Don't get hung up on having a business checking account.

June --

I am starting a side business while currently employed. Trying to stay under the radar from my boss knowing about this (so please don't print unless use a different name and state).

Due to financial difficulties, I am unable to get a business checking account so I plan to use one of my personal bank accounts exclusively for business income and expenses. I use a different business name than my real name but intend to put on my invoices to make checks out to my real name.

My question is do I need to file a fictitious name with the state?

Jane Noname
Utah


Hi Jane Noname,

First things first: Read this You Do Not Need A Business Checking Account. You'll see there that as a sole proprietor who is not an LLC that there are time and recordkeeping advantages to not using a business checking account. Also, note that There are many other posts on checking accounts in my blog right here checking account .

I do not recommend sending an invoice in one name and asking to be paid in another name even if it is your own. People often do that to skirt around claiming income and it gives a non-professional feel to things. Why not bill in your own name and use a clever tag line under your name that relates to or describes your business?

You don't say what you do so I can't give you any suggestions on a name but ask your bank if a check made out to, say, Jane Noname Services would be acceptable into a Jane Noname checking account.

Here's some posts on using a business name DBA - Doing Business As .

-- June

No Mix or Mingle for an LLC

Hello June,

Purchasing The Confident Indie: Five Easy Steps has been a great investment and I appreciate how much it is teaching me about running my LLC.

I have an opportunity to bring in additional income, supporting new moms, by working part time as a W4 employee with a company.

My question is should I have my employer direct deposit my earnings into my personal checking account or in the account for my LLC?

Thank you so much for your reply.
Peggy


Dear Peggy,

Pleased to know that Five Easy Steps has helped you.

I gather that you are an LLC structured as a sole proprietorship. I assume you formed an LLC for liability protection not just for the panache of having "LLC" as part of your business name.

That being so, you must keep your LLC records separate from any income or expenses not related to the LLC.

Your paycheck should be deposited into your own account.

Here are more posts on LLCs -- business entity -- LLC -- if you want more info.

Best,
June

Meals & Entertainment Deduction @ 100%

June – Not quite sure how to both post a comment and ask a question in the same fell swoop on your blog page, so I’ll try here in e-mail instead. [Ron, click "comments" at the end of the post.]

I found you because I was looking for information on business checking online today. The fees, beginning at $12 monthly (for the least expensive option) seem unnecessary, and as I have been keeping solid records since beginning my consultancy last year, think I’m going to stick with the personal account for now. Nice to see someone provide a good rationale for what seems a rational choice. [Ron refers to this post: You Do Not Need A Business Checking Account .]

But now I have a question. You wrote as an example to deducting a business expense: "A carpenter deducts not only the tools that she buys, but also the expense of dining out. Why? Because during the meal with her husband she talks about her new business, gets his advice on questions of scheduling, picks his brain about various proposals, and tests his reaction to her brochure. She could not have had this business discussion at the family dinner table with her three children in attendance and so the gift given to her brother as thanks for baby-sitting while she was at this dinner is also a business expense."

Is this deductible at 50% for meals and entertainment, or is there another, full deduction category to be considering?

Thank you – Ron
Long Beach, Calif


Ron --

It's great to learn that my business-checking-post will save you $144 a year.

The carpenter's business meal is a 50% deduction as are just about all meals and entertainment.

The only M&E deductible at 100% are those that are offered to the general public. For instance: If you have an open house to display your artwork and you provide wine and snacks to visitors, that food and beverage is a 100% deduction.

Meals & Entertainment expenses are further explained in my book Self-employed Tax Solutions.

-- June

Checking; contributions; dining; home storage

Because Ron sent several questions look for my answers after each question.


Hi June,

I initially found you because I was looking for information on business checking online. The fees, beginning at $12 monthly (for the least expensive option) seem unnecessary, and as I have been keeping solid records since beginning my consultancy last year, think I’m going to stick with the personal account for now. Nice to see someone provide a good rationale for what seems a rational choice.
Ron refers to these posts on business checking accounts.

