This is part of our Financial Literacy Month Question and Answer series

Question: I want to start a business. Do I need a separate checking account? ~ Monica

Answer: Monica, with a small business it is very easy to mix business and personal expenses especially when you’re just starting out.

For some people the business started out as a hobby or a way to make a little extra money on the side. There wasn’t much thought to profit or a permanent enterprise at the time. All of the money funneled into one account.

Then, things began to snowball and soon you were making money hand over fist. As a sole proprietor working for yourself, the government categorizes you as “self-employed” for tax purposes. Once you make over $400 in a year, you have to pay taxes on your business profit. Having only one account makes things much more confusing for you and your tax accountant.

Business expenses are items or services directly related to the business and its management. Business expenses can be deducted on your tax return if you are self-employed. Personal expenses cannot. If everything is in one account it is hard to separate the two convincingly and may raise a red flag with the IRS.

If you haven’t already, start a separate business checking account. All business deposits and expenses should be paid for out of this account (including your salary).

Keeping things separate also helps you to see if your business is profitable (the major goal of owning your own business, of course).

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