you need. People pay bills, buy groceries, and fund leisure activities.

Business expenses encompass monies used for items or services directly related to the business and its management. Business expenses can be deducted on your tax return if you are self-employed. Personal expenses cannot. If everything is in one account it is hard to separate the two convincingly.

People who conduct their business on the Internet receive electronic payments for many if not all of their services. It is easy and avoids checks or cash getting lost in the mail. Secure servers can be set up to take the payments. Unfortunately, we use this same account to make personal purchases, especially if it is accessed with a debit card of some sort.

Create a budget for your business. Include a salary for yourself. Divide the salary amount into monthly payments and withdraw this amount or transfer it to a personal checking account similar to direct deposit by an employer. Use that account to pay personal expenses like bills, eating out, and allowances for your children.

The business account will record the withdrawal as your monthly salary. Any other expenses that are just for business will be paid for from the business account. In this way, you don’t have to go transaction by transaction and decide which was for business and which was for personal use.

If you already have this issue, go through the account and print a report of all withdrawals. Any that are for personal expenses can be counted as deductions from your salary. Other expenses will be business expenses and can be added up towards a deduction on your tax return. From this point forward, separate the two through monthly salary deduction for easier record keeping.

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