Are you still commingling your business and personal expenses on one card?
Here is a bit of tough love – stop!
Swiping your card for both types of expenses feels convenient now, but it’s not so convenient when you’re paying an accountant hundreds of dollars to sift through the mess and make sense of it all for you.
“Oh yeah, I’ll just categorize them at the end of the month” quickly turns into “What am I doing with my life?!” once a looming tax deadline presents itself.
Or, even worse, you are surprised at the amount you’ve spent in personal transactions when you finally decide to categorize it all. You could have paid yourself a full bi-weekly salary based on just those transactions alone.
Here’s how to officially pay yourself so that you can stop mixing and mingling your money.
You should start this transition by creating a new bank account under your business name. This will allow you to get a new debit card to use for all of your business transactions.
Next, based on your true business expenses, what is your likely profit each month? Take 50% of that number, and your monthly pay should be somewhere around there. Now, if you’re committed to monthly bookkeeping (as you should be!), then you’ll compute 50% of your profit each month to be exact. But I want to make this switch work for anyone, so use the estimate for now if you need.
Then, choose either monthly or bi-weekly or bi-monthly to start making transfers directly from this business account into your personal account. If you can’t transfer it directly, write yourself a check or go to the bank and withdraw it. Whatever you need to do to get these funds to your personal account, do that.
Who does this work for?
Sole Proprietors:
Is your business entity a Sole Proprietorship? According to the IRS a Sole Proprietorship is “someone who owns an unincorporated business by himself or herself.” You might have a county license, sometimes called a DBA, but you report your business activity on Schedule C of your personal tax return.
Single-Member LLCs:
If you have a Limited Liability Company (LLC), you probably know that separating your business from your personal assets is important. According to the IRS an LLC is “a business structure allowed by state statute. Each state may use different regulations, and you should check with your state …” If you’re a single-member LLC (meaning there’s just one owner – you!), then you report your business activity on Schedule C of your personal tax return.
Who does this not work for?
S Corps:
According to the IRS an S Corporation is “a corporation that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.” If you’re an S corp, you must become an employee of your business and be paid a “reasonable” salary if you’re an owner who’s performing revenue-generating business activities. You need official payroll through a service like Gusto or Intuit Payroll that can file quarterly payroll taxes and issue you a W-2 at the end of the year. You’ll also need to file an annual information return for the business that is separate from your personal return.
I hope this little bit of tough love helps remove the pressure of paying yourself and makes mixing your business and personal transactions a thing of the past for you. Good luck!
