Keeping Freelance Finances Straight: Opening a 2nd Bank Account
Once you’ve invoiced a client and received payment, what do you do with your money? The typical answer is that it goes into your bank account, along with any other income you earn from employers or through other sources. It’s a simple approach, allowing you to spend your money without any problems. But that doesn’t mean that it is quite as simple when it comes to keeping your books.
Separating Your Business and Personal Finances
I know a woman who works part time in retail, as well as selling her artwork and taking on freelance graphic design projects. All of her income goes into one bank account, which she uses to buy art supplies, pay her student loans and give her tax preparer a headache.
In order to determine just how much of her spending is for business expenses (and therefore tax deductible), she has to go through her records transaction by transaction to determine whether each one was personal or for her freelance business. If nothing else, that process takes up a lot of time she could be spending on finding new clients or painting.
There are a couple of options when it comes to separating out your expenses. You can keep meticulous records, maybe augmenting your own record-keeping skills with an application like Mint. But that requires you to keep track of information on top of what you’re doing to keep your invoices up to date.
There is an alternative: open a separate bank account for your business.
Business Bank Accounts
I have a business bank account at the same bank where I have my personal account. My business account is free, assuming I meet some very basic requirements every month. I deposit all of my income from freelancing into that account and pay for any business expenses out of it — which means that any time I need to look at tax deductions or business expenses, it’s just a matter of looking at my bank statement.
There’s only one non-business expense I pay out of my business account: my paycheck. Once a month, I move the money I need to pay my personal expenses into my personal account. This approach has actually made it easier for me to manage my finances overall. I have a better idea of what my cash flow looks like and it’s easier to budget for my personal expenses.
Making the Switch
Not every freelancer needs a separate business bank account. While it’s important to handle your paperwork professionally no matter what type of freelancer you are, the fact is that it isn’t quite as important if most of your income comes from an employer. If you automatically have payroll taxes deducted from your paycheck for the majority of your income, your business tax deductions are probably going to be relatively small — making the paperwork necessary to claim them less important.
But if the majority of your money comes from freelancing, good records become vital to managing your income and keeping your tax return from becoming a major burden. My friend, the artist, made the switch to two bank accounts when she — or rather, her accountant — realized that more than 50 percent of her income was was reported on 1099s. Your situation may differ: it’s not always a case of how much of your income comes from freelancing, but how much you’ll need to pay taxes on.
Because every freelancer’s situation is different, it’s best to consult an accountant about how your finances are set up. A good accountant can make your money management easier, and may even be able to provide advise like which banks in your area may be your best options.
I work as a web developer for a company right now but in the future I would like to go freelance.
It’s stuff like this that puts me off though, I wouldn’t have a clue where to start if I wanted to start freelancing and the majority of stuff I find is only really applicable to the US and I’m in the UK.
Could anybody point me toward some good information on where to start if I wanted to go freelance?
If you’re in the UK, check out http://www.freelanceuk.com/. It looks like it has some pretty good information.
http://www.businesslink.gov.uk has lots of useful legal type stuff. have a browse. concentrate on sole trader stuff.
I have found that it helps to have one additional bank account. I use it to save money for taxes. I deposit the money I get from freelance jobs into account #1, then transfer one-third of that amount into account #2. That way, at the end of the year, I’ve saved enough of my income to pay my taxes and don’t have an ugly surprise of owing a bunch of money that I no longer have.
nice idea. is the second account a business one also?
Thanks for this article. We’ve recently considered opening a business bank account. It will definitely make the task of keeping track of finances much easier. Wachovia, here we come!
I have been freelancing for a few years now and started off with very few projects, meaning very little income so I just deposited my earnings into my personal account.
Over the past few years, my income has been increasing therefore making my bookkeeping more difficult. Since I am my own accountant, I make sure to keep good records throughout the year so tax time isn’t that difficult. It is possible to maintain one account for both personal and business expenses, you just have to keep a close eye on your invoices, payments, and purchases. I have been reluctant to open a business account due to the costs associated with the account at my bank.
