A Photographer's Story about A Business Checking Account

Hi June,

Just wanted to make a comment about your advice about separate checking accounts for a small business. I think you are right on the money to make this suggestion. As someone who has been self employed for 14 yrs I had always heard and been given the advice that you should separate your business and personal accounts.

I have undergone an audit. The advice to keep separate accounts because it will somehow make an audit easier because the IRS auditor will look at only your business account and ignore your personal account is totally wrong.

So like many I took the advice and had the separate accounts and did all the right accounting practices for my business accounts and deposited money in my personal account that was for personal items such as gift money from various family members to my family and reimbursements from parents of a hockey team I coach.

For the years I was audited this personal amount totaled almost 15K. And since most of this personal money was deposited in cash I kept no real track of it. It was "PERSONAL" and not business.

Well as the story goes, the government seemed more interested in every family member’s "PERSONAL" account after they turned up only a few small accounting errors. To cut a long story short I was hit with penalties and huge interest payments on my personal money which was crazy but also made me understand the idiotic advice that a small indie business should have a separate account and separate their personal money from their business money and an audit will be a breeze and that in the end you will be glad you followed so called proper accounting practices.

What I learned is that when you are an indie there is no distinction made between business money and personal in terms of an audit and having multiple accounts just muddied the waters for me. Had I just had one account, photocopied all deposits regardless of the source and paid all my personal and business expenses out of one account my life would have been simpler and by not following "proper business practices" I would have saved myself a ton of money and headaches.

Having separate accounts for an indie is bad advice and even worse is the experts telling an indie they need separate credit cards for personal and business. My advice from a guy who has been through an audit is to ignore the experts and follow common sense which tells you keep track of all money in and out in the absolute easiest way and don't get bogged down with accounting but focus that time on developing your business.

All the best,

Cliff
Photographer


Thank you, Cliff.

Your experience perfectly makes my point about recordkeeping. There are pros and cons to different kinds of recordkeeping and different kinds of business structures. Each indie business is unique -- unlike many W-2 jobs -- and so each must use the system and structure that works best for his or her situation -- to be decided with the help of a tax pro who understands the pitfalls and the advantages. For instance, indies often overlook the possibility that liability protection may be taken care of by insurance.

There are no cookie-cutter answers for indies!

June Walker

One checking account does not waive recordkeeping requirements.

In the comments to Indies are not Corporations Monica, who is an attorney, wants to know “how to avoid commingling if the funds are in the same account.”

Your choice is not between commingling or not being able to keep accurate, provable records. If an indie has one checking account and, let’s say, uses Quicken for her recordkeeping then she might do the following:

** A meal with a client would be categorized as M&E for business meals and entertainment. Lunch with her daughter would be categorized as Family Dining.

** Expenses at the printers might be categorized as Photocopies-Printing or Family Wedding Invitations.

** For money in she might categorize the $1,000 as Graphic Design Income:Clyde Client. Whereas the $100 from mom would be categorized as Personal Inflow:Birthday Gift.

If the above transactions were questioned in an audit the indie would need to show the back-up for the business expense and income transactions as well as proof that the $100 was a gift from mom and not a payment from a client.

A Quicken report shows business income and expenses in a format acceptable to the IRS. And because of the ease of one account the records would likely be more accurate than flipping money back and forth from one account to another as funds ebb and flow but not necessarily as needed. Self-employeds do not find it easy to annotate account transfers accurately and so transfers often end up looking like income.

For the same reason, I advise independent professionals to not spilt checks. A $1,000 payment from a client should be deposited as a $1,000 payment. If $200 cash is needed then write yourself a check for $200 cash. It makes the audit-trail less wiggly.

Of course, the above applies to sole proprietorships and those sole proprietorships not operating as an LLC – unless the LLC is for show only.

Note that for a one-person business, even if that one-person business were a corporation, in an audit the IRS would want to see statements from all personal bank accounts as well as the accounts of the corporation. The one-person business would be required to prove the source of all the deposits into the personal accounts.

-- June Walker

Stupid questions are those unasked.

Hi June:

This is probably a stupid question, but does the accountant that does my taxes need to be in the same state?

Thanks!
Carrie


Hi Carrie,

I'm sure you've heard that the only stupid question is the one unasked.

No, your tax pro does not have to be in the same state as you. Just be sure she knows about your state's taxes.

