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Do I Need A Separate Bank Account For Being Self-Employed?

In the event of a claim made against the business, you could be on the hook legally and financially for the liabilities of the company without a dedicated bank account that proves you are managing your business affairs separately.

Suppose your business structure is a sole proprietorship. In that case, you can technically get by with a single bank account because your business and personal finances are already intertwined from a legal perspective. However, even as a sole proprietor, it’s prudent to maintain a separate business bank account to help differentiate between personal and business income and expenses. Depending on the bank and the number of transactions you need to make each month, your bank may even require you to open a separate business bank account.

The separate account will also help you track your spending, easily budget, reduce tax filing hassles and support any business deductions or credits you claim should the ATO audit you. Given the many options available today for free or low-cost business bank accounts with minimal administration, there is little reason not to get a separate business bank account.

Working for yourself has many benefits, including setting your own hours, being your own boss, not having to ask for a day off or vacation time, and being in complete control of your business. With an advantage, though, comes a disadvantage.

As anyone who is self-employed knows, one major challenge of running your own business is handling the finances. It’s typically worth the trouble, but you need to figure out how to handle the following:

  • When you work for yourself, you don’t have a paycheck coming in every two weeks. Some weeks might bring zero revenue or require that you invest heavily in the business.
  • You need to open bank accounts, accounts with state and local authorities, and manage business finances (as opposed to doing the work you love—and generating revenue).
  • You need to track income and expenses carefully so that you don’t miss tax deductions.
  • Your employer doesn’t withhold taxes for you or help you pay those taxes.
  • You typically don’t get bonuses, and taking time off means you might not get paid.

Knowing how to correctly manage a business bank account when self-employed can be tricky. Whether you’ve been self-employed for the past 10 years or you’re brand new to the self-employment world, these tips can help you keep your finances in order.

 

What Is A Sole Trader/Self Employed?

If you’re working as a sole trader, then your personal and business affairs are treated as one for tax purposes. You are your business. So, in theory, you can use your personal bank account for business transactions, as long as your bank allows this.

In reality, most banks will insist that you open a separate account for your business, especially if you process a large number of transactions each month. Inevitably, you can expect to pay a monthly fee for the privilege.

On the positive side, having a separate account will enable you to easily separate your business and personal expenses, which will help you reconcile your accounts when it’s time to complete your annual self-assessment return.

Having a dedicated bank account will also make your business appear more professional – you can use a ‘trading as’ (t/a) name so that all payments are made to a business name rather than your personal name.

A self-employed bank account can mean one of two things: using a personal account for business conducted when self-employed, or using a business account instead.

For sole traders, business bank accounts are not a legal requirement. Using your personal bank account for business transactions is fine as far as HMRC are concerned, as personal and business income is treated as one.

Limited companies, on the other hand, do not share the same luxury. As a legal entity, money it generates must be kept separate to the business owner or director. Although, this may be the route to go for all self-employed workers going forward.

Why You Should Not Mix Business And Personal Funds?

These reasons illustrate why it is not a good idea to mix business and personal funds:

  • It doesn’t look professional: If you are dealing with a vendor or customer and you pull out your personal cheque book or credit card to pay a business expense, you are giving the impression that you are not a real business owner.
  • In the same way, lack of separation shouts “hobby” to the ATO. And the ATO is quick to deny deductions and losses for hobbies. If you want the ATO to look at your business as legitimate and not a hobby, keep business and personal separate.
  • Your business deductions and income aren’t clearly designated. If you want to be able to claim expenses as deductions, you must be able to show that these deductions were for business purposes. Trying to sort through your personal records at tax time is a nightmare. Capture business expenses in your business account to make it easier to claim those deductions.
  • The ATO may audit you. As noted above, the ATO is more likely to audit your business and deny deductions and business losses if you have no clear separation between business and personal expenses. If you have a home-based business, for example, the ATO might not allow home business expenses if they are not separate.

 

Keep Business Expenses Separate from Personal Expenses

  • Do you need a separate bank account if you’re self-employed? While it’s not technically required, it’s a good idea.
  •   It would be best if you considered having a separate checking account and savings account for your business. While it might seem confusing at first, having separate accounts streamlines your accounting procedures and simplifies your taxes. Plus, it’s much easier to keep track of exactly what you’re spending and what you’re bringing in when all your business expenses and income are funnelled separately into their account.

Keeping Separate Accounts

First, and most importantly, set up separate checking accounts for business and personal use. Write checks for business purchases from the business account and personal purchases from the personal account. Put business income in the business account and personal income in the personal account. Do the same with credit card accounts–one for business and one for personal–and don’t mix charges or payments for these accounts.

If you are an employee of a corporation, pay yourself a reasonable salary, based on comparable salaries for other similar positions. If you are a sole proprietor or partner, you can take a draw by writing a check to yourself from the business account.

Choosing the Right Accountant

Does A Sole Trader Have To Have A Separate Business Bank Account?

 

The simple answer is No: a separate bank account is not needed, and by not using a business bank account, the sole trader may be able to save on the bank charges that are usually applied to business accounts.

This follows from the fact that the business is not legally separate from the self-employed person who is running it.

However, there are a number of reasons why it might be better to open a separate business account:

  1. The terms and conditions of a personal bank account may prevent it from being used for business.
  2. If the sole trader is using a different business name and receives cheques in that name, it might not be possible to pay them into a personal bank account.
  3. The business may wish to accept payments by credit card or debit card, which is unlikely to be possible with a personal bank account.
  4. The bookkeeping is made easier if all transactions relating to a business are grouped together into a separate bank account. At the very least, it saves having to pay your accountant to filter out your weekly personal shopping trips to the supermarket in the process of adding up your proper business expenses.
  5. By regularly monitoring the balance of a separate business bank account, it can give some idea of the profit or loss being made.
  6. Money can be left in the account to pay the tax on the business profits, reducing the risk that the money might instead be inadvertently spent elsewhere.

