So you just started a digital marketing and consulting business, and there is a lot of pressure, the fatigue, the work, and the unceasing pressure to satisfy your clients. Sometimes, you grab the wrong credit card- not minding whether it’s for business or personal use- to cater to business expenses. Now, your business expenses are muddled up in the sea of personal transactions, and this could spell a lot of trouble with your taxes.
Sometimes, the only stumbling block that keeps you from claiming tax deductions is the fact that you mix business and personal expenses. But that’s not the only thing you stand to lose. What if you get audited tomorrow? How would you justify the dangerous mix of business and pleasure?
Grab your coffee, and let’s talk about it
What Is The Difference Between Business And Personal Taxes?
Whether you run a business or work 9 to 5, the IRS expects you to pay taxes on any income you earn. However, the significant difference between business and personal taxes is how they are filed.
For business taxes, you’re required to take into account the inner workings of your entire business and your income, while personal taxes only focus on your income as an individual.
Business taxes involve dealing with a lot of things, from your business income, business expenses, business investments, dealing with employees, and more, which makes it more complicated than personal taxes.
Why Should You Separate Your Business And Personal Taxes?
Clarity and accuracy: mixing business and personal transactions makes it harder to track your expenses and identify tax credits and deductions. In the end, you might find yourself making unnecessary errors when filing taxes and getting into trouble with the IRS.
Liability protection: having a clear-cut separation between your personal and business taxes provides legal protection for your business and personal assets. So, if you run into any legal problem with your business, your assets will be protected from legal risks.
Simplified record keeping: keeping your finances separate eases record keeping and gives you a clearer picture of your business’s financial health. This way, you can make informed financial decisions.
How Do You Separate Business And Personal Taxes?
Keeping business and personal taxes separate can be challenging for a business owner. However, the benefits are significant. By setting everything right from day one, you can untangle the web and potentially save a substantial amount on your taxes. Here’s how to separate your business and personal taxes in 5 simple steps:
- Register your business: the most critical step you’ll need to take to keep your business and personal taxes separate is to register your business. This means you’ll have to decide if you want your business to be a sole proprietorship, partnership, corporation, or LLC. You should know that the type and structure of your business affects your tax bill as well as your tax credit and deduction. Pick one that best aligns with your business and financial goals and register it officially.
- Get your Employee Identification Number (EIN): the next step is to apply for your EIN, which is some sort of social security number for your business. It is a nine-digit number that the IRS uses to track tax reporting for your business.
- Open a business bank account: This step is crucial to keeping your business expenses separate from your expenses in a different bank account. With a business bank account, you can keep track of your taxable income and business expenses so you can file your taxes easily.
- Get a business credit card: if you’ve successfully created a business bank account, then you should also get a business credit card. A business credit card makes business purchases much more accessible and also helps you organize your financial records.
- Automate your business: Accounting is one of the most complex things for many business owners to deal with, so getting automated accounting software helps you keep track of your business expenses and manage your financial records.
Separating your business taxes from your own saves you time, stress, and money when it’s time to pay your taxes—Do more questions about separating your business and personal taxes? Reach out to the Tax Goddess team, and we’ll be happy to help you.