Best,
June

Indies are not Corporations

The header on my blog says, “June Walker, Tax and Financial Advisor to the self-employed.” On my website, blog, and in my books I say:

“Whether you call yourself a
1099 Worker
Sole Proprietor
Freelancer
Subcontractor
Free Agent
or
Self-employed
you are an independent professional.
The IRS classifies you as an independent contractor.
I call you an indie.”

Well, I know all you indies are smart enough to know that I am talking to you, advising you, teaching you. I am not addressing my advice to corporations. Pretty straightforward, one might think.

Many of you also know that my 30-years’ experience has shown me that most attorneys blatantly advise indies to incorporate for no good reason. And that incorporation often makes an indie’s life unnecessarily complicated and costs money in corporation set-up fees and tax preparation fees.

Also pretty straightforward, one might think.

In my post, You Do Not Need A Business Checking Account I advise indies, both as clients and as readers, that it isn’t necessary to have a separate business checking account – that it’s simpler, easier, and because of the nature of an indie venture, it works better just using a personal checking account for both personal and business needs.

I have examined some of the reaction to that post in There’s no shortage of bad advice out there.

Much of the reaction, especially from lawyers, has been hot-air-ballooned into warnings about how the only safe business structure for indies is incorporation. We can talk more about that at a later date.

For now I want to address something else. As you, my indie readers know, I pressure you to present your questions carefully. Whether you’re a massage therapist, sculptor, IT consultant, psychologist, carpenter, writer, cruise ship entertainer, furniture refinisher, or astrologer when asking a question you will get an accurate, appropriate answer only if you provide the right information. Sometimes I’m pretty harsh about that. That’s because words mean something and accuracy is important. If careless with words not only will you likely get a wrong answer but carelessness with words makes for sloppy thinking.

That said, I can’t let Attila Attorney respond to my posts by being inaccurate in his quotes of what I said.

In his post here, Attila Attorney, Esq. wrote, and this is a direct, accurate quote:

“I recently wrote in a post titled Tax Advice, Legal Advice & Piercing the Corporate Veil that it would be legal malpractice for an attorney to advise his corporate and business clients to commingle their personal and business funds.

“I wrote the post in response to June Walker who had written a blog post titled You Do Not Need a Business Checking Account in which she proceeded to give that very advice to her clients and readers.”

The problem with Attila’s premise: My readers are indies, not corporations. None of my clients is a corporation unless I am in the process of dissolving the corporation for him or her. I never mentioned corporations in that post. And, with 30 years of accounting experience [He’d know that because my blog header says “since 1979”] I’d be pretty silly were I to say that corporations don’t need to keep completely separate business and personal records. That’s one of the reasons I advise my wedding photographer clients not to incorporate. Just ask Billy Bridesnapper. He’ll tell you.

Attila continued: “Ms. Walker responded with a post titled There’s No Shortage of Bad Advice Out There. In it, she reiterated her advice to commingle, corrected my grammar and called me ‘Atilla the lawyer.’”

No, Mr. Attorney, I did not advise "to commingle funds.” I said a business checking account was not needed for indies. Big difference.

This is similar to the faulty logic of many accountants and attorneys who tell indies you must have a profit in 3 out of 5 years in order to be a business. No way. The IRS says that if you have a profit in 3 out of 5 years you are a business. Think of it this way: If it’s your birthday you will get a gift does not mean that if you receive a gift it must be your birthday.

And one more thing about Attila. In his attempt at quoting me he said I called him “Atilla the lawyer.” The gods invented quotation marks to mean that the words in between them are exactly what the person said. What I said exactly is: “Attila Attorney.”

In my book Lily Legal wants to know if, because she writes her briefs at the dining room table, she can deduct the dining room as a home office. [She can not because she also has dinner parties there.] Maybe in my next book Lax Lawyer will be asking if his reading glasses are a business deduction because he keeps misreading quotes. [He can deduct them if he uses them only for business and has another pair for reading the funnies.]

Accuracy is important. Not just for indies, but equally for accountants and attorneys.

I have received many emails from indies and tax professionals. All the indies say how much easier it is to keep accurate records using one checking account. Most of the tax pros say it's wrong. One pro said I was engaging in "chick think." Wow! More about that some other time.

Please do read The Tax Lawyer’s Blog and the comments. You need to know the kind of advice that is out there so that you can make the right choices in choosing a tax or legal professional.

June Walker

Bravo Indies!

