Freelancing can be a tough grind. You're responsible for a lot more than providing goods or services; you also need to market yourself, manage client communications, and do the bookkeeping.
When you're a one-person show, it might seem easier to put both business and personal expenses on the same credit card and figure out the charges later. But this can end up causing headaches in the long run.
Here are seven reasons freelancers need a separate credit card for business expenses.
1. Monthly Budgeting
You probably have a monthly budget for personal expenses—or at least a general idea of what you can afford to spend. Doing the same for your business is a smart freelance strategy.
But it's hard to keep track of spending when your personal and business expenses are mixed. You have to either diligently save receipts or pore through your credit card statements each month. Sticking to a budget is much easier when there's a clear line drawn between your personal life and your business.
2. Filing Your Taxes Correctly
When you file taxes, you'll have to report business activity, including revenue and expenses. Fortunately, many business expenses qualify for full or partial tax write-offs. But if your business and personal spending is mixed in one account, you'll have to go through a year's worth of statements or receipts to identify the business expenses you need to report.
Joshua Zimmelman, president of Westwood Tax & Consulting, confirms the importance of separate accounts: "When you're self-employed, operating as a sole proprietor, there is no legal obligation to keep business and personal expenses separate unless operating as an LLC. However, come tax time, it might be quite difficult to distinguish if that Uber expense was a night on the town or a trip to a client site. Therefore, it is much easier to keep a separate credit [card] for business transactions."
3. In Case of Auditing
If the IRS or your state government decides to audit you, it'll perform a thorough investigation of your finances to determine if you're complying with the tax code. Audits can be frustrating and stressful, but if you've carefully separated your business and personal expenses, accounting for your business activity will be much easier.
"If [my] business expenses were commingled with all my personal expenses, not only would I have a hard time . . . calculating profitability, but I am concerned that in case of [an] audit I would have a harder time justifying my expenses," says Russell Rivera, president of Voice Wealth Management. "[When I keep] the worlds walled off from each other, I believe that not only am I being ethical, but I am also prepared in case of outside review."