Business and Personal Expenses Don't Mix

There are a number of different facets to owning and running your own business. Most people do not realize that as a small-business owner you must wear a number of different hats – indeed, if you're a one-person operation you've got to wear all of them, including that of bookkeeper. And if you're not used to number-crunching and keeping immaculate financial records, this can be both boring and daunting. Nevertheless, it's a crucial part of any business, whatever size it may be. But as a small organization it's also very important to that you separate – and keep separate – your business and personal expenses.

It's easier than you might think to mix the two. Perhaps it started out as just a way to spend a few weekends each month doing something that you like to do, and make a few bucks at it to boot. You probably never bothered to give much thought to organizing, much less turning things into a permanent enterprise. And, as such, all of the money you made from your little diversion simply went into your personal account. But then, things actually began to pick up and soon you were making money hand-over-fist. Here's where the fun begins, because the IRS now categorizes you as "self-employed" for tax purposes, and because your sideline occupation is pulling in more than $400 of profit a year, you have to pay taxes on it. Your single personal checking account is now going to make things more confusing for both you and your accountant.

Many people that open Internet businesses make the same mistake. Because electronic payments are easy, convenient and (for the most part) safe, the overwhelming majority of Internet marketers sell their goods and services in this manner. Unfortunately (especially in the case of beginners), many simply use their personal accounts to receive those business payments, and this can cause problems come tax time.

Of course, these difficulties are surprisingly easy to sidestep or correct. The first thing you'll need to do will be to open a dedicated business account to handle all of the business's transactions. Next, you'll want to create a reasonable and workable business budget, and include in it your salary as a business expense. Divide your total salary amount into monthly (or bi-weekly) payments and transfer them to your personal account at the appropriate times. You can now pay your personal expenses from your personal account.

In this manner, you can be sure that all expenses paid by the business account will be strictly for the business, and you won't have to sift through that single account later, examining each transaction to decide whether it was for personal or business use. But, if that problem has already arisen, simply print out a complete record of the account's activity, paying particular attention to all debits and withdrawals. Any personal expenses that you find can be recorded as deductions from the salary the business pays you. All remaining expenses will be business-related and, as such, can be used as business deductions. But from now on, be sure to keep the two separate by withdrawing your monthly salary from the business account into your personal account for more concise and headache-free recordkeeping.