This is Why You Need to Separate Your Personal and Business Expenses

If you’re a freelancer or working in the gig economy, you probably have your personal and business finances mingled. It’s pretty common for people to do that. But that doesn’t mean it’s the right choice, or even a good idea. Your business expenses, for example, should really be kept separate from your personal expenses. Why? As it turns out, there are several important reasons. Here’s what to think about, when you’re taking a look at the best way to handle expenses for your business.

It Reduces Your Personal Liability

You don’t want to end up with a lot of personal liability for any business venture you’re creating. If you’re using all your personal money to fund your start-up, for example, you could have some serious financial problems if that start-up doesn’t do well. If that venture has a lot of expenses in the early stages, before it brings in money, you’ll also have to cover those things, so the business doesn’t go under. So, are you making money from it? Have you recouped your investment? How can you tell?

You don’t want to be personally liable for your business. It’s simply too much risk for your financial future. Instead, look for ways to separate what you’re doing from a business standpoint from your personal goals, finances, and investments. If your company has expenses, those should come out of the money the company has received from start-up investors, from business loans, or from profits. Make sure you consider all the expenses your fledgling business will be responsible for. And have you paid yourself?

It Makes Your Taxes Easier

As a business owner, your taxes can feel stressful and frustrating. But it’s not just about the stress you might experience, as there are a lot of other considerations, too. You could end up owing more than expected, if you mix your personal and business finances. To write off expenses for your business, you need to be able to document them properly. Otherwise, you’re making a guess and hoping the IRS won’t notice or mind. That may not be a very good gamble.

You also need to understand what categories your expenses fit into, and what you can and can’t write off in specific categories. If everything comes out of one account, and there’s no division between personal and business expenses, that can be nearly impossible to do. Because of that, you could miss out on deductions that would help you and your business save money. You could also deduct things you can’t really write off, and end up with fees and penalties.

It’s Easier to Track How Your Business is Performing

If you’re not clear on your business expenses, and can’t compare them to your business income, it’s really hard to get an idea of your company’s viability. Whether you’ve started up a full-fledged company, or you’re handling several side gigs, a business is a business. Keep it separate from your personal finances, and it’ll be much easier to see if it’s doing well or needs some adjustment.

A well-performing business is one that’s making a profit. You should be able to cover the company’s expenses, pay yourself (and any employees you have), and hold some money back for any surprise costs that show up. If you aren’t able to do that, one of the reasons could be the level of expenses your company has. Until you track your business expenses, though, you may not catch where the problem lies, or how to fix it. Keeping personal and business expenses separate can make your life a lot easier.

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About the Author: Michelle Dakota Beck has worked as a professional freelance writer since the 1990s. During that time she has written everything from product descriptions to full-length books. Her areas of specialization include real estate, home services, legal topics, relationships, family life, and mental health issues. You can find her on WriterAccess.