When you become your own boss, however, there are some important things to take into consideration, such as managing your business finances, maintaining a budget, and planning for tax requirements. You often have more financial responsibilities than an employee with a regular paycheck. One of the best ways you can juggle all your responsibilities as a self-employed person is by opening designated bank accounts and managing them on a monthly basis. That way, you can stay ahead of your expenses, eligible deductions, and income reporting when it comes time to pay taxes. Although it may seem overwhelming, a little planning can go a long way when it comes to managing bank accounts. Learn what types of bank accounts to consider, how to budget for expenses and taxes, and what kinds of tools can help you along the way.
Why You Need To Manage Bank Accounts
Although it’s not a requirement for most small businesses, separating your personal finances from your business expenses will help streamline your tax and income reporting. Essentially, managing your bank accounts well helps you stay organized so you can run your business efficiently. Dedicated business bank accounts can help limit your personal liability, protect your customers’ private information, and establish credit history for your business.
Making the Most of Expenses
Businesses accrue numerous expenses, and keeping those organized will allow you and your tax professional to deduct those expenses accurately. The IRS considers a business expense deductible if it is both ordinary for your industry and necessary for the course of business. If you work from home, for example, you can take advantage of the home-office deduction, which accounts for not only the office space, but supplies, utilities, and even a proportionate amount of your mortgage or rent. Similarly, if you run a client-based business, you can use that business bank account to pay for any client meetings, mileage, and other expenses that may be required to acquire new clients. Understanding what qualifies as a deductible expense can help you make major decisions while growing your business, such as whether to buy a car or enroll in continued education. Deducting expenses allows you and your business to keep more of your income, and can lower your tax burden significantly. So it’s important to maximize your available deductions.
Prepare for Taxes
Seasoned self-employed business owners know the importance of keeping up with their tax responsibilities. When you’re earning a W-2 income, the taxes are withheld and sent directly to the IRS for you. When you’re self-employed, you must set aside a significant portion of your income to avoid being hit with a major tax bill. Maintaining a bank dedicated to taxes can simplify the process. In addition, you’ll need to plan for any sales taxes, employee taxes, and state and/or local taxes you and your business might owe. You can plan for your estimated taxes based on the income and expenses you’re seeing in your dedicated business bank account. Setting aside 30% to 35% of your earned income is a good rule of thumb, and using a separate bank account to do that can keep all your funds and expenses organized.
Open a Business Bank Account
Opening a business bank account is as simple as opening a personal checking account. You can open an account online or by visiting a bank or credit union branch. By providing some personal information and making a minimum deposit, you can open your account in one day, sometimes in a matter of minutes. Like any bank account, fees can vary by banking product, or be waived entirely depending on the type of account you choose. Consider local credit unions, online banks, and major banking institutions when you’re researching the best business bank account for you. Take advantage of any introductory offers. Think about how your business will use a bank account. Do you have hundreds of daily sales, or are you simply using it to collect 1099 income from freelancing?
Self-Employed Retirement Accounts
Working for yourself also means you are responsible for your own retirement fund. Although managing another account may be the last thing you want to do, setting up a 401(k) or an IRA will ensure you receive tax advantages for retirement savings. If you are a self-employed individual with no employees, you can set up a solo 401(k), which has the same rules, contribution limits, and tax benefits as any other 401(k). You may also consider a traditional or Roth IRA.
Use Budgeting Software
Budgeting software can help you understand how your personal budget ties into your business budget. There are plenty of affordable budgeting software options to choose from to help you manage your bank accounts. Find an app or program that can fit your needs, perhaps by integrating bank accounts to help you manage your budgets and bank accounts in one place.
