Guide to separating business and personal finances for a streamlined tax season

When you work for yourself, it may seem easier to combine your personal and business finances; you may think about dipping into your personal savings to help fund your new business venture or using your personal debit card here and there to make business transactions. While this may seem easier up front, filing taxes and managing your finances can go much smoother if you learn how to separate business and personal expenses from the start.

Filing business taxes requires much more documentation for things like business expense write-offs, financial reports, and payroll information, so it’s important to distinguish a clear separation between the two. In this guide, we’ll teach you how to separate business and personal finances so you can stay organized and prepared for tax season.

NOTE: We have made a reasonable effort to provide accurate information, but we are not tax attorneys or accountants. This article is for informational purposes only, and Solo does not accept any liability for the use or misuse of this information. Consult a tax professional familiar with your state's laws.

Business taxes vs. personal taxes

Similar to personal taxes, business owners get taxed on the income they make from their business. The biggest differences between personal and business taxes are the forms you need to fill out, write-offs you can deduct, filing requirements and deadlines you must meet when filing.

So, what exactly are business taxes and personal taxes and what are we paying for?

Examples of business tax:

• Income tax
• Employment tax
• Self-employment tax
• Estimated tax
• Excise tax

Examples of personal tax:

• Personal income tax
• Payroll tax
• Property tax
• Capital gains tax
• Estate tax

Do you file business taxes separate from personal taxes?

Determining whether or not you can file your business and personal taxes together or separately comes down to your business structure.

Many business structures, aside from corporations, are pass-through entities, which means business owners will file their business taxes on their personal tax returns. If you’re a pass-through entity, you’ll file an informational federal tax return but won’t be responsible for paying corporate income tax.

Each structure has different filing requirements outlined by the IRS.

Partnership

Partnerships are pass-through entities, meaning each owner must report business income and losses on their personal tax returns using Form 1040. Partnerships must first file Form 1065 to report the business's financial information. From there, each owner will receive a Schedule K-1 that they will use to prepare their personal tax return.

Sole proprietorship

As a sole proprietor, your business structure is a pass-through entity, so you cannot file business and personal taxes separately. You will use Schedule C, Form 1040 to file business income and expenses on your personal tax return.

S corporation

S corporations are also pass-through entities, so each individual owner will pay their portion of business taxes on their personal tax return using Form 1120-S.

C corporation

You can file business and personal taxes separately as a C corporation since the IRS sees it as a separate entity from its shareholders. To report your business expenses as a C corporation you must file Form 1120.

LLC (Limited Liability Company)

LLCs are also pass-through entities, so the owner will report business incomes and losses on their personal tax returns. However, if your LLC has multiple members, you can elect to file as a corporation to keep your business and personal taxes separate using Form 1120.

How to separate business and personal expenses in 7 simple steps

Keeping your business and personal finances separate starts with the formation of your business. Here are seven simple steps you can take to ensure you keep your business and personal expenses separate to make the filing process during tax season a breeze.

1. Register your business

Determining your business structure and registering your business is the first and most important step in maintaining separation between your business and personal finances. As mentioned above, each type of business structure—sole proprietorship, corporation, partnership, and LLC—has different tax filing requirements. As a small business owner, you’ll likely classify a pass-through entity, so you’ll file business income and expenses on your personal income tax return.

However, incorporating your small business may allow you to keep your personal and business finances separate, as it’ll be a separate legal entity. If you want to keep your business tax return and personal tax return separate, it’s best to register your business as a C corporation or LLC and elect to file as a corporation.

2. Apply for an EIN

An employer identification number (EIN) also known as a Federal Tax Identification Number, is a nine-digit number issued by the IRS to identify your business for tax purposes. Think of it as a social security number for your business. Business entities operating as a corporation, LLC, or partnership must obtain an EIN.

If you operate as a sole proprietor, you aren’t required to obtain an EIN and can use your social security number when filing your taxes. However, you can still get one. If you plan to open a business bank account, it may be smart to get an EIN, as some banks require this when opening a business account.

To obtain an EIN, you can:

• Apply online: Complete the online application and receive your EIN immediately.
• Apply by fax: Complete Form SS-4, fax it to the appropriate fax number, and receive your EIN within four business days.
• Apply by mail: Complete Form SS-4, mail it to the appropriate address, and receive your EIN within four weeks.