But as the business keeps growing, I have done some research and found a local bank that has a FREE business account that will work for my deposit/withdrawal patterns and I will most likely open a business account towards the end of this year so that I can stop taking payments to my personal name and start taking payments in the business name.
Thanks for the article!
Any accountant would recommend separating your “monies”, as they call it. If you’re ever audited and the IRS sees that you’re commingling monies, I hear it makes your situation much worse.
Usually banks will require articles of incorporation before giving you a business account, so if you haven’t formally incorporated first, you’ll probably need to before getting that separate account. But that’s for the better, anyway – another way to separate the personal and business.
Amazing how the basic advice if often the most useful and hard hitting.
I found that my life was much better (and simpler) when I followed the advice given here about a year ago. Great blog post.
As soon as I decided to start my own business, I immediately opened another checking account. I did not want there to be any confusion when it came to my business finances. I also figured it would save me a lot of time when paying taxes. I am very glad I did this because it has kept things very simple for me. I just used $100 of my personal funds, and as soon as I made $100 and deposited into my business account, I paid myself back. Now my accounts are reconciled and everything is neat and in order. For a type-A like myself, this is very comforting. I would advise anyone opening their own business to do as I did. It also adds a level of professionalism, that, even if you are the only one who knows it is a separate account, will say, “This is for real, this is my business, not just a hobby.”
Good post, I think it’s a good idea to open a separate bank account for full time freelancers. If you have taxes to pay at the end of the year it makes it easier to use your business account to pay for things such as that and other necessities here and there.
Having two bank accounts can be a little inconvenient when freelancing is your sole source of income, but if you have a DBA, it’s the only way to go.
This is very good and I’m planning on doing this in the next coming weeks, but do know that it is not a hard requirement. As I manage my finances regardless down to the penny (if I can), everything including all my business dealings are accounted for, and qualified as such on the spreadsheet. Everything, including cash flow and all the stuff you’re talking about, is on that custom spreadsheet I created.
Personally I’ve been holding off because it would actually make my accounting more complicated to put an extra bank account on there. Plus, paying cash on business expenses makes it more complicated, not to mention I prefer to use credit cards for the rewards. And finally, when times are tough and I need cash for personal reasons immediately, I’d rather not have to cut myself a check from the business account, deposit it, and wait for it to clear before I can use it. As freelancers you know how your situation can change drastically from one week to the next.
The only thing that I’m really considering it for is for certain credit/background checks, it’s less confusing when, say, landlords accepting applications can see “paychecks” coming regularly instead of a whole handful of personal checks from everywhere.
Separating my Money was definitely one of the best decisions I made at a early stage of freelancing, due to the money coming in and out, you don’t get muddled up with your expenses etc. Especially if your personal life have a influence on your bills being paid. Therefore keep it simple, keep it separate.
Another route WRT tracking business expenses vs. personal is to have a Credit Card used exclusively for business expenses. That way the monthly statement has everything you need for bookkeeping. Plus many business cards give good rewards options.
I’ve actually recently just done this and am finding it very useful, both in tracking my cashflow and expenses and, funnily enough, in monitoring my personal spending. The latter benefit derives from the fact Ihave to transfer money from my business account to my personal account, and I generally perceive these drawings to be a business expense. I like to keep a good buffer in the business account.
I still keep a database of my expenses and the categories in which they occur so I can see how things are trending. But I’ve set this up very simply so that, taking advantage of Opera’s custom search facility, it’s as easy as writing a one-liner of the details in my browser address bar.
A separate business bank account is a must for full or part-time freelancers who don’t have W2 income. You don’t ever want to mix personal and business funds. This is especially difficult if you get audited. It’s not that hard to manage if you do everything online and choose user-friendly tools. FreshBooks and Outright are great for invoicing and tracking profit and loss. I download my two business credit card statements each month and enter them into Outright. This, along with online banking keeps my income and expenses in check. It also simplifies tax preparation and helps me be more accountable by keeping a better eye on what comes in and goes out.
