Do I need a business bank account if I’m self employed?

When you’re self employed, you are your business in the eyes of the IRS. As you can imagine, that makes untangling your business and personal affairs a bit tricky, especially if you’ve been a bit lax on the subject so far. If a freelancer and their business are one and the same, many self employed folks are left wondering: “Do I need a business bank account if I’m self employed?”

The short answer is, no, you don’t need a business bank account for freelancing. In fact, you can easily use a personal bank account for a sole proprietorship for years without any problems. but, there are benefits to having a separate bank account if you’re self employed.

While there are millions of us self employed folks out there, there’s unfortunately little information out there about how to manage your bank accounts when self employed. That’s where we come in.

Up next, we’ll talk discuss if you can use a personal bank account for a sole proprietorship and about the benefits of a business bank account for freelancers. Let’s get to it!

Do I need a business bank account for a sole proprietorship?

If your self employment business is set up as a sole proprietorship, you may be confused about whether or not you can keep using your personal bank account for your freelance business. Unfortunately, being self employed makes handling your finances a whole problem onto itself, so you may be thinking about opening up a business bank account for your freelance gig.

The question is: Do you really need to?

The fact of the matter is, there’s no law dictating that you need to open a business bank account to handle the finances of your sole proprietorship. Why is that?

Well, according to the United States Small Business Administration:

A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.

U.S. Small Business Administration

That means when you own a sole proprietorship, there’s legally no distinction between you as an individual and the business you run. In the eyes of the IRS, you and your business are taxed together as the business’ income is your own.

Thus, unlike another kind of small business owner, you don’t technically have to formally separate your personal finances from your business finances because they are one and the same.

The only exception to this rule is that you must have a separate business bank account if your sole proprietorship operates with a DBA (doing business as) name. For example, if your name is Frank Smith and your business is called “Frank’s Freelance Writing,” you need a separate business account.

Can I use my personal bank account if I’m self employed?

Okay, so we just said that you don’t have to have a separate business bank account if you’re a freelancer, but does that mean you can use your personal bank account if you’re self employed?

Well, we wouldn’t go that far. While, sure, you can continue to use that one checking account that you’ve had since you were 15 for your sole proprietorship, it’s not really recommended.

Especially if you freelance only as a side gig, using your personal bank account to handle your business income and expenses means everything will easily get tangled. When you have paychecks getting deposited and bills being paid for personal reasons outside your business into your bank account, it can be tricky to determine precisely what’s an expense and what’s income for your Schedule C at the end of the year.

So, what should you do about your bank accounts when you’re self employed? Well, you have two options:

  • Choose one of your personal checking and savings accounts to be solely for your freelance business (or open new personal checking and savings accounts for this purpose)
  • Apply for a business bank account

What are the benefits of a business bank account?

If you’re considering opening a business bank account for your freelance gig, you might be wondering what the benefits this kind of account offers for your business. Here are some of the top benefits of a business bank account for sole proprietorships:

  • Better organization of accounts. When you have one account that’s solely dedicated to the income and expenses of your freelance work, it’s easy to keep good accounting records. If you have a separate business bank account, you don’t need to worry about accidentally counting a W-2 paycheck as business income or your cell phone bill as an expense. Accounting simply becomes a whole lot easier.
  • More accurate tax filing. Tax season is already hectic, so why would you add to your stress by having a messy bank account situation. In the off chance that you’re audited, you want to be able to show the IRS that you’ve been doing everything by the books. Having a clear distinction between your personal life and your business makes this simple.
  • Increased awareness of your spending. No business ever got anywhere without spending, but you don’t want to consistently be in the red quarter after quarter. If your personal finances are mixed in with your business books in one bank account, it’s easy to overspend on your business’ dime.

Simply put, by separating your finances into separate personal and business accounts, you can avoid the headache that comes with inaccurate bookkeeping and messed-up taxes.

That being said, you don’t necessarily need to open a business-specific account, unless you have a DBA, partnership, LLC, or other business structure outside of a simple sole proprietorship. For many freelancers, using a regular ol’ checking account will do just fine – you just might want to have one for your personal business and one for your freelance work.

What is the Self Employment Tax?

Whether you’re new to freelancing or you’ve had a sole proprietorship for years, when you own your own business, you take on a whole new assortment of responsibilities when it comes to tax time. One of the most common questions we get from new freelancers is: What is the self employment tax?

The self employment tax (SE tax) is the fee that you pay to the federal government to cover the cost of social security and medicare when you’re self employed.

For many people, the self employment tax comes as a surprise, as it’s not something you’re used to paying when you work for someone else. Unfortunately, there’s also a lot of misinformation out there about taxes for freelancers, which is why we’re here to help clear the air.