For similar reasons, a person running more than one self-employed business may prefer to have a separate business account for each business. Still, again this is not a legal requirement.

Note that the position is very different with a limited company. While it is not a specific legal requirement for a limited company to operate a business bank account, not doing so can lead to all sorts of tax and legal difficulties, and we would strongly recommend that every company has a separate bank account in its own name.

Choosing The Right Business Account

When choosing the right bank account, it’s important to consider the current and future needs of your business. Make sure to look beyond just the account fees – for example, the expertise and support of business banking managers, plus the extra features offered with the account, can play an important role in helping your business expand.

With our business account, you’ll not only benefit from our knowledge and expertise, you’ll also get access to lots of helpful tools. When you are searching the market for a suitable bank account, we recommend that you do not automatically use your personal bankers, as they may well not offer the best deal for business customers.

Many of the main high street banks offer up to 2 years’ free banking for new business accounts, although they are less generous to established businesses if you decide to switch. Make sure you also find out what standing and transaction charges apply to business accounts after any initial ‘free’ periods are over.

 

The majority of high-street banks will offer a business account for sole traders and small business owners. It’ll be down to you to weigh up the benefits of each and choose the one that suits your operation best.

It isn’t as simple as choosing the bank with the lowest fees. Be sure to check customer reviews and see whether or not the bank has an app which means you can access them from wherever you are.

For some individuals, it pays to choose a bank that’s located close by. If you foresee yourself needing to meet with your bank manager regularly, larger branches with parking access can be invaluable.

Several banks and credit unions offer affordable accounts for self-employed business owners. Fee structures for these accounts are typically different than fees for personal accounts, so ask about fees for business accounts, and describe how you plan to use your account.

If you chose to register your business as a sole proprietorship, there is no real distinction between your personal and business finances. Nevertheless, it’s best to keep them separate, as it will simplify things when it comes to managing your finances. It will also make it easier to talk to the bank about your personal financial situation and that of your business.

 How To Keep Your Finances Organised

As soon as you decide that you want to apply for a mortgage, it would be best if you started getting your accounts in order. There are a few tried and tested ways to do this:

Hire an accountant

Hiring an accountant is an obvious way to get your accounts in order, and a few mortgage lenders might even require you to have a qualified accountant prepare your financial information, especially if your accounts are complicated. If you get your accounts prepared by an accountant, both you and the lender can be confident that the figures are accurate, but that’s not the end of it!

Understand your figures

Being overly reliant on an accountant can be dangerous. If you can’t demonstrate to the lender that you know what goes on with the money inside your own business, then they’ll probably be reluctant to hand over any of their own money to you.

For example, if your cash flow has dipped at some point, then the lender might ask you to explain why. Shrugging it off isn’t going to give them confidence that they can trust you with a loan, but if you can clearly explain your business finances, it will be likely to increase their confidence in you.

Cash Flow

Use accounting software

Using FreeAgent’s accounting software is a great way to keep your finances organised and provide evidence to mortgage lenders of your business finances.

The dashboard overview brings together all your business’s incoming and outgoing money in one place, allowing you to keep track of your cash flow at any moment in time. You can also see at a glance if your invoices have been paid, or are due or are overdue, so you can quickly chase any late payers and get your finances in a good place ahead of submitting your mortgage application.

What are the best practices for managing your finances when you’re self-employed?

In addition to maintaining separate business and personal bank accounts, use these tips to stay on top of your business finances:

  • Maintain a separate bank account for tax payments: Avoid spending money that is supposed to be set aside for quarterly estimated tax payments by putting the funds into a liquid (e.g., interest-bearing checking or savings) account.
  • Budget wisely: Feast or famine economic cycles are not uncommon in small businesses. Preparing and regularly maintaining a budget that considers revenues, expenses and profits will allow you to save more during feast cycles so that you can survive lean periods in which your business isn’t turning over as much profit.
  • Keep credit card spending in check: Credit card debt can silently stack up and catch you unaware at bill payment time. If you must use a credit card, consider limiting its use to large or essential expenditures. Use a dedicated business credit card to make your credit card spending easier to monitor.
  • Maintain an emergency fund: Having a rainy day fund will keep your business bank account from taking a significant hit when unexpected expenses arise. Aim to keep your emergency fund in a non-volatile liquid vehicle such as an interest-bearing savings account or a CD.
  • Save for retirement: Retirement accounts are an often neglected aspect of how to manage bank accounts when you’re self-employed. Don’t let your nest egg stall in growth when you go into business. Allocate a manageable percentage of your self-employment earnings

Plan your retirement.

Retirement planning is particularly important for self-employed workers as they cannot count on a pension plan from their employer. Consult your financial planner to ensure that your golden years are secure.

Given the ups and downs that come with working for yourself, it’s easy to forget to save. Set up an automatic savings mechanism that will force you to set funds aside for unforeseen expenses and retirement.

Use Budgeting Software

To go along with your zero-sum budget, you could use budgeting software for both your business and your personal life. Many programs allow you to track your spending, create categories for different areas of spending, track your net worth, follow your investment accounts, and more. Budgeting software can help keep you on track each month and help you monitor your spending.

Managing your bank accounts doesn’t have to be complicated when you run a small business. With your finances and bank accounts running smoothly, you’ll be able to devote more of your time to what really matters—your business and your clients.

 

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