3. Open a business bank account

Next, you’ll want to open a dedicated business bank account. This is the easiest way to ensure you keep your business and personal finances separate. It’s best to start with a business checking account, so you can use it to pay bills and make day-to-day business transactions.

Even if you are a sole proprietor and have to file your personal and business taxes together, a business bank account will allow you to track your business’ income and expenses separately. This will make it easier to distinguish your business income from your personal income during tax time.

A business bank account can help build your business line of credit, gives you easier access to small business loans, and helps protect your personal information, since you have to use an EIN as opposed to your social security number.

To open a business checking account, you’ll need:

• Personal identification, like an ID or passport
• Employer identification number (EIN)
• Business details, like your business name and address
• Any supporting documents, like your business license
• Minimum opening deposit if the bank requires one

4. Get a business cash card

Next, you’ll want a dedicated business card to make any business transactions. This is just another way to keep your personal and business expenses separate.

A business debit card is used to spend the funds you have available in your business checking account with no interest charges, credit limit, or other requirements. You can also quickly withdraw cash from your account if you need to.

A business credit card is used to make business transactions that you can pay back later. It can also help you establish your business credit, increasing your chances of getting a business loan. However, there are more requirements, like a credit limit and interest.

Solo’s business cash card makes it easy to spend money on your business while helping you keep track of expenses and payments all within the app.

5. Keep track of your expenses and keep receipts

Staying organized by keeping track of your business expenses will make filing your taxes so much easier. When tax season rolls around, you won’t have to worry about digging up receipts, invoices, and bank statements at the last minute.

Business expenses are any costs related to running your business. Here are a few tips for successfully tracking your expenses.

Automate with accounting software

Manually tracking your business expenses can become tedious and time-consuming, especially as your business grows. Accounting software makes it easy to keep track of and organize your expenses, saving you a ton of time you’d spend manually inputting information.

The great thing about accounting software is that it also has other built-in tools that can give insight into how your business is doing financially, like reporting tools.

Save and digitize your receipts

It’s important to keep receipts for every business transaction you make, so you have a proper log of your business purchases. Come tax time, you’ll need to reference these expenses when determining your tax deductions.

You can keep paper receipts and invoices in a folder, but digitizing them is a safe and easy way to ensure they’re all in the same place. The accounting software you choose will likely have a feature that allows you to scan the receipts using your phone.

Monitor business use of personal items

There may be some instances where you use personal items for business use, like using your car, home office, or personal phone. In this case, make sure you’re properly tracking when you’re using them for business purposes. For example, tracking your mileage when using your car and keeping your gas receipt.

6. Pay yourself

You want to avoid using your business funds for personal needs, so paying yourself a salary is necessary to maintain a clear boundary between your personal and business finances.

Just as you’d get a paycheck from an employer, pay yourself a salary twice a month (or on a schedule that works for you). Transfer the funds from your business account to your personal account, or set up an automatic transfer on the same day each month, so you don’t forget.

You may be wondering, how much should I pay myself? Here are a few things to consider:

• What is your monthly net income? This will help you understand how much profit your business generated after you’ve subtracted your business expenses.
• Do you have enough money set aside for taxes? A good rule of thumb is to set aside 30% of your net income to go toward paying your business taxes.
• How much do you need to cover personal expenses? This will give you a realistic estimate of how much money you’ll need to pay yourself to cover your bills and other personal expenses.
• What is a reasonable monthly salary that won’t put my business finances at risk? Based on your monthly net income, tax savings, and personal expenses, determine how much you can comfortably afford to pay yourself.

7. Prep for tax season year-round

The final step in keeping your business and personal finances separate is filing your taxes, which should be easy if you’ve followed the steps above. Preparing for tax season all year will set you up for success come time to file. This means setting aside a portion of your earnings for taxes.

When running your own business, you may be required to file taxes quarterly and annually.

• Quarterly taxes: On a quarterly basis, the IRS requires small business owners to pay estimated tax if they expect to owe $1,000 or more in taxes or $500 or more for corporations. Form 1040-ES includes a worksheet that can help you determine your estimated tax.
• Annual taxes: You will still need to file your annual federal income tax return at the end of the year. If you didn’t pay enough in your quarterly estimated tax payments, you will have to pay the remaining balance after you file your tax return. If you paid too much, you could receive a refund.