Coming up, we’ve got your ultimate guide to the self employment tax, including information on what it is, how much you need to pay, and when you need to pay your self employment tax on your earnings. Let’s get to it!

What is the self employment tax?

As we’ve already discussed, the self employment tax is the amount that an individual pays to the federal government to cover their share of social security and medicare when they receive wages from self employment work. While this may seem like a “special tax” for freelancers, it turns out that employees pay it, too – it just happens to be withheld from their paychecks each month.

If you’ve ever received a pay stub from an employer, you’ll notice that there’s a deduction set aside for “FICA” taxes (Federal Insurance Contributions Act). These are the fees you pay toward social security (your federally sponsored retirement and disability insurance) and medicare (health insurance for older folks).

When you’re employed by a company, 6.2% of your paycheck is withheld for social security benefits while an additional 1.45% is withheld for medicare (as of 2019). As an employee, your federal income tax is also withheld from your paycheck, according to the withholding rates you calculate on your W-4. This happens automatically, with no extra leg work on your part when you work for someone else.

When you don’t receive regular paychecks from an employer where taxes are automatically withheld, however, you need to pay your own taxes directly to the IRS. This is where the self employment tax comes in the picture.

How much is the self employment tax?

The self employment tax rate, as with all tax rates, changes frequently. In 2019, the self employment tax rate is 15.3%. Does this sound like a lot? That’s because it is.

In fact, if you do the math, the self employment tax (the sole proprietor’s version of FICA) is exactly twice the amount that an employee pays for the same services. How does that compute?

Well, it turns out that when you’re employed, your employer has to pay half of your FICA taxes. This means that the actual FICA tax for individual employees is 15.3%, but your employer pays half of what you owe for you. You would never know this based on your pay stubs, which is why the self employment tax is such a surprise to new freelancers.

Who needs to pay the self employment tax?

At this point, you’re probably asking yourself: Do I need to pay the self employment tax? Here’s the IRS’s answer:

You must pay self-employment tax and file Schedule SE (Form 1040) if either of the following applies.
1. Your net earnings from self-employment (excluding church employee income) were $400 or more.
2. You had church employee income of $108.28 or more. (2019)

Basically, if you’re not a church employee and you made more than $400 in self employment or freelancing income this year, you’re liable for self employment taxes. So, if you sold $399 worth of earrings on your Etsy shop, you’re off the hook. Otherwise, you need to pay up.

That being said, there are special rules for certain freelancers, especially people who work as family caregivers. You can learn more about those special rules here.

Do freelancers pay more in taxes than employees?

Now that you know how much more you need to pay in self employment tax as a freelancer, you might be wondering if freelancers pay more in taxes than regular employees. The unfortunate truth is that, yes, freelancers almost always pay more in taxes than employees.

Since freelancers need to pay both the additional self employment tax and their regular income tax based on their income level, they do, on average, end up paying more in tax than regular employees. Generally, most accountants recommend that freelancers plan to put aside upward of 40% of their income (even more if you’re a high earner or if you live somewhere with high state taxes) toward taxes each year.

When you compare this to a regular W-2 employee, this is quite a bit more. The main difference between a W-2 employee and self employed individual, however, is that the freelancer needs to pay that extra 7.65% toward the self employment tax that the W-2 employee gets paid for them.

What is the self employment tax deduction?

While it is true that freelancers pay more, on average, than a W-2 employee in taxes each year, there are quite a few tax breaks that freelancers can take advantage of, if they’re in the know.

Perhaps the most important tax deduction for freelancers, at least when it comes to the self employment tax, is the aptly named “Self employment tax deduction.”

What is this mysterious deduction, you might ask? Basically, it’s a way to deduct the amount of extra money you’ve had to pay in self employment taxes (when compared to a W-2 employee) from your overall income.

Basically, you can deduct half of what you paid in self employment tax for the year from your total adjusted gross income on your Form 1040. This means that if you made $100,000 this year from all of your income sources and paid $5,000 in self employment tax, you can adjust your total income to be $97,500 thanks to your new $2,500 deduction.

Since this is a deduction and not a credit, this tax break doesn’t directly decrease the amount you owe. Rather, it reduces your taxable income that’s used to figure the overall amount of federal income tax you need to pay.

Think of it as a small break for paying more than other folks, not a complete reparation for the extra money out of your wallet just for being entrepreneurial.

How do I pay the self-employment tax?

Unfortunately, many people begin their self employment career totally unaware of the self employment tax. As you can imagine, this comes as quite a shock to many new freelancers come tax time.

In fact, If you don’t pay your taxes during the year and you owe more than $1000 come tax time, you actually might get another fee slapped on top of the amount you owe. Ouch.