So now I’m writing because I’ve just finished reading your book Self-employed Tax Solutions (terrific – thank you! everyone should follow your New Year’s Eve/Day tip!). I agree. I’ve been tracking all my expenses and incomes meticulously, but you gave me some other good points to think about. Here are some questions I have, based on the book scenarios:

1) My kids’ sports leagues all solicit team sponsorships from local businesses. But in your book, you suggest this might not be a wise write-off for indies. Can you elaborate? Should I not do it? And what about sponsoring the softball team that I play on myself?
A quick overview on charitable contributions made by sole proprietorships -- indies: They are not deductible as business deductions. They are personal deductions. Advertising is deductible. So $100 to your daughter's soccer team -- not deductible. $100 for an advertisement in your son's concert program -- deductible. $500 for hockey uniforms that have the name of your business visible to the public -- deductible.

2) I’m still hung up on the “if you have dinner with your wife …” point, primarily because you’re describing exactly what happens to us: The only real time we get to talk about the business, strategy and planning is when we dine together! Permissible deduction, right?
Dinner with someone with whom you have a personal relationship is deductible only if the reason for the dinner is business. Not that you happen to talk business while at dinner. There must be specific business goals that you work on achieving at dinner: spouse reviews brochure; spouse sketches designs for an ad. Things like that.

3) Currently, I can’t take the home office deduction because we don’t have “exclusive space” to work from. But, we do have some space that is exclusively used for storage of business books, files and materials. Can I claim that area? Yes.

Thank you – RA in L.A.
Ron
Long Beach, Calif.

Recordkeeping and Receipts for Items Paid by Check

Hi,

I've been reading your book Self-employed Tax Solutions and I get your email. Thank you for what you do.

I'm wondering if the growth of online banking movement has changed your thoughts about having a checking account that returns your cancelled checks to you. I pay some of my bills directly out of my account and don't even write checks. I don't have any cancelled checks from last year and should I change banks to find one that will send me my checks back for this year? I'm thinking the IRS might have adjusted in the past 5 years. What is the current thinking on this?

I am a psychotherapist in private practice. Not a lot of transactions in a month, maybe 25 outflows at the most and about 3,000.00 inflow per month.

Thanks,
Kim


Dear Kim,

You are welcome. And, thank you for letting me know you appreciate the output. Indies do need as much clear, accurate info as they can get.

You must have proof of just about all business expense deductions. The most simple way is through cancelled check and credit card receipts. And if you follow my Most Simple System you must have backup for every dollar you spend.

Even though few banks return cancelled checks anymore most banks do provide photocopies of all checks written. You may cut them out, or copy and then cut them out. Treat them just as you would a cancelled check. A psychologist client in NJ urged her bank to provide a second, larger photocopy of her checks each moth. The bank wanted to keep her as a client so they obliged.

If your checking account is through your brokerage house you probably get a list not copies of checks. In that case I would suggest you use a local bank for your regular check writing.

If you pay bills directly you must still have something that tells you how much to pay. Print it out. For instance, if ATT emails your monthly bill print out the first page and note the date and from which account it was paid. That is your proof. And not only is it proof for taxes, it's proof if ATT says you didn't pay the bill.

Whenever possible get a paper invoice or bill for whatever you are paying by check. If you pay by check for an item purchased online, printout the purchase info. Note the check # and date paid on the printout. [BTW -- I suggest putting those kind of orders in a "waiting" bin. Pull them from the waiting bin when you actually receive the item. We are all so busy it's easy to forget about a one in the morning online purchase.]

Whenever you pay a bill by check, write the check number and the date paid on the invoice. For example, if you paid your cable bill on March 14 with check number 607, you would write √ #607 3/14/11 $234.56

File the receipts consecutively, by check number, in a folder labeled: 2011 CHECK BACKUP.

This and a complete method of manual recordkeeping is explained in my new petite publication, The Confident Indie: Five Easy Steps. It also includes worksheets for your 2010 tax return.

Best,
June

revised 1/30/11

Recordkeeping not a bank balance is the real indicator of an indie's financial status.

Visionary Accounting For Entrepreneurs said...
June,

I love your book. I love your passion. However I politely disagree with your advice to have one bank account. Business owners need clarity with regard to the distinction between business and personal. Commingling funds should be avoided if at all possible. Maintaining a separate bank account for business activities enables this to occur for most all transactions. Loans between the owner and the business can be tracked in an Owner's Draw account, to be reconciled at year-end. Keep up the awesome job! You rock !

