by Meryl K Evans
Meet Joe, a freelance writer with a decent portfolio containing a mix of print and online articles. He loves to skydive and play tennis. Joe has one credit card for both personal and business purchases. After all, freelance writing started out as a side venture that eventually grew big enough that he could quit his corporate job for the freelance life.
In the beginning, the credit card bill didn’t faze him. He didn’t have many business purchases being a fledgling freelance writer on the side. Now that he’s gone big time — managing his credit card and its bill becomes a hassle.
Highlight here, highlight there, everywhere a highlight
When he receives the bill, he has to study the items to figure out what they are. After all, that printer he bought from Printers R Us shows up on the credit card as Dominate Electronics World, the parent company. So he has to make the connection between the order from Printers R Us and the parent company by comparing the purchase price.
He takes out his green and yellow highlighters. He highlights personal purchases in yellow and business purchases in green. After all, green means money and business brings in the dough. Whoops, he highlighted a personal purchase in green and scribbles notes to fix that. By the time he finishes with his bill, it looks battered and worn.
Recording where the money goes
Joe manages his income and expenses in a spreadsheet. He realizes the spreadsheet can’t handle his business anymore, so he buys QuickBooks. Though he easily dives into new software, the accounting program turns out to be the biggest monster he ever faced in software.
And reconciling his business credit card and payments proves a confusing and time-consuming job. He records all expenses in QuickBooks, but he still has to separate business and personal purchases to reconcile QuickBooks with his credit card bill.
And the crying begins
His credit card company only takes one electronic payment, so Joe pays the bill out of his personal account and then writes a check from his business account to his personal account pay for the business purchases. When the cleared payment shows up his bank statement … well, you can see how confusing this gets and most of us would cry, scream, pull hair, or [fill in the blank with your favorite anger coping mechanism] by now.
Doesn’t all of this sound too complicated? Oh, you have one bank account for both business and personal finances? We’re crying for you. Just stop what you’re doing, head to the bank and open another account.
Big brother (or sister) accountants and IRS
As a one-person business, it seems logical and simple to use one credit card for everything. Pat yourself on the back for limiting your credit cards. However, here you do need two cards so you can separate business and personal purchases.
You don’t really want your accountant or the IRS to see you’ve been shopping at Victoria’s Secret or the Pleasure Chest, do you? We don’t want to know either.
This sort of thing happens by accident because we freelancers usually start a business with our own money. We forget we need to draw a line between business and personal finances.
Remember the printer Joe bought? Since he has a home office, he’s going to have a fun proving to the IRS that he uses the printer for his business especially when the printer appears on the bill right after Victoria’s Secret. If he has a business only credit card, it’ll come easier.
Joe smartens up by opening a separate business bank account and obtaining a business credit card. Reconciling each becomes much easier for him and he can do “adult” shopping to his heart’s content without revealing his secret hobby to his accountant or the IRS.
Meryl K. Evans is the content maven behind
meryl.net and author of
Brilliant Outlook
Pocketbook and co-author of Adapting to Web
Standards: CSS and Ajax for Big Sites.
September 18th, 2008 at 8:43 am
My goal is to get rid of my credit cards. I’ve almost paid off my furniture which eliminates one. It’s my Bank of America card that gives me nightmares. A few months ago, I made my payment online. The payment went through and cleared my bank without any problem. Two weeks later, BOA was calling me eight times a day telling me I hadn’t paid and that I was now being slapped with late fees. I explained that I had indeed paid and the matter was cleared up. I even asked the woman to email me so that I had proof that the situation was cleared up. She did and also mailed a copy as well as the removal of the late fees. Yet another week goes by and I get a letter from BOA stating I haven’t paid and that now my account is seriously overdue. Again, I call and I’m told to disregard that letter.
The next month, I go in to pay and find late fees galore have been added back on. My payment is now up to $280 in interest and late fees (triple what it usual is), as well as the fact that they really upped my interest rate to 30% (more than double what it was) because they claim I hadn’t paid. I opted to pay the entire amount and then fight it after. That extra money, of course, had to come from somewhere, so groceries were out for a couple weeks. The payment cleared my bank so I went in to the BOA Web site to check. Sure enough, they said I hadn’t paid and had now doubled the late fees and interest which then put my account over the credit limit, so I was being charged that as well.
I got on the phone and asked for a supervisor who immediately berated me for not paying. I read off payment confirmation numbers and was told that I wasn’t paying the correct amount. That the amount showing on the computer screen was $8 lower than the amount showing up on my printed statements and that it is my responsibility to make sure those amounts match and that I’m paying the right one. This ticked me off. Their computer and statement should match! Anyway, I was getting no where so I hung up on that person and contacted my attorney general.
Needless to say, three months after it started, my account is now straightened out thanks to the President of BOA’s secretary. But it was a nightmare getting it straightened out.
September 18th, 2008 at 9:47 am
Although that’s frustrating, the idea of having two (or more!) credit cards really scares me. My dad has his own business and I think my parents have about… oh, ten credit cards, but I can’t do that.
Will saving receipts help at all? Anytime I make a business purchase, I purchase it separately from everything else and set it aside in a “business expenses folder.”
September 18th, 2008 at 9:59 am
@ RobinMarie: Keeping your receipts does help, and you will need them in case you are audited.