I do the exact same thing. It took me about 4 months of earning and record keeping to find the path of least resistance.
Combine a separate business bank account with a personal budget, and the finances pretty much run on auto pilot.
Reading “My Total Money Makeover” helped too.
Here in Québec ( Canada ), if you are incorporeted you must have a separated account for your business. In fact, because the compagny is considered ( by the law) as another person you cannot move the money from your personal to the other or vice versa. But, with bill that you charge it is possible. If also you get check by the gouvernement it is easier to kept all track of your income and outcome.
You must kept the bill of all incomes and outcomes…
As soon as I started freelancing, I had a business account in place – all my income goes into that bank account and I transfer out 70% into my personal account – my wages if you like.
This way, all of my income, wages and tax savings is done using my online statements nice and easy.
I was so confused when it came to figuring out tax in the UK after being a 9-5er for the rest of my career, and to be honest, it was this area that put me off starting my freelance career sooner. But by keeping is simple using a 2nd bank account, it’s so much easier that I could ever imagined.
Just remember to keep all of your receipts – for everything!
Great post! I’d like to add my own small piece of advice to this:
Research your business bank account before opening it! Does it allow overdraft? Debit cards? Credit cards? Are their transaction fees? It’s easy to get landed with a really bad account if you don’t do your research beforehand, as I found out.
I got stuck with an account that was really great, but refused to give me a debit card – making it completely useless to me. It took a good 3 months to get it all cleared up and moved over to a new bank.
The first thing I did when I started freelancing was open separate checking and savings accounts for my freelance earnings. I wasn’t incorporated, so I just opened two new personal accounts at a local bank with free checking. I used the savings to stash money for taxes. Best thing I’ve ever done – I don’t use any bookkeeping software outside of my invoicing software, but I can easily tell how much money I brought in from freelancing in a given month, year, etc. Also, many banks that offer online account access are starting to offer free transfers to and from external accounts. I give myself a “paycheck” from my business account to my personal account in this fashion, and it takes three business days to clear. Not instant, but still good.
I must have a very different business from everyone above. My client’s pay me via Paypal – none of my client’s live in my country – so I run a business over 2 Paypal accounts.
However paypal is not be trusted with large sums of money so I routinely have to sweep money back to back to bank accounts. In addition I sometimes use credit cards to pay for expenses. I also run this all over 3 currencies LOL and two tax regimes! I have this horrible feeling that I actually need an accountant!
I have three bank accounts for these reasons, with the additional benefit of it being significantly easier to save with another bank account. Personally I have a direct debit to my third account from my business and personal account. I have an average of 10% which comes out monthly. I then use these saving to start a new project. That’s my secret of being well off.
The Golem
I just recently started my own llc, and one of the first things I did was to set up a separate business bank account. When it came time to depositing my first client check I was able to use my new account. It means I now have a debit card and checks linked to my business account and any expenses can be taken from it. It makes my business look more professional, and it also gives me a small sense of satisfaction/pride to see my business name on the checks!
I ended up using the same bank I have my personal account with. There online banking is great, and having banked there for many years now, I have built up a good relationship with them.
All of my income is documented with FreshBooks – but it’s all currently going into one bank account.
I submitted the final paperwork today for a business checking account. This posting really got a fire lit under me to do this… I think it will definitely make things easier…as I’m really not sure what is and is not a business expense.. I’m gonna have a hellova time next tax season
Opening a business account when I first started was a no brainer for me. I don’t understand why others find doing so inconvenient.
I’m going to go down to the bank now and set-up a proper dedicated business account!
Anyone have any suggestions for the best (very) small business banking in Washington State?
I have three bank accounts for these reasons, with the additional benefit of it being significantly easier to save with another bank account. Personally I have a direct debit to my third account from my business and personal account. I have an average of 10% which comes out monthly. I then use these saving to start a new project. That’s my secret of being well off.
The Golem