Oh, thank you indies! I am so pleased to know that you read my info and use it in your professional life. Congratulations. It does my indie-accountant heart good.

Here are a few of the emails that I received about You Do Not Need A Business Checking Account and There’s no shortage of bad advice out there.. More to come, as well as my next reponse to Attila Attorney.

To recap what I've said here, there and everywhere:
1. The IRS does not require a sole proprietorship to have a separate business checking account. Of course records must show whether inflow and outgo are for business or personal, however, for indies that is typically more easily and more accurately accomplished with one checking account.

2. Corporations must keep separate records for business and personal. For independent professionals that's one of the negatives of incorporation.

3. LLC law is governed by each state. If you formed an LLC for the purpose of liability protection you need to check whether your state requires separate accounts for business and personal in order to maintain that protection. If in doubt, keep them apart.


From Lisa Lepine, Consultant, Branding for Creatives
Portland, OR
I love your eletter re: one checking acct. Don't let those dissenters get you down!

For many freelancers - having separate checking accounts is just ridiculous.I tried it for about a month - and still have a stack of checks that I will never use. I have followed your approach for the last few years with confidence and peace of mind.What makes your advice so dependable is that you truly LOOK AT THINGS THROUGH THE LENS OF TRULY SMALL BUSINESS. Here is a gadget some folks would love. -- Neat Receipts.


From NancyKay Sullivan Wessman, WessComm, LLC
Jackson, Mississippi
Thanks for the advice!
I do have a business account, but it’s in my Federal Credit Union; so it’s basically free. My desire was to NEED to keep work and personal money separate – but, sigh, I’ve never had enough of either to justify. Still, the business checks come in handy for buying some things. Most of the time, everything that can gets charged for easy access to American Express and Visa end-of-year statements. That makes identifying the business vs personal expenses fairly easy. . .

I especially like getting advice from another woman and, specifically, one who lives in Santa Fe near my friends. Bill and Sue and Margaret!

Best to you!


From Rose at Content Matters LLC in Colorado Springs, CO
Writing, Training, and Project Services for people who need help with the content that matters to them.Rose.CMLLC@gmail.comhttp://www.content-matters.com/
Dear June -

I'm a sole proprietor LLC with a service business and in-home office. I read your post and the two contrarian posts, and I have several responses based on my 15 years as an Indie.

Either the contrarians have not read your book or have forgotten key points that you make in it, such as that an Indie needs to find the system that works best for her. In no way are you insisting that people use only one account.

It is only in the past several years that I began using two accounts. The primary factor influencing my switch was the increased frequency of business income and expenses due to an increase in clients. To use an analogy, it was ok to put all my socks and stockings in the same drawer so long as I could keep the drawer neat. When I started spending more time sorting socks than wearing them, it was time to use two drawers: one for socks and one for stockings.

I keep track of all my personal and business monies in a single Quicken file, which lets me see at a glance the balance of any account and whether I need to make any transfers. I tried using two files, one for personal and one for business, and abandoned that in a hurry because I had to track inflow-outflow via paper reports. This is another example of not making your system any harder than it has to be.

I reconcile all monies at least once a month; I tried doing it less frequently and didn't like it.

A business associate is a Sub-S with a business that is far more complicated than mine. She reconciles just once, at the end of the year. Different strokes for different folks (cliche but true). We each trust our systems to work for us.

Over the years your book and your site have helped tremendously in getting myself "straight" about how to best manage my checking accounts, credit cards, and records as an Indie. You are doing a great job and a great service by focusing on the Indie as you do!


Thank you, all.
June Walker

You don't have to be a math whiz to figure out estimated taxes.

Hi June,

My name is Pete, from Boston, MA. For the past few months I've been freelancing as a web designer.

I've had a hard time finding the right information on estimated taxes. Basically, I've been just about scared away from continuing my freelance business and feel like cutting my losses, wiping my hands of this and finding a job that will give me a W-2.

The bottom line is: I've made about $10,000 total since I started freelancing in May, and I know I need to make a payment by September 15th. But I simply do not know how to figure out what amount I should be paying - even though I've researched endlessly (as you may have guessed - I'm not a math whiz). All the information out there on the web and in books seems to direct me to last year's taxes - 'take your adjusted gross income from last year, and...' - but I don't see how that's relevant at all when I just started doing this in May (also, I was a student most of last year).

Also, I can't figure out if my wife's income (she's a public school teacher) should come into play when estimating my tax payment.