September 18th, 2008 at 10:15 am
We used to save piles and piles of paper receipts. Now, of course, credit card companies itemize the specifics on your monthly bill - so why not let them do the work?
We also had trouble with “too many credit cards” so now have just two: a personal debit/credit card and a business amex card (which we pay off each month).
The toughest part of the whole thing, for me, is the transferring of money from one account to another. We don’t MAKE more than we need, but by putting income into the “business” account and then transferring it (in theory for tax purposes) we wind up with double the frustration and very little to show for it!
September 18th, 2008 at 11:47 am
I use credit cards frequently, and I figured out the one bank account/one credit card rule last year when my accountant said, “Bring me all your bills.” Um, yeah, okay. I took out 12 monthly statements for each of my 5 cards (no, that’s *not* a lot, some people have 15), and started going through all 60 (hope my math is right) statements with a friggin’ highlighter.
Then there was tax to calculate. Then there was US exchange to calculate. Then I had to add it all up and show him the results.
He had one question: “Are your numbers right?”
God. I hope so.
This year? One credit card. I can take all 12 statements and bring them to him. Have fun with them, buddy. Squeaky clean.
@ Jodee - Make that *when* you’re audited, especially if you’re a web worker
September 18th, 2008 at 11:56 am
Yikes. Yeah, I don’t like the idea of having a lot of different credit cards. I only have one credit card, which I opened last year solely for the purposes of establishing credit in my name for when I want to buy a house.
But having separate accounts for business and pleasure is a good idea. Most banks should offer you a *debit* card with a checking account, which you can use just like a credit card. On my monthly checking account statements, it even lists where the card was used, so it will say specifically “Printers R Us” (or whatever), just like credit card statements, so you can demonstrate that it’s business related.
September 18th, 2008 at 11:58 am
I pay cash for everything and just keep my receipts. It’s much easier. I pay for all domain registrations & hosting from PayPal and then just print the PP history at the end of the year. It’s super-easy.
September 18th, 2008 at 12:41 pm
@ James: We were audited a few years ago, actually. It’s a bit like having someone poking through your underwear drawer. I have had the conversation where I’ve had to explain that I bought new bras through the mail and that is what the cheque written to XYZ Company is for, so I got a good chuckle at the reference to shopping at Victoria’s Secret in this post.
September 18th, 2008 at 1:02 pm
@ Sonya and also just a tip for everyone, if you don’t already know - Suze Orman is the money guru, and if you want to keep your finances straight, I’d follow her advice and flip through her books regularly. She says “Women & Money” is her best book, but the “Road to Wealth” series is also good, and my personal favorite (Sonya, I’d recc. this one, since you’re building credit, want to later purchase a home, etc.), “The Money Book for the Young, Fabulous, & Broke.” It offers THE need-to-know advice on every major purchase in life for the YF&B - which many of us are at some point in life - as well as credit card advice, information on the all-important fico-score, student loan debt, good debt vs. bad debt, and more. When you are YF&B or OF&B, that book is fantastic. And for credit-card info, she’s just the best.
My mother owns a business, and there is this ONE book that covers everything - Tax Strategies for Business Professionals by Sandy Botkin. It’s amazing the deductions you can take, that book just opened my eyes, SERIOUSLY.
Just sharing resources. Enjoy :-).
September 18th, 2008 at 3:52 pm
Pretty much every penny of my income goes to our bills, so I don’t have a separate account for it. I also don’t have a business credit card. Every time I purchase anything for work, I keep the receipt and stash it in my files. I also keep copies of every check I get. Is this a bad way to do it?
September 18th, 2008 at 6:22 pm
Hi Meryl! What a nice surprise to find you here.
I use a separate account for business so I don’t have to cry and so my accountant won’t have to smack me. He threatened to do that to me the first year I went to him with a stack of unopened statements that had everything all together.
Between dyslexia, OCD and ADD, I definitely need to keep things separate. Lesson learned, the hard way.
Great, funny post.
September 19th, 2008 at 7:43 am
I only have one credit card that I use for both personal and business purchases. Believe it or not, it’s been a lot, lot easier for me. Having more than one would inspire me to actually go out there and buy something just so both cards are being used. Seeing as I already have everything I do need for the business side of things for the next year or so, I don’t think I’ll have a problem managing my finances afterwards. Also, I remember every single thing I spent money on–really. How funny is it that I can never remember what I did an hour before but I could recall, in detail, what I bought, when, and for how much?
September 19th, 2008 at 9:41 am
You need two have two cards, no doubt. Keeps finances clean for IRS. Additionally, using a card helps gain about 20 days extra time to pay, enabling some payments to come in. If you’re accepting payments in 30 days, but paying business-related expenses immediately, you can literally go broke from business expansion (it’s happened to many companies much larger than any of us).
September 19th, 2008 at 2:12 pm
@Jodee (and everyone else who commented)
Thanks. The thought of being audited scares the crap out of me, not because I think I have an actual reason to worry, but because numbers scare the crap out of me. Numbers + me = really bad news.
September 19th, 2008 at 3:03 pm
If credit cards are the greatest source of bad debt, auto loans are a close second. You are upside down on the loan the second you drive off the dealership’s lot and it’s downhill from there. Too many people shrug off a car payment as a necessary evil.