Separating business and personal money

When you start freelancing or running a side business, it's easy to let everything flow through one checking account. A client pays you, you buy groceries, you pay for software, all from the same place. It works until tax time, when you have to sort out which of hundreds of transactions belong to the business. Keeping the two apart from the start saves that work and gives you a clearer picture of how your business is really doing.

Why separation matters

Mixing business and personal money in the same account is often called commingling. Here is why official sources recommend avoiding it.

The IRS recommends it. In Publication 583, its guide to starting a business and keeping records, the IRS says "One of the first things you should do when you start a business is open a business checking account," and that you "should keep your business account separate from your personal checking account."

Your records have to back up your tax return. The IRS recordkeeping page explains that good records help you prepare your tax return and support the items you report on it. You can use any recordkeeping system that clearly shows your income and expenses. When business transactions sit in their own account, your bank statement already does much of that work.

It can matter for liability. The SBA says business banking "offers limited personal liability protection by keeping your business funds separate" (SBA). How much protection you have depends on your business structure and your state, so this is a question for an attorney if it matters to you.

You can see whether the business is working. When business income and costs are in one place, it is much easier to answer simple questions: Did I make money this month? What do I spend on software? Which clients pay late?

Opening a business bank account

According to the SBA, banks commonly ask for:

• An Employer Identification Number (EIN), though sole proprietors may be able to use a Social Security number instead
• Business formation documents
• Ownership agreements
• A business license

The SBA also points to other benefits of business banking, such as being able to accept card payments, the option of a line of credit, and the chance to start building a credit history for your business.

Ask each bank you're considering for its own document list and account terms, since these can differ.

Getting an EIN

An EIN is a federal tax ID number for a business. The IRS page Do you need an EIN? says you need one if, among other things, you have employees, operate as a corporation or partnership, or file employment or excise tax returns. As noted above, the SBA also lists an EIN among the things banks commonly ask for when you open a business account.

Getting one is free. The IRS says plainly: "You never have to pay a fee for an EIN," and warns, "Beware of websites that charge for an EIN" (IRS). If you apply online and the application is approved, the IRS issues the EIN immediately. The online application has to be finished in one session and expires after 15 minutes of inactivity.

Sole proprietorship vs. LLC: the basics

Your business structure affects your taxes, your liability and how you pay yourself. This is a quick overview, not legal advice. The SBA's guide to business structures describes them this way:

Even as a sole proprietor, with no legal separation between you and the business, a separate account still helps with records. The SBA suggests that "consulting with business counselors, attorneys, and accountants can prove helpful" when choosing a structure.

Paying yourself

Once your business has its own account, you need a clean way to move money to your personal account. Publication 583 says to write checks payable to yourself only when making withdrawals from your business for personal use. The same idea applies if you move money by transfer: money for personal use leaves the business account as a clear, separate withdrawal to you.

A few practical habits keep this tidy:

• Use one regular transfer. Moving a set amount on a set schedule is easier to track than many small withdrawals.
• Don't pay personal bills from the business account. Transfer the money to yourself first, then pay from your personal account.
• Label transfers clearly. A note like "owner draw, October" makes year-end review simpler.

The tax treatment depends on your structure. The IRS Paying yourself page explains, for example, that partners are not employees and should not be issued a Form W-2, and that an officer of a corporation is generally an employee whose wages should generally match their duties. A tax professional can tell you which rules apply to you.

Planning for taxes

Money in your business account isn't all yours to spend. The IRS says individuals, including sole proprietors, partners and S corporation shareholders, generally have to make estimated tax payments if they expect to owe $1,000 or more when they file. Some owners keep a separate savings account just for future tax payments, so that money isn't mistaken for profit.

How SpendySaver helps

SpendySaver has a separate Business workspace, so you can keep business transactions apart from your Personal workspace. You can flag and tag business transactions, attach receipts to them, and run a business report from Spending and reports, with exports to Excel, PDF or CSV by month, quarter or year. SpendySaver is read-only and never moves money between your accounts.