I've spoken with a couple of accountants through personal contacts of mine, but I haven't gotten far on free advice. I've wondered if I need to just pull the trigger and hire an accountant to help me. I hope you can give some advice.

I found your site through searching 'can I pay estimated tax with a credit card', so you can imagine I'm sweating this quite a bit right now :)

Thanks very much for your time.

- Pete

PS - Even a quick answer like "You made $10,000, your estimated tax is $4,000" would be fantastic.


Oh my goodness, Pete. Stop sweating. First of all, nothing horrendous happens if you don't pay estimated taxes on time or ever. You may pay what you owe later on. And, you may owe some penalty and interest. Maybe.

Husband and wife typically file a joint return. Calculations are based on their combined income and expenses. Their total tax is based on their total income and various deductions.

If there is money coming in on which tax was not withheld -- for instance, dividends from investments [OK bad example at this time] let's say rental income from the beach house, well then estimated taxes may be necessary.

Or there may be large amounts of income on which no tax was withheld but perhaps there was over-withholding on wages that made up for it so no estimateds are required.

To determine estimated taxes you need to look at your entire tax situation.

That said, here's an example with real numbers. Plan on paying about 1/3 of your net income toward taxes. Could be more. Could be less. But that's a safe bet.

So if you had $10,000 gross income and only $1000 expenses against it then your net is $9000. So plan on $3000 to the feds and state government.

Or: $10,000 gross, minus $4000 expenses, leaves $6000 net. So only $2000 goes to taxes.

You said you're not a math whiz. If you had six bottles of beer and two friends and you wanted to share, how many bottles would each get? That's 6 divided by 3 = 2. Now add the zeros.

Here are two must read posts: Estimated Taxes and Estimated Tax: How much should I pay?

Do let me know if this doesn't help you with the sweats.

Cheers,
June

Recent Grads Need Help With Taxes and Recordkeeping

This is from Jess and came as a comment to my post Designers Dozen: Tax Saving Tips for the Graphic Artist . Since it is typical of questions I receive from recent graduates I decided to give it more attention.

Graphic design students head out upon graduation, most of them toward freelancing, without a clue about how to handle income and expenses.

From Jess ... Thanks for this great article. I graduated from a graphic design school 3 weeks ago and have just started working full time as a graphic designer.

I have the receipts from the expenses during school, my mac, books, the course itself and going along to design based events. Can I claim any of these items? I use the same mac bought at school in my current position and I look at the books I have? I was also wondering if you knew about phones and phone bills if used for business?

THANKS HEAPS for your time! It is wonderful being able to access this information.
Jess


Congratulations, Jess, on both graduation and the work you got.

If you were not working or actively seeking work while in school you cannot deduct as business expenses any of the costs you incurred.

You can, however, deduct assets. In your case, assets are things -- computer, books, any kind of equipment. Your cost-basis for deducting these things -- in other words, the amount considered your business expense -- is not what you paid for them but their fair-market-value on the day you started your business. That means the day you started looking for work.

For instance, the fair-market-value of your Mac would be what some other graphic designer would pay you for it on that day.

The same with your books. Think of it as: On the day you tossed your cap in the air and said you were ready for clients, what would an incoming freshman pay you for your books? That amount is the fair-market-value of the books and your basis for deduction.

Hope that helps.

And thanks. Happy that my is helpful.

-- June

There’s no shortage of bad advice out there.

Indies, an alert: Be careful. Know your source.

Sammy Segar, CPA, is the composite figure I use in my writings to depict the tax pro who totally misunderstands indie life; my recent blogpost, You Do Not Need A Business Checking Account, woke the real Sammy Segars out of their after-lunch naps.

Last Friday The Wandering Tax Pro, Robert D. Flach took respectful disagreement with my post in his You Do Need A Business Checking Account.

Flach advocates a separate business checking account because an indie should “do as much as possible to give your self-employment activity the appearance of a real business entity so that the IRS does not come back and say that it is really a ‘hobby.’” But then he steps on his own message by citing the chronic problem of indies with business checking accounts – what to do when the money gets low. Well, he says, “loan” money to the business account from your personal account and then return it later. If you have attended my seminars or read my book you know: That leaves a very wiggly audit trail for the IRS to follow.

He quotes my observation that in an IRS publication “you are urged to open a business checking account.” But he fails to include the rest of the comment, which was my main point: “The very next example from the IRS in the publication is the mixed use – personal and business – of your automobile. So, let’s see how efficient two checking accounts would be in this situation – hmm … guess you are expected to pay for each gas purchase with two checks – one for the personal use amount of gas and a business check for the business use portion.”