Paying quarterly taxes may seem like a drag, but you might find it easier to pay smaller installments than having to fork over a bigger lump sum at the end of the year. Make sure you’re staying ahead of filing deadlines for quarterly taxes to avoid penalization.

How to separate business and personal taxes

Learning how to separate your business from your personal expenses helps make tax filing easy. Now that we understand how to keep business expenses separate, here’s how to separate business and personal taxes so you’re prepared to file.

1. Organize and gather what you need to file your taxes separately

When you work for yourself, you’ll need to gather a few more documents and additional information than you would need when filing your personal tax return. If you’ve stayed on top of your business finances throughout the year, accessing this information should be no problem.

Business tax documents needed

Here are some things you may need to gather when filing business taxes:

• Social security number or EIN
• Last years tax return
• Invoices and receipts
• Bills
• Sales records
• Bank statements
• Credit card statements
• Record of deductible expenses you plan to claim
• Proof of income
• Balance sheet
• Income statement
• Cash flow statement
• Business loan records, including accrued interest and payments
• The appropriate tax forms for your business structure
• Payroll information (if you have employees)

Personal tax documents you need

When filing your personal income tax return, here are some documents you may want to gather ahead of time:

• Social security number
• Last years tax return
• Income statements (W-2’s, 1099 forms)
• Dependent information
• Mortgage interest statement
• Student loan interest statement
• Charitable contributions
• IRA contributions
• Education expenses
• Childcare expenses
• Medical expenses
• Health insurance

2. Know the common tax deductions

Tax deductions, or tax write-offs, are business expenses that you can subtract from your taxable income to lower the amount you owe when you file your tax return. Careful planning and organization of your business finances can help you accurately calculate your yearly tax write-offs.

Common business tax deductions

Here are some common tax deductions you should keep in mind before you file your business tax return:

Common personal tax deductions

When it comes to personal taxes, there aren’t as many write-offs to deduct from your taxable income. Generally, people take the standard deduction—an automated deduction taken from your taxable income. The standard deduction varies depending on your filing status, whether you’re 65 or older, and whether another person claims you as a dependent.

However, if you paid property taxes or student loan interest, for example, those qualify as deductions and are considered eligible for write-offs. In this case, you can choose to itemize your deductions as opposed to taking the standard deduction.

Here are some common personal tax deductions you should consider ahead of filing:

• Student loan interest
• Health care premiums
• Retirement contributions
• Mortgage interest
• Property taxes
• Charitable contributions

Note: Ensure you only report tax deductions once

To make sure you don’t accidentally report your personal tax deductions on your business tax return (and vice versa) you’ll want to make sure you have all of the proper documentation separated, so you only file the write-offs once. This is why staying organized during the year is important—it makes tax filing easier and limits small mistakes.

Though pass-through entities file their business income and losses on their personal tax returns, you’ll still want to keep business and personal write-off documentation separate to ensure you’re filing an accurate tax return.

3. Stay on top of filing deadlines and other tax dates

Though some business structures have the same filing deadline as your personal tax return, some have an earlier deadline. You’ll also want to make a note of filing deadlines for estimated taxes, as well as deadlines for filing an extension. If you owe taxes and miss your filing date, you may receive a penalty and have to pay.

Business tax dates and deadlines

Here are the tax filing deadlines and dates you need to know when filing your business taxes.

Personal tax dates and deadlines

Unless you file an extension for your personal tax return, there’s only one important date you need to remember when filing your personal taxes—April 18th, 2023. If the filing date lands on a weekend or holiday, you’ll have until midnight the following business day to file.

If you’d like to file an extension, you’ll need to submit Form 4868 by April 18th, 2023, and you will have until October 16th, 2023 to file your personal tax return.

Keep personal and business expenses separate with Solo

Filing taxes when you’re self-employed can be tricky, but staying organized and properly separating business and personal expenses can take some stress off your plate when tax season rolls around.

Solo can make it easier for you to pay expenses and track your spending. Make purchases for your business from your Solo account balance with the Solo cash card. Your customers can also pay you using multiple payment methods, like Apple Pay, Google Pay, and other traditional payment methods. An all-in-one place for freelancers, sole proprietors, contractors, and small business owners to pay, get paid, and track their spending.

Learn more at Solo.co.