August 20, 2009 5:22 PM



Hello Visionary!

What a great name.

Thanks for your generous comments about Self-employed Tax Solutions. And, I don't know if I "rock" but I sure love rock 'n' roll and I love to dance.

Regarding a business checking account, keep in mind that I am talking about only sole proprietors who are not LLCs.

They include writers, graphic designers, poets, musicians, composers, web developers, handy men -- and women, astrologers, psychologists, photographers, landscapers, theatre critics. To name just a few of the independent professionals I work with. They are not small businesses. They are not widget makers.

They typically do not have funding for their professions. What do they do? They write. They sculpt. They photograph. They advise. They cut grass.

For many of these people their lives are their work. My goal is to help them distinguish between personal and business. That is a learning process and not one that forces them to make a decision, at a bookstore for example, as to whether the book is being bought for private leisure reading or as a business purchase. That decision can be made during the recordkeeping process.

In a sole proprietorship the owner is the business. The business is the owner. One's money is no different than the other's. There is no loan from one to the other because there is no other.

There is no owner's draw for sole proprietorships. There is for corporations. There is no reconciliation. It is not the balance in a bank account that is the determining factor. It is the recordkeeping that determines the profit or loss and that gives indies the information they need when they need it.

Depending on how timely he or she wants to be, the indie can keep records on a weekly basis, a monthly basis, or once a year on an annual basis. As to method, he or she can keep those records manually, or use software like Quicken, or have the records kept by a bookkeeper. Timeliness, recordkeeping method and of course accuracy are what provide an indie with the information needed to determine where the venture is financially.

Thank you for contributing to a discussion that is worthwhile to indies.

Best,
June

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

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

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

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

EINs and Pensions

Hi June,

Thanks for your website. It gives lot of information for starters like me.

I just started working as indie software consultant. I wanted to open a solo 401k also. I read in your blog like if I want to contribute to solo 401k I need EIN number. If I apply for EIN number, I have to use that EIN number for my clients. Is that correct?

and also Do I have to open a business account with that EIN number or my personal account should be fine?

Thanks
Mani
Tallahassee, FL


Dear Mani,

EIN stands for Employer Identification Number. Here's a couple of my posts on EIN-employer identification # (2)

When you establish a 401k and certain other kinds of self-employed pensions you must get an EIN for the pension. That's because the pension is an entity -- something that is separate from you -- and it must have its own identifying number.

For some pension plans, once assets exceed $250,000 a tax return for the pension must be filed. It is Form 5500 or Form 5500-EZ. You, the indie, must then also have your own EIN because it is required on the Form 5500.

Keep in mind this does not mean that you have two EINs. Your pension has an EIN and you have an EIN.

You do not have to open a checking account with your EIN. You may use your personal account as long as you are not operating as an LLC.

I don't know what you mean by "use that EIN number for my clients."

-- June

Business Gifts Given

Hi June,

My husband is an Orthopedic Surgeon and works in Indianapolis. He never itemizes business gift write-offs. We have referring physicians who he speaks to throughout the year who are critical to referring heavily to his practice as a specialist. I know he is not comfortable giving a small 25$ gift certificate (and that is the number I heave read) and he spends literally thousands on stuff once a year at the holidays. I think he should and that's great!

Then I said, maybe he should purchase on his business credit card, 20 gift certificates from 100 - 250 dollars. That got us talking yet again about writing these business thank you gifts off our taxes. I wonder if this seems appropriate? It does top me.

Our tax person is very conservative I think. I couldn't care less if we get audited other than the headache. Thoughts?

Thanks
Sue

Hi Sue,

There is no limit on the amount you may spend on a gift for a business associate. The limit is on the amount you may deduct as a business expense. And that amount s $25 per business associate per year.

A more interesting element of your question is that you think it might be different were you to put the expense on a business credit card. There is a lot of misunderstanding about business checking accounts and credit cards. Just because an expense is paid through a business account does not make it a business expense.

I say in my book, Self-employed Tax Solutions that 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 up 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 typing your business plan, is a business expense.

Best,
June

Wacky payment method?

June --

I have been a sole proprietor home care physical therapist for 10 years.

