Understand how and why to keep your personal + biz money separatedJul 10, 2020
In our first episode of Finance Friday, Beth schools us in the importance of separating business from personal money. Plus her and Tiffany offer practical tips on how to do it, how to untangle a mess, and other useful ideas.
Full Episode Summary
One of the most important things to learn as a freelancer, solopreneur, etc, is to separate your business and personal money.
All assets and monies that belong to the company, also belong to you. You will make your life and your tax preparer's life a helluva lot easier if you work to separate your personal spending from your business spending.
How to Separate Business Money from Personal Money
First, you'll want to open a separate bank account for your business. If your business name is simply your own name, the account will be in your name. If your business is something other than your name, you will need a DBA ("doing business as"). This is a fictitious business name that you file with the county clerk. The DBA will allow you to open the account with your business name. Once the account is set up, you'll want to make sure that all income and expenses flow through this one account.
Keep in mind that the IRS does not recognize your DBA. If a company hires you as a freelancer and needs your W9, be sure to use your actual name and social security number. Your DBA is just to allow you to open that bank account, and it's not associated with your social security number. So make sure you keep this straight so you avoid headaches! If down the road, you find that you have been in business for a while and keeping your biz and personal monies separate is becoming complicated, Beth recommends that you consider becoming a corporation.
If you have a credit card, you may also think about using one for business and one for your own personal purchases. You could also get a debit card for that business-only account you opened, that way all of your business expenses are actually coming from your business funds.
Be Diligent About Setting Money Aside for Taxes
Be sure that you are setting aside money for your payroll taxes.
When you are an employee, you split the cost of payroll taxes with your employer. Each paycheck, your employer covers half of your payroll taxes, and you cover the other half. When you are self-employed, all of that comes from YOU. You are now the employee and the employer.
Aside from payroll taxes, you'll also need to set aside a certain percentage of your net income. We go into a lot more detail on this topic in Episode 10: 5 Tax Basics for U.S. Freelancers.
Do You Suspect That You Might Owe Taxes?
If you find yourself in hot water with taxes, just face it head on. Do not ignore it, hide from it, or hope and pray that it will just go away.
Your first step is to pick up the phone and talk to someone from the IRS. Don't be nervous about this - IRS agents are just people with a job to do. Call them up, explain your situation, be nice, and you’ll be surprised by how helpful they can be. You are not the first or last person to have made a mistake on your taxes. There are programs available to help you - but you need to educate yourself and figure it out.
Untangling a Mess
What if you haven’t been separating your monies, and find yourself with a big ol’ financial can of worms to deal with?
First, take a deep breath, and take it one day at a time. Pick a date, and start separating your cash from that day on.
It is never too late to start!
Beth recommends that you set aside some time each week to work on sorting out your finances so that it's not such a daunting task.
Going forward, we set up some rules and procedures for yourself, try to stick with it, and try to make some smart, conscious decisions. We recommend that each week you set aside an hour or so to:
- Check your online banking (credit and debit) to make sure everything looks right.
- Update your expenses to make sure they're categorized properly.
- Check in on your cash flow projections so that you're ahead of any potential issues.
After a while, you will get faster and better at this. And you may even consider hiring someone to do this part time for you if things get too time-consuming or complex.
Lastly, when in doubt, work with an expert! Taxes and finances can feel complicated and overwhelming, but they don't have to be. As soon as you start to ask questions, talk to experts, and understand more and more about your situation, you will find that it becomes more clear and you feel a lot more comfortable with it all.
Think of this as just part of the tradeoff of working for yourself - yes, it was convenient that your former employer "took care" of all of this. But don't forget how smart and capable you are. You can figure this out!
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