Put It On Plastic: A Freelancer’s Credit Card
After doing my taxes this year, I’m firmly of the opinion that every freelancer needs a debit or credit card just for business expenses. A separate checking account for your freelancing business — and the debit card that comes with it — is ideal, but for freelancers who aren’t ready to do that, having a credit card that is used exclusively for office supplies, business lunches and all those other expenses you can write off on your taxes can pay off.
Get the Paperwork Off Your Desk
When I was still using the same piece of plastic for paying both personal and business expenses, I had to sort through receipts and bank statements in order to figure out just what was actually a business expense. I swore uphill and down that I would record business expenses every day, or even every month, but I always wound up with a big pile of receipts each April.
I know I missed some expenses: I had a whole stack of receipts from Starbucks, my favorite place to meet clients. But I also go to Starbucks when I just need some coffee, making it necessary to guess which trips had actually been business expenses.
These days, the only thing I have to remember is which card to use when I’m meeting a client. If I’m at a business lunch, I pull out my business card. If I’m out to dinner with family, I pull out my personal card. Because I use a debit card for each, I just toss each bank statement in the appropriate folder — come tax time, the bank’s already provided me with convenient totals to do my taxes. I also route incoming payments through the same bank account, making my income easier to calculate as well.
The Logistics of Extra Credit
If you’re freelancing part-time or otherwise don’t want the hassle of maintaining two bank accounts, the easy alternative is to get a credit card just for your business expenses. However, if you choose to go the credit route, there are a few extra things to remember:
- Pay off your balance every month — you can’t write off credit card interest on your taxes, even if it was for office supplies.
- The card will most likely be in your name, even if it’s only used for business expenses. That means it can affect your personal credit score.
- Because of the current economic situation, it’s getting harder to get a credit card.
- There are personal considerations when opening a new credit card — for instance, it’s generally a bad idea just before you try to get a mortgage or other loan.
None of that means that having a credit card for your business is a bad thing. It just means that exercising a little caution is in order. Unless you’re expecting to need a huge credit limit, your bank is probably the easiest place to get a new credit card. They may not offer the best interest rate — shopping around is entirely an option — but as long as you pay off the balance completely each month, it’s likely to be the most convenient.
Record-keeping: Paper and Plastic
It’s worth hanging on to receipts even after you’ve made the switch to one card for all your expenses, if only to substantiate your spending in the event of an audit. Receipts can also help clear up just what company a particular charge on your account went to, which is an important consideration when many companies don’t have the clearest names. Lastly, reconciling your receipts and statements is just as important for your freelancing as it is for your personal expenses: you can catch even small problems and deal with them just by going over your statement once a month.
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One thing I’ve learned is to always write on your ”Starbucks” bills, who you met and what project you talked about. Makes it easier when you do your taxes. And no more guess about which trips had actually been business expenses.
Still, the business credit/debit card is the best option.
Great article! After sifting through mounds of receipts for tax forms yesterday (yes … yesterday), I can completely appreciate this organized way of separating personal and business expenses.
Question: Do you have your personal name on the company card, or your freelance company name? Is it difficult to get a freelance “company card” as opposed to a personal card?
Good article, I’ve been trying to do this more myself. I’ve been using a prepaid card to make all of my purchases recently. That way I’m more conscious about where my money is going and helps me avoid that “unnecessary purchase.” I found out last week that I can be setup as an employer and actually ship these cards to my other freelancers and pay them almost immediately. I much rather prefer this than using Paypal because their fees add up quickly. The website for this prepaid card is http://www.cardofamerica.com. I’m going to contact them to see if I can get a discount promo code for FreelanceSwitch. Stay tuned…
Thank you for advising us to pay the card off in full every month. I’ve seen far too many people get themselves into deep trouble with credit cards.
I can see how a credit card could track my expenses if I was freelancing part time and didn’t have much income to track… But as a full time freelancer, I’ve set up a separate bank account so that I have records of all money going in and out of my business. It is also a nice way to see my business paying for itself, rather than me feeding money into it.
Just a note to new freelancers: Credit cards are seductive, so don’t fall for these traps: “I’ll pay this next month – next month I’ll make more money” or “The up front cost of this sales scheme will be worth 10x in the long run”.
Thanks, Thursday. I would suggest something a little further along. Becoming a corporation with a separate account has benefits. I only write about 4 checks a year. Everything else goes on my business debit card. At the end of each moth I download my info into Quickbooks and I immediately have reports. Tax time this year only took and hour to compile things.
Kickassidy,
If you have a business bank account in the name of the business then getting a CC in the business’ name is a cinch.
To Martha’s comment I’d say, I prefer Amex simply because it requires you to pay it off each month so the risk of over extending is reduced.
This is exactly what I do. All business expenses are put on my business credit card. To make things even easier, the credit card is through my bank, so I can log in to my accounts and see my personal accounts, business checking and business credit accounts all in one place. When I get my statements every month, I reconcile the accounts in QuickBooks to make sure I didn’t miss anything.
@kickassidy, both my personal name and business name are on the card. It’s a business credit account.
I have a debit card from my bank and I only put what I receive on that card. I also get a reward from my bank when I use my card instead of cash, it’s quite nice.
Plastic is a dream, so I guess all freelancers should go green.
Hi there,
You might want to double check on credit card interest being deductible as a business expense. I believe it is actually deductible as a business expense if the inteset is tied to a 100% business expense. You can read more about it here…
http://junewalkeronline.blogspot.com/2009/03/is-credit-card-interest-business.html
I would just make sure and discuss it with your tax person as well…..
Thanks –
Colleen
I actually got a business bank account as well as a Business VISA card about two months ago—can’t say how lucky I am now that I see how nicely this allows me to separate spending and income.
After my first few years in a fulltime job and doing freelance work on the side, I decided to do exactly this a few years ago and it’s made my life so much easier when the tax return is due.
Now I’ve got a current account for my regular salary and personal living costs (mortgage, bills etc) and a separate current account for my freelance work and associated expenses (server costs, domain names, travelling expenses etc). The last few tax returns have been a breeze compared to when I had everything going through one account.
If you want to know more about credit cards and investing/saving in general, I highly recommend picking up a copy of Ramit Sethi’s ‘I Will Teach You To Be Rich’ book…it’s really fantastic and makes understanding complex money issues really attainable.
http://www.amazon.com/Will-Teach-You-Be-Rich/dp/0761147489/ref=sr_1_1?ie=UTF8&s=books&qid=1239926222&sr=8-1
Credit cards can easily get out off hand. If you have a good tracking system for your receipts and expenses like Quickbooks, cash and a debit card is the best way to go.
“Cash flowing” your business is the best way to go when you are starting or you have an irregular stream of income every month. Unfortunately people rely on credit too much. That is what got us into this mess.
Great article as always Thursday!
Can you get a credit card and bank account under a sole proprietorship or do you have to be an L.L.C. or S Corp?
Thanks!
Colleen is right. Interest paid on a credit card used 100% for business is tax-deductible. http://www.irs.gov/businesses/small/article/0,,id=109807,00.html
Receipts often fade over time, so I often make copies of them and include them with the credit card billing statement.
Freelancers definitely needs a credit card for doing online business. Its not possible without the credit card.