Freelance Finance: Separating Personal from Professional
Here at The Savvy Newcomer we understand that it can be intimidating to talk about money. It’s often a sticky subject, but we feel it’s the first order of business for small business owners. One major component of succeeding as a freelance translator or interpreter is managing your finances well. If you don’t master your money, your translation career won’t be profitable or sustainable. This series on money matters is intended to get right to the heart of some of our biggest questions about freelance finances; we won’t shy away from the tough questions and we invite you to dive into these topics along with us.
In this installment of the Freelance Finance series, we’ll discuss the topic of separating the personal aspects of your finances from the professional ones. This involves more than just having two bank accounts, but it doesn’t need to be complicated.
Why to separate personal from professional
Keeping your personal money separate from your professional money is similar to keeping your work life separate from your personal life; if you aren’t careful to set out clear boundaries and maintain them, one will start to creep into the other. It’s like how if you don’t plan ahead, you may end up taking work phone calls at 8:00 p.m. or taking a nap in the middle of the afternoon. It’s not easy to separate these two aspects of your life, but it’s worth it!
One clear and obvious reason to keep personal and professional finances separate is liability; if a client were to pursue legal action against you individually, are you confident that they would only be able to access your business-related funds and reputation, or would this bleed into your personal liability as well? If you were sued, having separate finances could be the difference between losing your life savings and losing a much smaller chunk of business capital.
Another rationale for keeping personal and professional finances separate is organization; it’s hard to know how much money your business is taking in (or spending) if you’ve got other non-business-related funds mixed in. If you wanted to get a mortgage and the bank asked you to prove your business income, would you be able to quickly and easily prepare a Profit and Loss statement, or would you have to muddle through the charges for coffee dates, charitable giving, and your latest vacation before finding the earnings you brought in for translation or interpreting work? It’s also helpful to have separate finances when you prepare your taxes each year, and depending on what type of business entity you set up (a corporation, for example) you may be legally required to keep money from your company separate from your own personal funds.
What to separate
What aspects of your finances should be separated between personal and professional? The first is your bank account. The quickest and easiest way to separate out which income and expenses are from your business versus personal money is to create two different accounts that will list them each separately for you. Each bank may have different guidelines to follow for business accounts (you may need to have an LLC, or use a particular name for the business account) as well as different fees and perks. The best way to find out what your bank can do for you is to set up a meeting to ask them about your options.
Other financial products can be separated between personal and financial also; for example, you could allocate certain expenses as business-related by paying for them on a separate business credit card. Lots of business cards come from the same companies that make your personal credit card but may have different perks and rewards systems; mine has a robust travel rewards system, which I love!
To separate your personal liability from professional, consider setting up an official entity based on the state or country in which you live. Limited Liability Companies, for instance, tend to be relatively easy and inexpensive to set up and require little ongoing maintenance in the form of tax filings and fees. Corporations, on the other hand, may require more time and money to set up at the outset but could offer further separation of liability and other tax benefits. Talk to an accountant or lawyer to determine the best option for your business.
How to separate your finances
It can be challenging to separate your personal and professional finances if you’re doing so for the first time. How do you know which home expenses are business-related versus personal if you have a home office but also live there? Is your phone primarily a business device or a personal one? These questions are best answered by a tax professional when it comes to claiming deductions, but from the perspective of where the funds should come from, ask yourself the following questions:
- Do you use the product or service primarily for business or personal use? (e.g., I use my home internet for business use 8 hours a day so I pay for it from my business credit card… and they happen to offer higher rewards for these expenses!)
- When you buy the service or product, will you benefit more from it personally or professionally? (e.g., I may use Adobe Acrobat software occasionally to open non-business PDFs, but the primary benefit is for my company so I pay for the service using my business bank account.)
- For what purpose did you initiate the purchase? (e.g., I bought a new computer because I wasn’t as productive at work using my old, slow laptop, so I purchased it using business funds.)
Sometimes it will be tricky to determine which expenses are for business and which are personal. For instance, when I went on a trip to the Dominican Republic, it wasn’t considered business travel since I was going to the beach and not visiting clients, but the wi-fi I paid for in order to have access to email at the hotel was a business expense. Similarly, food expenses while traveling or working may be either business expenses or personal ones. And when it comes to tax deductions, the tax codes change from time to time, so you’ll want to work with an accountant who is aware of the latest tax breaks you can claim.
Transferring between the two
At some point you’ll need to exchange money between your personal and professional finances; your personal money comes from the proceeds of your business, after all! Taking money out of your professional account to set aside as personal funds may involve a biweekly paycheck or bank transfer from your business account to your personal one, based on how much money you’ve earned and how much you need to keep in the business account. On the other hand, you may also want to contribute funds from your personal bank account to the professional one; this is especially true when you are getting started or when you wish to make a large purchase that may not be covered by the funds you keep in your business account. The rules governing these owner contributions and draws between personal and business accounts will vary depending on your business entity, bank, and location; ask a professional what best practices you should follow depending on your situation. One thing we can recommend to everyone is to always keep track! Whether it’s a spreadsheet or accounting software, make sure to record any income and expenditure of funds to and from each of your accounts so you can be sure you know where your money is and account for any questions that may arise.
When in doubt about whether something is related to your personal or professional finances, always ask a professional. Tax professionals can tell you what is suitable for deductions, business expenses, and other tax-related issues based on where you live. Legal professionals can tell you what is suitable depending on the type of business entity you have formed.
Stay tuned for more finance topics! And as always, comment below if there are any topics you’d like to learn more about.