Keeping business and personal funds separate is essential for several reasons, most importantly for accurate and efficient bookkeeping.
Ease of Tracking:
Maintaining separate accounts makes it exponentially easier to track your finances. This means fewer questions, less guesswork, reduced room for error, and ultimately, time saved—leading to lower fees and more accuracy in your financial records.
Audit Preparedness:
Separating your funds is also a good practice in the event of an audit. It helps maintain clear and accurate records, demonstrating good financial management.
Practical Tips:
• Use Separate Accounts: Pay personal expenses from your personal accounts and business expenses from your business accounts. If cash is tight, transfer funds between accounts, but document these transfers clearly.
• PayPal Accounts: If you use PayPal, maintain separate profiles for business and personal use. Your business profile should only be linked to business accounts. You can update this in PayPal under Pay & Get Paid > Banks & Cards > and then remove any accounts that are not business-related.
Handling Mistakes:
• Personal Expenses from Business Account: If you accidentally pay a personal expense from a business account, it will typically be coded as an owner’s draw and will not count as a business deduction. For recurring payments, please correct the billing account.
• Business Expenses from Personal Account: We won’t know about these unless you inform us. Missing these deductions is not ideal. Email us the date, amount, and vendor of the transaction, and we’ll enter it in your books. You can also reimburse yourself by transferring funds from your business to your personal account with a memo indicating it’s a reimbursement. Without this information, these transactions might be incorrectly coded, causing you to miss the deduction.
Minimizing Errors:
We kindly request you minimize these cross-account transactions as they create more work, increase inefficiency, and introduce more room for error.
Fun Fact:
Estimated tax payments and payments on your personal tax return are considered personal expenses and are not deductible. If paid from your business account, they will be treated as an owner’s draw.
