"Business" vs personal checking account - how do you split finances?

[happydoc90]

Those of you that have a separate "business" checking account - how do you split up your finances?
I'm starting as a 1099 sole proprietor. My thought was to have my income deposited into my personal account, take out ~40% of that every month and place into my business account for taxes.
Would you open a "business" credit card to use for any purchases you can write off? Paid then through the business checking account?
What about student loan payments? health/disability insurance? Scrubs/licensing fees?

How do y'all decide what goes into what account and how to pay for it?

[Tim]

Not a sole proprietor. I would lean to separate accounts, including the income. You need to keep a separate set of books that account for every dollar taxable or deductible.
You don’t have to keep a personal set of books for personal. Administratively it seems easier.

The thought is transfer funds to personal as a draw monthly or for specific personal needs. That includes taxes or student loan payments. Those are personal, no impact on business. The miscellaneous expenses you described are business. Run them through the books.

[White.Beard.Doc]

In my opinion, it is best if you have a separate system for tracking business expenses. I have separate personal and business bank accounts (S corp) and separate credit cards that are used for business and for personal expenses. That keeps the accounting process much simpler for me.

[southerndoc]

All business-related payments go directly to business account (I'm an IC as an ER doc as well as medical director for 3 fire departments). ALL business-related expenses are paid from that account. Student loan payment comes out of that account, disability insurance, FirstNet phone (for medical direction), CME, licensure, etc. I also have a business credit card for business-related travel. Solo 401(k) contributions, HSA contributions, etc. come out of the business account. I keep record of all business expenses.

My "salary" is moved from my business account to my personal account. Taxes are paid from personal account (personal savings store quarterly payments). Under no circumstances will I ever pay a personal credit card or personal expense from my business account. If you don't have enough to cover an expense in your personal account but have it in your business account, then transfer the money to your personal account and then pay it.

It may be overkill, but it's much easier to keep track of expenses especially if you're audited.

I use Bank of America because there is no delay in transfers between accounts. If you have a business account at one bank and personal account at another, a payment from business to personal account may take 2-3 days to clear.

[jfoxcpacfp]

So, you're doing this backwards. All "business" income needs to be deposited into your "business" account. Taxes on your earnings (business, W2, investments, etc) are your personal responsibility, not the business's. I typically recommend you transfer a set amount from your business account to your personal account to simulate a salary on a monthly (or any period you prefer) basis. This helps you stay on budget and avoid arbitrary spending. When cash accumulates in the business account, determine your objective for it in advance (for ex, deposit into solo-k, then into brokerage after maxing out, take a draw to pay a chunk of student loans, move to your house downpayment fund, etc).

[Hatton]

Learning to manage your cash flows is essential to owning any type of business. When I had my solo practice all money flowed into my business checking account. Any expense that could be legally paid from my business checking was paid that way. This includes stuff like WSJ, cellphone, some auto expenses, accounting fees etc. I had a separate personal checking account to pay home utilities, mortgage (when I had one), groceries. It is easy to transfer money in the same bank. I also had a brokerage account where I kept money to be used for quarterly tax estimates and malpractice premiums invested (Tbills or HYSA for example). I constantly harvested excess money from the business account and transferred it to my brokerage. Usually weekly. You keep enough working capital to keep from stressing out about paying day to day bills like a payroll. You will figure this number out. Then you fund your tax estimate account. Then fund your retirement accounts. Then you fund your taxable. I had a business credit card and a personal credit card. If you mess up and use the wrong card then you let your accountant know about it. I used Quicken to track everything. I used tage for business and personal expenses.

[BruinBones]

Thanks for thorough replies to the OP’s question.
I am transitioning from W2 to 1099, and these answers are better than anything else I found on the internet!

[happydoc90]

This is all really helpful. What about health insurance premiums - business or personal?

[southerndoc]

I'm a member of a PEO for health insurance. It comes out of my business account and the leftover after premiums is deposited to my personal account as a salary.

If you're an IC/self-employed, then you the employer are paying your health insurance premiums. My disability insurance also comes out of my business account.

[Hank]

Not sure why “business” is in scare quotes?

[Cubicle]

What about health insurance premiums - business or personal?

Depends on your business structure.

Schedule C: deduction taken on your personal 1040. So should be paid not from the business account.

S-Corp: as per the interwebs, most likely is a business deduction, so should be paid from the business account. The smart people on here should be able to confirm. Or more interweb searching.

[happydoc90]

I used quotes because I didn't create an actual business account - it's just a separate personal checking account that I'm using for business purposes. From my searches it seemed there is no need for an actual business account.

[Lithium]

I don't do any of these things. I just track everything in a Google Doc. But that's because I have almost no non-reimbursed expenses. I work for a locums company, and they either pay directly all the travel costs, or they reimburse me for them. Licensing fees are also reimbursed. I do write down all the days I'm traveling so I can deduct meals and incidentals. I tried for a while to keep track of all the minutes I spend talking on the phone and estimate what percent of my phone bill goes towards work. But after tracking a bunch of 1-2 minute phone conversations for a few months I gave up. That would only amount to a few dollars of deductions anyway. I guess I'll have to pay $175 to the board certification cartel later in the year, so I can deduct that, and I also just paid $70 to incorporate.
I did open up Chase Ink Preferred, but I just did it to get 80,000 UR points pre-COVID, and now I use it because it has better travel rewards than my other cards.

I haven't felt like I needed a business checking account or bookkeeping software. Does anyone think I'm likely to screw this up?

[Tim]

“I haven't felt like I needed a business checking account or bookkeeping software. Does anyone think I'm likely to screw this up?”
How do you tally up your tax deductible business expenses? The question is how difficult is it to peal out business from personal. Since you get reimbursed for many, those you skip and rely on the reimbursement submitted. The difficulty is if you mix business and personal with a volume of transactions. Memory fades a couple months later. What did I buy?
Anecdotally, my spouse buys crap for her mom that we get reimbursed. I gave her a separate card. My lovely spouse was buy stuff for us and her mom on the same purchase! Not going back and splitting up a Sam’s receipt and figuring the stuff out. I call it Mom’s card. Pay for hers separately from ours. End of the month- get me $43.52 or $435.20. Now we are even.
Sounds like you simply pick the checks and credit card charges. Easiest way to segregate. Separate account is a productivity enhancement.
Separate advantage is a separate account can be provided for any IRS request, keeps your personal stuff out of their hands. Spreadsheets work.

[SerrateAndDominate]

Great thread and super timely as my wife will be doing some IC work starting July; she's been w2 since graduating dental school. I also advocated getting business only checking account and credit card.

Not to hijack this thread:
She isn't too big on doing paperwork and tracking expenses so I thought the business only accounts would be a good start. Does anyone have any other suggestions for easy/automated tracking? I suggested Quickbooks Sole Proprietor.