If you’re a freelancer, you likely have many concerns including finding new clients, discovering ways to increase your productivity (and your rates) as well as not letting work take over your life. However, don’t forget about proper accounting procedures.
Often freelancers start working on the side, and gradually, their part-time business can become their full-time job. When their work grows this way, they may neglect to take the proper steps to establish their business as a separate identity from their personal finances. If this has happened to you, here are some steps you can take to make the IRS happy and to avoid any future tax difficulties.
1. Establish a separate business account. Some people are reluctant to do this, especially in the beginning, because money from the business is already tight. However, don’t let this detract you from setting up your accounts properly. There are plenty of banks with free business banking. Just do your research, and you’ll find several banks offering this.
2. Consider establishing an LLC. The easiest way to operate your business is as a sole proprietor, but if you’d like to protect yourself and your finances from potential litigation, you may want to establish an LLC. Of course, this will depend on the type of work you do as well as the state that you reside in. Some states are extremely reasonable in their charge to set up an LLC while others are expensive.
3. Consider taking out a business loan. When your business is just starting up, you may be tempted to dip into your own savings or even retirement accounts to help support the business. However, you should keep your own money separate to protect your finances and to demonstrate the separation between personal and business finances for the IRS if you ever get audited. If you need cash, business loans can really benefit your business and relieve some financial pressure for you as the business owner.
4. Hire an accountant. Accountants aren’t as expensive as you might think, and a professional can let you know if any of your financial actions may increase your chance of being audited. Just avoiding an audit can make hiring an accountant worthwhile.
If your business has gradually grown, you may not have taken all of the proper steps to separate your business finances from your personal finances. However, just following these simple steps can help you avoid any potential conflicts with the IRS.