- Self-employment is like running a business. You’re in charge of everything, which includes balancing the books and paying your own taxes.
- If you don’t pay your estimated quarterly taxes correctly, you could get hit with a huge penalty from the IRS.
- Getting set up with a business checking account, business credit card, and accounting software completely changed the way I do business, and I honestly wish I would have done it sooner.
- See Business Insider’s list of the best small-business credit cards »
During my first year of self-employment, I’ll admit I was flying blind. I made a lot of mistakes that year, the most costly of which was not getting my finances properly set up. When you’re self-employed, you’re running a business — even if it’s just you.
When tax season finally rolled around at the end of my first year, I spent countless hours trying to sort through income from dozens of different clients and comb through bank statements to figure out which expenses, if any, I could deduct. Once I finally got that headache sorted out, I filed my taxes and breathed a sigh of relief.
That is, until I was hit with a massive penalty for not paying my estimated quarterly taxes.
As you may already know, if you’re an independent contractor rather than a full-time employee, taxes aren’t taken out of your paycheck each month. If you make over a certain income level, the IRS wants you to pay your taxes on a quarterly basis, based on an estimate of what you think you owe. Basically, they don’t want to wait until next year to get their money.
Between quarterly estimated taxes, juggling payment from multiple clients, and business deductions, taxes can get sloppy when you’re self-employed. I learned after filing my earnings from my first year the importance of separating your personal and business finances and keeping track of your income and spending.
Several years later, I can genuinely say that doing my self-employment taxes is a breeze. Here are my three favorite products that help me get through tax season unscathed.
A business checking account
Separating your finances is a must when you’re self-employed. While you aren’t legally required to have a business checking account as a sole proprietor, (you are required to keep business and personal money separate as an LLC or corporation), opening one is the best way to keep your finances organized.
For one, having a separate checking account for your self-employment income and business expenses simplifies your taxes and saves you hours of sorting through jumbled-up charges. It also lends you some extra credibility as a business owner, and seeing your business’s earnings and expenses all in one place makes it easy to assess your performance.
Finally, if you registered as an LLC to protect your liability, intermixing your business and personal finances can demonstrate to a court that there isn’t a clear line between the two, and someone could come after your personal assets more easily.
I opened a business checking account with Chase because it was offering a $300 cash sign-up bonus if I deposited $1,000 at the time. The process was about as quick and easy as opening a checking account, and because I’m a sole proprietor, I didn’t need to present much in the way of additional paperwork. This account does charge a $12 monthly fee, but I’m able to get it waived by maintaining a balance of at least $1,500 in my checking account.
When comparing business checking accounts, you want to go with one that either has no monthly service fee or one that has a waivable monthly service fee, but only go with the latter if you’re certain you can meet the requirements each month to get it waived. Other traditional banks tend to require even higher minimum balances than Chase to get the monthly fee waived. However, a number of online banks and credit unions offer free checking accounts.
Axos Bank Business Checking and BBVA Compass ClearConnect for Business are two of my favorite low-cost business checking accounts, although your local credit union might offer a comparable option.
If you’re already a member of a credit union, it’s worth checking with them first to see what business checking options they offer.
Folks who are comfortable with doing their banking online will find that Axos Bank Business Checking is an excellent free business checking account. In addition to not charging a monthly fee, they also offer unlimited ATM fee reimbursements. You do have to make an initial deposit of $1,000 to open an account.
For those who prefer to have access to physical branches and require a lower opening deposit, the BBVA Compass ClearConnect for Business account has no monthly fee and can be opened with just $100.
If you need an account with a $0 minimum opening deposit requirement, Capital One’s 360 Checking is a simple, free, online-only personal checking account that will get the job done. You can always open a second personal checking account for your business finances, as long as you’re okay with using your personal rather than business name and don’t need business account features like employee debit cards.
A business credit card
While I use my business checking account for practical purposes, my business credit card adds some fun in the mix in the form of lucrative rewards.
It’s worth mentioning that I don’t use credit cards to finance my business because the interest rate isn’t favorable. I pay mine off in full every month. What I do use it for is award travel.
I’ve been using credit cards to travel hack for years now, and my all-time favorite is the Ink Business Preferred Credit Card for its flexible, high-value rewards and massive sign-up bonus.
Chase’s Ultimate Rewards program is one of my favorite rewards programs because the points are consistently worth at least 1.25 cents each (or 1.5 cents each if you have the Chase Sapphire Reserve) when you redeem them for travel through Chase, and I can use them to book a variety of different travel experiences or transfer them to one of my favorite airline or hotel loyalty programs.
With the Chase Ink Business Preferred, you’ll get 3 points per dollar on your first $150,000 in combined spending on travel, shipping, internet, cable and phone, and select advertising purchases. You’ll also get a massive 80,000-point sign-up bonus if you spend $5,000 in the first three months.
That means if you earn the sign-up bonus and your business spends $1,000 per month within the bonus categories, you’ll earn 116,000 Ultimate Rewards points — worth a total of $1,450 in travel spending.
There are plenty of other excellent business credit cards, including some that earn cash back, others with premium perks like airport lounge access, and a few with no annual fee. Your business card might also come with benefits like auto rental insurance, extended warranty protection, and purchase protection. Plus you’ll be building your business credit, and most business credit cards don’t appear on your personal credit report.
The best way to use a business credit card is to find one that fits your spending habits and pay it off in full each month. When it comes time to browse your business expenses, you’ll find them all in one place.
Accounting software for the self-employed
Once you’ve split up your finances, it’s time to track them. Luckily, there are plenty of low-cost options for accounting software geared toward the self-employed so that you don’t have to do this manually.
These programs are particularly useful when it comes time to file your quarterly taxes, as it’s up to you to estimate how much you owe. If you’re off by too much, you could end up paying a penalty during tax season.
I use QuickBooks Self-Employed because it’s affordable and integrates seamlessly with TurboTax, which I use to do my taxes.
Your expenses and income are automatically imported and categorized after you link your various bank accounts and credit cards. You can then automatically export all your financial data directly to TurboTax Self-Employed, calculate your deductions, and pay your quarterly taxes online.
I got it at a $12 per month for the first three months and then $17 per month after that. If you want just QuickBooks Self-Employed, it costs $5 per month for the first three months and then $10 per month after that.
Xero also offers cloud accounting software for small business owners and folks who are self-employed. They have several different plans depending on your needs, from a very basic plan that’s slightly cheaper but less capable than QuickBooks Self-Employed up to a $60 per month plan with features like the ability to work in multiple currencies and track project time and costs.
When I started my journey into self-employment, taxes were right at the top of my list — alongside healthcare — of things that made me feel stressed, lost, and confused. I’m not going to tell you I love doing my taxes now, but I no longer worry about them, nor do I spend days trying to sort them out.