The solution? Don’t let this be you. Pay your self employment tax throughout the year as a part of your quarterly estimated taxes (more on this in another article).

How do you pay your self employment taxes? It’s actually quite easy, though there are a number of different ways to do it.

By far, the easiest way to pay your self employment and quarterly estimated taxes is through the government’s Electronic Federal Tax Payment System (EFTPS). This is a completely free service provided by the US Department of Treasury and it’s pretty simple to use.

To pay your taxes through the EFTPS, you’ll need to make an account. While making the account itself doesn’t take much time, you’ll need to receive a PIN in the mail, which takes a while. So, plan ahead and do this well ahead of the tax deadline for your quarterly schedule.

You can even connect your EFTPS account to your Quickbooks Self Employed account for any easy way to pay your estimated taxes. Since Quickbooks Self Employed estimates your tax payments for you, this is a super convenient, streamlined system for paying the feds on-time each quarter.

Another method for paying your self employment tax is to use the IRS Direct Pay system. Direct Pay allows you to pay your estimated taxes straight from your bank account.

Alternatively, you can use the IRS2Go Mobile App to pay your estimated taxes, check your tax refund status, or find free tax preparation assistance. This app works well on both Apple and Android devices, so it’s pretty handy. You will need to verify your identity before using it, though, so have your last two tax returns handy to get started.

Self Employment 101: 5 Business Essentials

Start your business off right with our top 5 tips for new freelancers!

Congrats! You’ve finally shed the confines of traditional 9-5 corporate living and have decided to embark on your own occupational journey as a freelancer. Being a freelancer opens up a whole new world of opportunity for you, both personally and professionally, as it allows you to control your hours, set your schedule, and do the work you love to do.

But, as a new freelancer, it can be tricky to navigate the world of owning a business, working through the murky tax code, and getting ourself organized. That’s where we come in.

Whether you’re new to the world of self employment or you’ve been living large in the gig economy for some time, we’ve got our top ten five to make the most out of your freelance business right here:

1. Brand Yourself

Now that you’re on your own, you need to market yourself and your skills. Why should a potential client hire you over the hundreds, if not thousands, of other freelancers in your industry?

As a freelancer, you are your own company, so how are you going to make yourself shine? Self employed business owners are solely responsible for turning themselves into a trustworthy brand, so it’s time to get your name out there.

First things first, you need to figure out precise what you offer to clients that they can’t get anywhere else. Then, you need to determine how you’re going to express this to the world. What’s your tagline? What makes you amazing?

2. Start a Digital Presence

These days, you’d be hard-pressed to run a profitable new business without some sort of online presence. Whether it’s a formal website or a collection of social media profiles, you need to find a way to get the word out about what you can do.

If you’re not technologically savvy, this news might make you feel a bit queasy. The good news? You don’t need to be a prolific coder to get out and create a stunning website that attracts prospective clients.

Thanks to the plethora of different website building platforms and tools out there, it’s totally possible to create a beautiful online presence with minimal effort or background knowledge.

Still not certain about your ability to create a quality website? There are plenty of people out there that can help. Hire a fellow freelancer or a website development firm to make your online presence positively pop off the screen.

3. Be Your Own Accountant

Small business owners (yes, that’s you!) need to track their own revenues and expenses, so you’ll need a system in place to make that happen. While some people try to put off this “formal accounting” for as long as possible when starting out in the freelance game, there’s nothing worse than creating your own financial mess that you’ll then have to sort out come tax time.

Our advice? Get started on your own accounting, right away. Whether you’re bringing in $10 a week or $1000 a day, everyone needs to be on top of their finances.

The good news is that you don’t necessarily need to go out and hire a professional accountant to keep track of your cash flow. While this is certainly an option (and perhaps the best choice for some folks), many freelancers can and do manage their own finances with the help of accounting software like Quickbooks Self Employed.

Check out our top software choices for freelancers here!

4. Organize Your Portfolio

Unless you’re already a bigwig in your industry, no one in their right mind will hire you just because you say you’re an expert. You need to prove it.

The best way to strut your stuff in the freelance world is to create a portfolio that displays all of your finest work in one place. Of course, this is easier for those of us who operate in fields such as photography, design, and writing, but it’s certainly possible for folks in other industries.

Often, your website is the best place to display your portfolio, though you may find that you want to create a number of smaller portfolios to encourage people to learn more about you. Facebook, Instagram, and other platforms are a great way to create “mini portfolios” that link back to your website and contact information.

5. Get Clients

As a new freelancer, clients won’t just come to you. Almost always, freelancers start our their self employed life by applying to a seemingly endless series of jobs, hoping that, one day, someone will bite.