Flach says: “a separate business checking account is not a strict requirement.” I am not sure how a “strict requirement” differs from a plain requirement but the IRS didn’t require – it “urged,” which is no requirement at all.

Mr. Flach’s website does indicate that he works with self-employeds. He offers information to the “sole proprietor and one-man LLC.“ Well, if we were still in the 20th century I could understand, but this is the 21st. One-man!

Another response to my post came from The Tax Lawyer's Blog . Let’s call him Attila Attorney.“ In a recent post,” he writes in astonishment, “she advises her business clients to commingle their business funds with their personal funds. You read that write. She advises the commingling of funds.” Yes, indies, you read that right. He did say “write.”

Then he warns: In advising that an indie doesn’t need a separate checking account I am “engaging in the unlicensed practice of law and it’s dangerous.” I’m not sure if he means dangerous to me or to you indies. I didn’t realize that advising against setting up a business checking account was fraught with such peril.

Oh -- and I was not going to mention this but I just had to. He says: “First, Ms Walker may be the most brilliant, competent, well-meaning person on the face of the planet …” Well, my mother and my husband always thought so and I’m pleased to know that A. Attorney, Esq., is considering the possibility.

He follows that with, “Second, and more importantly (his seventh grade teacher would have corrected that to “important”), Ms. Walker is giving business owners horribly bad advice.” (Oh, wait. Maybe I shouldn't correct his grammar because I'm not a licensed teacher.)

He has warned of danger and spoken of horror. But should we be getting goose-bumps and feeling our hair standing on end? Not really, because there is nothing illegal, immoral, fattening or unwise for a sole proprietor, who is not an LLC, to conduct business by depositing income or paying for business expenses from a personal checking account. For that matter, for reasons explained on my website and blog, it’s smart.

Attila Attorney then abruptly changes the subject to the protections that await the indie who does exactly what the lawyers want him to do – form a corporation.

He warns indies – likely in his thinking they are all corporate monarchs -- against “a general commingling of corporate activity and/or funds and those of the person or persons who control the corporation.” Well, duh! That would be a serious mistake.

But can Attila keep his attention span focused long enough to note that my blogpost never mentioned corporations? Did I advise: Don’t set up a separate checking account, even if you form a corporation? Of course not. Whatever his motive for changing the subject, it gives him a chance to plug incorporation – a legal step near and dear to the hearts of many lawyers.

And when Jeff Day, an enrolled agent, in a comment to the post disagrees with Attila the Tax Lawyer, Attila responds to Jeff with: “If you have a serious business, it’s unwise to operate as a sole proprietorship and probably malpractice for a lawyer not to point that out to his clients.”

I’m trying to think of a word that properly describes his assertion that advising against a business checking account is practicing law without a license or not advising to incorporate is “malpractice.” “Preposterous” somehow doesn’t seem strong enough.

Of course, the issue we should be looking at today isn’t practicing law without a license or malpractice or man-only businesses. It’s Attila and Sammy giving tax and legal advice to self-employed independent professionals without really understanding how indie businesses function.

June Walker

October 15 is the Tax Return Filing Deadline

Hi June,

I have been a fan for years and have recommended your very informative book + website to several other artists too. You have very generously answered a question I had in the past and now I have another:

For the first time my husband and I filed for an extension this year [we're both artists with some W-2's as well as 1099's and other misc. income, despite which we estimate not owing any taxes]. We're using a new accountant this year and she says we have until Oct 15th to file but in your book you mention having to file another form to get approval for this "super" extension.

Have the rules changed since your book was written? I'm hoping we'll have everything ready to file by this Friday Aug 14th anyway but it would be nice not to have to worry about it.

Thanks so much for any clarification,
Jill R.


Hi Jill,

There have been two changes since Self-employed Tax Solutions was published. One change allows for the deduction of start-up costs more quickly than before, and the other is the elimination of the mid-way extension. Your accountant is correct. You now need file only one extension, Form 4868, before April 15 and you will have until October 15 to file your tax return. So you can take your time and proof your numbers.

Here's a couple of my posts with more info File an extension. It's the smart thing to do. and Receipts a mess? Don't know which way to turn and it's almost April 15th!

