I’ve worked as a freelance writer / independent contractor for well over a decade. Some years I do better than others with money management. Which in turn means that some years it’s a lot easier than others to complete my taxes. At the start of 2021, I’ve made a super simple change that will simplify my taxes immensely.
Operating as a Sole Proprietor Without a Business License
People often ask me what my business legal structure is. Am I registered as an LLC or DBA? Do I have an Employee Identification Number (EIN) or do I just use my Social Security Number (SSN)? The answers varied over time. At one point, I was working with a partner, and we had a small business that we operated as an LLC. For the most part, though, I just work as an independent contractor and use my SSN.
Business and Personal Finances
For the most part, working for myself hasn’t required me to do anything in particular business-wise. I’ve never earned enough or had enough assets that it was worth separating my personal and business lives financially. When I file my taxes, I claim the percentage of my home that I only use as an office. I list my business deductions and obviously don’t claim the personal ones. It’s generally fairly simple.
Separating Business and Personal Expenses
However, there is one thing I’ve done all these years that makes tax time a bigger headache than it needs to be. Although I separate out my personal and business expenses for my taxes, I don’t do it throughout the year. In other words, come tax time, I have to go back through and work out all the numbers for the whole year.
Sometimes, I’ve managed to stay on top of it and do this monthly. But either way, it’s still an ordeal. It requires me to go line-by-line through my checking account and multiple credit cards. I have to figure out whether each expense was business or personal. Then I have to tally it all up. It’s not difficult. However, it’s tedious.
Separate Credit Cards for Work and Play
So, that’s why this year I decided to do something so simple it’s ridiculous that I haven’t done it before. I went through my credit cards and figured out which ones were the best to use for different types of expenses. I factored in their credit limits, interest rates, and rewards. Then, I chose two credit cards for all expenses: one for all business expenses and the other for all personal expenses.
Now each month when I get my credit card statement, I can easily pull out the one card that’s all business expenses. Every single item on that card will get put to use at tax time. And all of the personal expenses won’t. Sure, I’ll still need to look closely at some things. For example, determining if a cost was for travel or office supplies. However, it’ll all be in one place now.
As a bonus, the separation of personal and business finances also assists me with better budgeting in both areas.
Why Didn’t I Do This Sooner?
The main reason was because I had quite a few things that automatically paid to various credit cards. For example, I autopay my phone, Internet, and various other services on different cards. Therefore, I had to go through and figure out which were business expenses vs. personal expenses then update the payment data on each of those accounts with the appropriate credit card information.
Obviously, though, that’s a heck of a lot simpler to do once than to sort through every single month. So, now it’s done. And I expect that come tax time, my financial life is going to feel a whole lot easier.
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