For many people, self-employment is the ultimate dream. Working for yourself provides many benefits, including flexible schedules and more control over your creative goals. Not having to deal with office politics is also a nice bonus. However, there are many aspects of running a business that requires a great deal of time and attention, including finances. One of the most important things you should do is learn how to manage your bank accounts.
Read on to discover the basics of what type of bank accounts you should have as a self-employed individual.
Do Self-Employed People Need Separate Bank Accounts?
Opinions can vary on the pros and cons of sharing a bank account with a spouse or partner. However, make no mistake that a self-employed person should absolutely keep personal and business expenses separate.
To be clear, we’re focusing on bank accounts because personal and small business credit cards can have different guidelines depending on your needs. Managing your business bank account will come with unique challenges that shouldn’t mix with your personal expenses. Using a single account for personal and business use will lead to headaches down the line as you try to untangle a web of financial transactions.
Benefits of Separate Bank Accounts for the Self-Employed
Maintaining separate bank accounts when you’re self-employed will help streamline the process of reviewing your financial statements and records. When it comes time to file a tax return or prepare for an audit, the last thing you want to do is comb through endless bank statements and receipts to determine how to categorize each expense.
Without a separate bank account, you’ll have to wonder if that trip to Costco was meant for business supplies or products for your family.
Separate bank accounts will also help accomplish the following:
Lays Foundation for Growing Business
Building a new business is an exciting and stressful adventure. For many small business owners, the fun comes from creating a marketing strategy, fine-tuning the products or services, and setting up a website.
Thinking through the financial details isn’t always the most enjoyable task. However, setting up a bank account for your new business helps lay the foundation for your continued growth. Starting your business on the wrong foot financially is a surefire way to close your doors before you reach the first anniversary.
Simplifies Tax Returns
Filing an annual tax return can be challenging enough if you’re self-employed. Combining a business and personal account will create another layer of difficulty as you begin filing your tax documents.
Whether it’s calculating self-employment tax or understanding how to save with write-offs, there’s a laundry list of things to do when it comes to filing your return. Managing a separate bank account for your business expenses will be tremendously helpful when tax season arrives.
Simplifies Cash Flow
Revenues and expenses are only a portion of a business’s financial health. A better indicator of business viability is the measurement of cash flow, which shows you your company’s liquid assets.
Cash flow is important to understand because your business environment can change very quickly. Uncontrollable factors like instability in the market and supply chain issues can negatively impact your business. If your business has poor cash flow, you may struggle to stay afloat during these unexpected events. A business bank account enables you to simplify your cash flow so you have a better understanding of exactly where your money lives.
Makes It Easier to Track Business Deductions and Expenses
Large businesses often have an accounting department to track deductions and expenses such as utilities, office equipment, insurance, and more. However, self-employed folks typically manage these on an individual level. A separate bank account simplifies the process of tracking various deductions and necessary expenses that you accumulate for your business. It’s easier to identify your costs for health insurance, phone bills, and travel deductions when they’re documented in a separate statement.
Separate Bank Accounts Protect Your Personal Accounts
In addition to simplifying your business financials for tax and audit purposes, a separate bank account will also protect you on a personal level. Managing your business’ financials can lead to some common bookkeeping mistakes if you lack the right experience. Taxes, deductions, and expenses are all unique in a business environment and require special accounting skills. If your business and personal expenses are combined in a single account, any mistakes made will inevitably impact all of your finances.
1-800Accountant Serves the Self-Employed
Small business owners know that self-employment requires a lot of discipline. After all, you’re the boss of your business, and you can’t pass the blame or responsibility onto someone else.
One way to help yourself is to outsource the tasks that you’re either not equipped to deal with or don’t have the time to handle. If you need help with payroll or accounting, our team can help.
1-800Accountant has a team of experienced accountants who can help you meet your financial goals. We know that self-employment is a lot of work, so consider outsourcing your financial duties to an expert. When you partner with us, we’ll take the time to understand your unique needs and challenges. You’ll work with a qualified accountant who understands the nuances of your industry, as well as local and state regulations. We’re committed to your success and provide consistent, high-quality service to meet your goals.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.