Please continue to tell you colleagues about all the information available to them -- here, on my site, and in my book. They need as much clear, accurate info as they can get.

Best,
June

A home is a home is a home.

Hi June,

First, thank you so much for the list of possible business deductions.

I'm also wondering about taking depreciation on a home office. Since I'm purchasing a condo, can't I take depreciation for the percent of my home devoted to an office? Also, can't I take the same percent applied to mortgage interest paid and to property taxes?

Again, thanks for helping me launch.

Jack


Dear Jack,

Yes, you may take all those deductions. All the regs that apply to a home office apply whether it's a condo, houseboat, free standing home. It doesn't matter, so you get the same deductions. It's explained here on my website Office-in-the-Home Expense .

And, you are welcome. I'm sure the expense list will be of use to you.

Best,
June

You Do Not Need A Business Checking Account

Hi June,

Remember me? We had a face-to-face here in Cambridge MA years ago.

I just helped a class of Certified Family Coaches to graduate, and sent them to your site. One of the concerns they have is about whether or not they should set up a business checking account. Their instructor told them, "Absolutely." I disagreed.

Banking fees are ridiculous these days, and I want folks not to contribute, unnecessarily, to the banks' economic stimulation package, if you get my drift.

BTW, your advice and book still continue to serve me well. I swear by all I have learned from you. Even, sometimes, contradicting my tax accountant.

Venus

Hi Venus,

I remember you well. And your two children. Who were so cute and fun and well behaved during our tax meeting.

Here's what I have to say about checking accounts. Please send the graduates to this post and, even more important, send their instructor. I think he/she could use some instructing.

You need only one checking account. Do not open a separate checking account for your business.

Yes, that’s the exact opposite of what Sammy Segar, CPA, told you. And it’s not just Sammy who tells you that. In an IRS publication, you are urged to open a business checking account and “although a bank may charge you an extra fee for a business account, the new account will more than pay for itself in accounting efficiency.” The very next example from the IRS in the publication is the mixed use – personal and business – of your automobile. So, let’s see how efficient two checking accounts would be in this situation – hmm … guess you are expected to pay for each gas purchase with two checks – one for the personal use amount of gas and a business check for the business use portion.

Most accountants disagree strongly with my position – because they don’t know you like I know you. My system will save you money and time; their advice will cost you money and time.

Let's look at Luisa Lifecoach shopping for groceries at Total Foods. If she had both a personal and a business checking account, which one should she have used to pay for her groceries, assuming she knew that three business associates were dropping by that evening? Oh! Says Sammy Segar, CPA, she should have divided the groceries into two piles: one for family and one for business guests. And paid with two checks. And what if Luisa’s three-year-old was tearing at the display case while she was at the checkout and she was late picking up her 10-year-old at soccer practice?

Sammy Segar always insists that a business checking account is a must. But Sammy, if Luisa is just starting out, where does she get the money to put into her business account? Sammy says, transfer it from her personal account. But I thought that you’re supposed to keep these accounts separate. Okay, says Sammy, after she has made a little money, transfer the funds back to her personal account. But whoa, wait a minute, Luisa transferred too much out of the business account; now she’ll have to move some back to the business account again. It’s beginning to get messy already, and how will she keep a record of those transfers? Well, she won’t get any help from Sammy: he hates working with those eccentric freelancers.

As long as your records are accurate one checking account is perfectly acceptable to the IRS. I think one big factor in the insistence on a business checking account is that it’s supposed to cover financial shenanigans. Many people like to believe that because something is paid by a business check that makes it a business deduction. Of course, that is not so! The attaché case for your daughter's twentieth birthday, even though purchased with your business check, is not a business expense. But the flowers, paid from your personal account, given to your mother as thanks for reviewing your business plan, is a business expense.

As I've said before, in the lives of self-employeds the line between personal and business is not clearly drawn; it wiggles around a lot. By the nature of the types of businesses that self-employeds are in and by the structure of a sole proprietorship, personal and business often intertwine -- almost always so in the creative fields. You do not want to struggle with business versus personal decisions every time you spend money.

Use one checking account!

Besides, a business checking account costs money, while your own checking or savings account is usually free of charge. So who needs the extra expense? Well, sometimes it's unavoidable. It may be necessary to have a separate account, for instance, if you do not use your own name as your business name.

