When you’re self-employed, it’s essential to separate your personal and business expenses. If you don’t, you could pay more taxes than you have to. It may be tricky to figure out a business expense and what’s not, but it’s important to get it right. Here are some tips for separating your personal and business expenses:
Personal vs. Business Expenses
To help you get started on the right foot, you must know how these two kinds of expenses differ. Your personal expenses can be anything from mortgage or rent payments to groceries and entertainment. Anything you would generally pay for yourself, regardless of whether it’s related to your business, is considered a personal expense.
On the other hand, business expenses are those incurred in running your business. This could include office supplies, marketing materials, and travel expenses. If you’re not sure whether something is a business or personal expense, ask yourself if the purchase is necessary for your business to function.
Tip #1 Keep good records
This may seem obvious, but it’s essential to keep track of all your personal and business-related expenses. That way, come tax time, you’ll have everything you need in one place since you’ll need to itemize your deductions.
An excellent way to do this is to create separate bank accounts for your business and personal expenses and use a credit card for business expenses only. This will make it easier to track your expenses and keep them separate.
Tip #2 Get a business credit card
Consider getting a business credit card if you don’t already have one. This will give you another way to track your business expenses, and you can often get rewards and points for business-related purchases. Plus, you’ll benefit from building up your business credit score.
Tip #3 Consider setting up automatic payments
If keeping track of your expenses is proving to be difficult, you might want to consider setting up automatic payments. This way, your business expenses will be paid for automatically, and you won’t have to worry about forgetting to pay a bill.
The same goes for your fixed personal expenses. For instance, you can discuss the payment terms of your house with your home loan lender and set up an automatic payment plan from your bank account to make things easier. You can be sure that your personal and business expenses are always taken care of, and you won’t have to worry about mixing them up.
Tip #4 Hire an accountant
If you’re still struggling to keep your personal and business expenses separate or just not confident in your bookkeeping skills, you might want to hire an accountant. They can help you set up a system that works for you and your business and assist with your tax return.
Tip #5 Know the tax deductions you’re entitled to
As a self-employed individual, you’re entitled to several tax deductions. These can help reduce your tax bill and make it easier to afford your business expenses. You might be eligible for some deductions, including office expenses, travel expenses, and marketing costs.
Of course, this is just a general overview of some deductions you might be able to claim. For more information, be sure to speak with an accountant or tax advisor to rest assured you’re taking advantage of all the deductions you’re entitled to.
Tip #6 Use accounting software
If you want to save yourself some time and hassle, consider using accounting software like Xero or QuickBooks. This can help you keep track of your expenses, and it can also help you prepare your tax return since most software programs will automate the process. So be sure to do your research to find one that’s right for you and your business.
Tip #7 Make sure your business is legitimate
Lastly, it’s essential to make sure that your business is legitimate. This means registering it with the government and getting all the necessary permits or licenses to operate your business. Not only will this help you avoid any legal trouble, but it can also help you get access to government benefits and programs, like small business loans.
So, before you open your doors to the public, make sure you’re doing everything by the book. This will help you save time and money in the long run, and it will give you peace of mind knowing that your business is up and running legally.
While it takes some effort to keep your personal and business expenses separate, it’s worth it in the long run. By doing so, you can be sure that you’re staying organized and within the law. Plus, you might even save some money come tax time because you’ll be able to take advantage of all the deductions you’re entitled to.