While this might sound mildly demoralizing, it’s just how things work in the current gig economy. The secret to success? Learn how to distinguish yourself from the rest and never stop trying. After that 100th application with no callbacks, it may seem like all hope is lost, but you have to persevere.

Depending on your industry and specialization, you might have luck with certain platforms, such as Upwork, that cater specifically to clients looking for freelancers to work long-term and short-term gigs. Others might find that networking through LinkedIn or word of mouth is more prosperous in the end.

Essential Software for Freelancers: Our top 5 picks

Use technology to power your work

As a freelancer, you’re on your own to organize your financial life and optimize your business. Unless you already have an MBA, past experience running a Fortune 500 company, and nearly unlimited financial resources at your disposal, at some point, you’ll need to find ways to do all of the jobs that HR and accounting departments do for you at a regular workplace.

Thankfully, there’s an abundance of technology at your disposal to help you get the most out of your freelance business. Whether you need a simple way to do your accounting, a surefire web host to publish your website, or help doing your annual taxes, there’s software out there for you. Here are our top picks:

1. Accounting Software: Quickbooks

We talk about Quickbooks so often, you might be wondering if it’s all a scam. The cold, hard truth is that Quickbooks has helped us organize the horrible mess that was our business finances, getting them to a place where it’s all more or less automated and ready to go.

Quickbooks consistently provides some of the most user-friendly and intuitive accounting software for freelancers, so we have no problem recommending it as one of our top picks. Depending on the type of business you own (whether you’re classified as a sole proprietorship, S corp or, LLC), there’s a different Quickbooks software out there for you.

The best choice for freelancers? It’s hands-down Quickbooks Self Employed, which makes it easy to separate your personal and business finances with just the click of the button. Plus, Quickbooks Self Employed helps you track mileage, store receipts, and even calculate your estimated quarterly tax payments to help you stay on top of your current financial situation.

If all of that wasn’t good enough, Quickbooks Self Employed even has a number of different bundle options available that let you quickly and instantly connect your TurboTax account for a seamless process come tax time. What’s not to love?

2. Tax software: TurboTax

Long a staple of the do-it-yourself tax software industry, TurboTax is our top choice for a freelancer’s tax software. These days, TurboTax offers a variety of different products, each designed to meet the needs of a different individual, whether they be military, small business owners, or freelancers.

For freelancers, the best TurboTax software is the self employed program, which makes it easy to file that Schedule C at tax time. That being said, we HIGHLY recommend using TurboTax Self Employed Live, which allows you to connect directly with a CPA or tax lawyer who can answer your questions at any time – even when it’s not tax season.

Unless you’re already a tax professional, these awesome folks at TurboTax can make it easy to sort through the ridiculous amount of tax legislation that affects freelancers every year. If you want to get really fancy, though, you can sign up for the TurboTax Self Employed Live/Quickbooks bundle and save money by getting these two great softwares all at once!

3. Personal Finance Software: Mint

Okay, okay, at this point, you’re probably starting to wonder if this whole website is just a cover for Intuit to advertise their services, but we swear we’re legit! We just really love Intuit’s suite of different finance softwares!

Unlike both Quickbooks and TurboTax, Mint is a totally free personal finance software that makes it super easy to stay on top of your current financial situation. To get started on Mint, all you need is to make an Inuit account or log in to the account you use for TurboTax and Quickbooks.

From here, you can securely connect your bank accounts, credit cards, and investment accounts to get a bird’s eye overview of how you’re doing financially. Mint even lets you get unlimited access to your credit score and sends you alerts if anything changes.

Oh, and it’s 100% free, so you really have no reason not to sign up!

4. Invoicing Software: PayPal

If you accept payments digitally, there’s no better service than PayPal. Long thought of as the domain of avid eBay shoppers, PayPal has reinvented itself into one of the most reputable brands of invoicing and digital payment processing software around.

With PayPal, small business owners can quickly and easily create and send invoices and estimates to clients anywhere in the world. Plus, you can set up your PayPal business account to accept payment in nearly any foreign currency, opening up your business to a world of possibilities.

If you still wanted more from your invoicing software, PayPal allows for easy eCommerce integration as well as the ability to accept credit cards in-Person with its POS payment systems. Oh, and PayPal offers reasonable rates for most of its transactions, keeping more money in your pocket.

5. Project Management Software: Trello

At some point in our lives, we’ve all missed a deadline. But, as a freelancer, your reputation is everything, so you can’t risk upsetting your clients. Make it easy to manage your projects and stay on top of your game with Trello, one of the best project management software options for freelancers.

Trello offers a variety of different membership options, but with a free plan, you can quickly and easily create to-do lists and track projects toward their completion. Plus, you can invite others to collaborate with you on projects, helping to keep your clients informed of your work, every step of the way.