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The Importance of Separating Business and Personal Finances

 

Starting a business means you'll have to find a method of keeping business finances separate from personal finances. Personal business finance may seem overwhelming to some, but it's very important to keep up with for two reasons:

 

1- The IRS

 

The most important reason to use accounting software in your work at home business to separate business and personal finance is for tax purposes. When you work at home and report your own income to the IRS, statistically, there is a higher chance of audit. Completely separating the income will help you when filing your taxes, so as to prevent any issues if an audit arises.

Report all income to the IRS, regardless of whether or not you will receive a 1099 at the end of the year, to avoid raising any red flags. If you're worried about what taxes you may have to pay (as a result of the business income), take a close look at all possible tax deductions to help lower the taxable income.

 

2- Loans and Credit Cards

 

If you ever need to apply for personal loans or credit cards, you'll want to show that income instead of business income, because you are not your business. The same can be said for applying for a business loan or credit card, because your business is not you.

Having these two incomes mixed together makes for a difficult time proving the difference between your income and your business income (making for a potentially rough situation). Business credit is completely separate from personal credit, though at first, personal credit may be used to make a decision on whether or not to extend business credit.

 

How to Separate Business and Personal Finances

 

The easiest way to do this is to use a separate bank account for business related transactions. Some people may choose to go as far as using a completely different banking facility, to avoid confusion with account numbers. This simplifies everything and aids in keeping your sanity, compared to using one bank account and separating the transactions as they occur.

 

Use the business account to pay all business related bills, and make deposits to your personal account for your paycheck only. This way your business will be able to use the payments to employees as tax deductions from income, and you'll be able to show personal income for the purpose of loans, credit, and taxes. Do not become tempted to loan yourself money from the business, because if for any reason you cannot pay it back, you won't be able to properly justify where the money went and could run into trouble.

 

As a sole proprietor, you are responsible for all taxes and business debts, and your personal income will be used to pay those debts if necessary (but it doesn't mean you should not separate the income as if you were an LLC or corporation). This way, there will be no questions about where the funds are, how much there is available, and what the funds have been used for. Even though you and the business may be one and the same, when it comes to finances, you should behave as if you were completely separate.

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