Can sole proprietors be paid via direct deposit in NY? We were always told no, but now one of my clients ( a hospital) wants us to sign up for direct deposit. I'm leery. Any advice?

Frank -- Franklin Square, NY

Hello Frank,

"We were always told." Told by whom for goodness sake?!!!! And for what tax reason were you not allowed to have your payment deposited directly into your checking or savings account?

I get emails where indies have been told a lot of wacky things, and let me tell you that's up there with the wackiest. You may be paid in and by anything -- camels, dollars, rubles, gold, check, credit card, cash, barter, wampum, even direct deposit into your bank account.

And it's all income that must be reported on your tax return.

You must email me back and tell me who told you that.

Best,
June

Web developer with lots of questions

My answers to Peter are embedded below. Think that makes it easier with so much going on in his correspondence.
-- June


Hi June,

Great site. Thank you. I must say, a lot of info - possibly too much to find all the questions I have. Try the "search" box in the upper left of the screen. It may help.

I am a web developer. I started an LLC (sole proprietorship) in Ohio last month. I have couple of clients I make websites for (some for over 2 years now) and as expected I have some questions about what my new "status" brings:

1) When I receive checks, they all go to my business account. I read on your site that as a sole proprietor I am not an employee but rather I AM the company itself. Therefore: How do I pay myself? You don't pay yourself. You may take money whenever you like. You "income" is the profit your business has at year end. Can I just take the money from the same bank account, do I write myself a check, or what? Write a check to yourself or to cash.

2) How do I pay taxes? Read this post Estimated Taxes I have an EIN, I have no employees, and I have some freelance developers doing some work for me at times - I consider them as vendors, not employees.

3) What are the benefits of having an accountant, Jack Smith has a web making program. Why does he need a web developer? I do not do much business really, one or two checks a month come in... I read somewhere that in order to comply with the Limited Liability part, I need to separate my business and personal expenses. If you are an LLC you must have a separate checking account and a separate credit card to maintain limited liability.This comes together with Q#1: If I pay myself, transfer money to my personal account, or buy personal things directly with my business credit card, does that in any way change the LL part of the LLC? Yes.

4) How do I know if I should charge my customers a Sales Tax?? Every state is different. Call your state tax office.

5) What can you do for me, besides making my life easier by answering the above questions, or at least pointing me in the right direction? Contrary to most laymen's thinking, tax preparation for indies -- and many other situations -- is not simply putting #s on specific lines. There are often many choices for the same kid of deduction, there is different tax treatment for similar situations, there are different kinds of pensions for indies depending on income, age, family situation.

Just like Jack Smith doing his own website. For some Jacks it might be OK for other Jacks it might mean a big loss of money.

Thank you so much in advance! You are very welcome.

I can tell by your questions that you would benefit from the info in my book, Self-employed Tax Solutions. You might want to check it out.


All best, Peter, OH

Simple Recordkeeping: No Business Checking Account Required

Hi June,

I was poking around on the web for information and I found your book and your site. I just ordered your book, but I have an immediate question. I'm a self-employed sole proprietor. My business is video production and editing. I am about to invest in a computer and editing software so that I can edit at home. My husband is eligible for a discount on the computer and the software - I am not. If he buys the computer and the software, and then I in turn write him a check and buy it from him - will I be able to claim the computer and the software as my business expense?

Thanks in advance for your advice.
Stefani, Elizabeth City, North Carolina

P.S. You happen to live in my favorite place - Santa Fe. I lived in NM for a few years as a child and have never gotten it out of my system. I still have fond memories of my last trip there a few years ago and my visit to Ten Thousand Waves.



Hello Stephani,

Your husband can buy the computer, or spend money on any other business expenses for you and they will be deductible as your business expenses. You do not need to reimburse him. You don't even need separate checking accounts. You will see why when you read my book.

It's all a lot more simple than most folks think. And a lot more simple than most accountants will lead you to believe.

And, on your P.S. I feel the same way about Santa Fe. We came. We saw, We loved it. We're here forever. And here's a little weird thing, well, sort of. I married my first husband in front of a justice of the peace in Elizabeth City, North Carolina. He was an actor. Civil rights was a hot topic. Ah, yes, I remember it well.

Cheers,
June