If graphic designer Victor Visual called his business, the "Double V Studio" most folks would pay him with checks made out to his business name. If his bank does not allow both names – Victor Visual and Double V – on his account he’ll have to have an account in the name of his business in order to deposit his checks. The simple (and money-saving) alternative is for Victor to open a savings account in his business name, deposit the checks into it, and then have the bank do an automatic sweep of the funds from his savings to his checking account whenever the funds reach a certain amount specified by Victor.

Best,
June

Home Office: Neither Reasonable nor Unreasonable.

Hi June,

I'm planning on doing freelance programming from my apartment full time and I'm wondering exactly how much of this I can write off as a home office.

I've got a 1 bedroom with my desk and computer gear in the living room. Can I write off the area of the living room (say 50% of the apt)? What if I also watch TV or have people over in that space?

Am I only allowed to write off the 5% or so that the desk occupies? What if I use the computer for non-programming activities? I guess I am wondering what a reasonable deduction would be...

Thanks.
Mark
Boston, MA


Hello Mark,

For home office use there is no reasonable nor unreasonable.

Either using your home for business fits the regs or it doesn't.

The use must be exclusive. In other words you can do nothing in the home office area other than work. That means no friends in to watch TV, no emailing Mom or your girlfriend from your home office computer [everyone breaks that rule].

The area does not have to be an entire room. It can be a small area of one or more rooms.

Here's a more complete explanation of home office expense.

-- June

"The Web" is not a recognized expert.

June --

Government Consultant. Indie for 3 years.

What are your thoughts on opening a SEP vs. a solo 401k. Since the SEP is limited by my net income I'd like the increased contribution limit of a solo 401k.

However, my understanding is that a solo 401k requires an indie to incorporate first?

F Rome


I so wish that F Rome and everyone else who says "my understanding is" would give me just a hint of where they get all this misinformation.

When indies send me an email I ask for some information. One of my questions is "Where do you get your tax info?"

Do you know what many of them answer? "The Web."

Well, "the Web" is not a recognized expert. Who on the Web? What on the Web?

I'd rather they tell me they got the info from Aunt Tillie. At least that's a source. A bad source but one you could put your finger on.

Anyway, F Rome has it wrong. You do not have to be a corporation to have a UNI-k, Which also goes by the names: one-person 401-k, a solo-k, an individual -k.

And a UNI-k does allow flexibility and a greater contribution than a SEP. I recommend it over a SEP.

Caveat: You may open a SEP up through tax return filing time in October for the previous year.

A UNI-k must be opened by December 31 of the year for which you will make the contribution. You do have until October of the following year to actually make the contribution.

-- June Walker

Just Starting Out

Hello June,

I am currently unemployed but may have the option of doing some contract work in the near future. What would your recommendations be regarding:
1. Do I need to do anything to set up a sole proprietorship?
2. If I wanted to be a LLC, what do I do to get started?
3. Who do I contact and what are typical fees in either scenario?

I live in Colorado.

Thanks so much for your assistance and guidance.
Jay


Dear Jay,

Many people who decide to work for themselves are confused about what it means to “go into business.” They think they have to “set up a company.” Or they have to incorporate. Or they must notify ten different government agencies. Well, indies, here’s how to do it. Hold onto your socks!

As soon as you sell or attempt to sell your service or product in pursuit of making a profit you have “formed” a sole proprietorship.

A sole proprietorship is the most simple business entity. Other entities are partnerships and corporations. Did you have a lemonade stand when you were a kid? Or, did you babysit or do yardwork? If you were doing it to make money then you were a self-employed in business and your business structure was a sole proprietorship.

You don’t need a business name. You don’t need to rent an office. You don’t need a business bank account. You need do nothing by way of notification. There are no papers to complete, no agency to contact. You simply engage in your business activity.

There are chores you may have to do depending on your indie profession and in which state you live and where you work. You may have to do things such as obtain various permits from state and local governments to comply with zoning or health code regulations or register for state sales tax or show proof of insurance.

If you'd like to learn more, read this on my website -- I am a Business or these posts on this blog -- being self-employed.

Before starting down the road toward LLC-ville better know where you're going and why you're going there. To start your education I suggest you read these posts -- business entity -- LLC .

Should you have tax questions you would contact an indie-savvy tax pro. To get answers to LLC questions talk with an indie-savvy attorney in your state. Typical fees are from $100 to $600 per hour and depend on ability and locale. Attorneys' fees are usually higher than tax pros' but not always. The more you learn the less time you will spend with a professional and so the less you will spend on fees.

Best,
June