Separating Business and Personal Finances: A Money Setup for New Contractors

Separating business and personal finances means the business has its own bank account, its own card and its own records, and every dollar that moves between you and the business is written down as what it is. Set it up before the first job and tax time is sorting, not guessing. This lesson gives you the setup in five steps and a weekly routine that keeps it working.

This is general information about organizing your money, not tax or accounting advice. How your business and your pay are taxed depends on your structure and your situation. Take the questions at the end of this lesson to an accountant.

The SBA puts it plainly: “You’ll need a business bank account no matter what kinds of payment you choose.” Its launch guide says to open one as soon as you start accepting or spending money as your business.

Before you pick a bank, ask these questions:

Use the business card for business purchases only, and your personal card for personal purchases only. If you slip, which happens, fix it the same week:

• Business purchase on a personal card: keep the receipt and pay yourself back from the business account the same week. Write “reimbursement” and the receipt’s date on the transfer.
• Personal purchase on the business card: pay the business back from your personal account the same week.

Ask your accountant how they want these recorded in your books, so it’s done the same way every time.

The rule isn’t about being neat. Every mixed transaction is one you’ll have to explain later.

The IRS says you may choose any recordkeeping system suited to your business that clearly shows your income and expenses. It lists the supporting documents to keep, including records of gross receipts, purchases, expenses, travel and transportation, assets and employment taxes. For expenses, its examples include proof of payment, cash register receipts, account statements, credit card receipts and statements, and invoices.

A routine that works in a truck:

1. Photograph every receipt the day you pay it, before it fades or blows away.
2. Write the job name on it, or in the photo’s note, if the cost belongs to a job.
3. Keep the photos in one place: one folder, one app, not your camera roll.
4. Keep invoices you send in the same system, numbered in order.
5. Tag each receipt with a category. A starter list: materials, tools and equipment, vehicle and fuel, insurance, licenses and permits, subcontractors, phone and software, marketing. Your accountant may want different categories; agree on them once.
6. Keep a mileage log if you use one vehicle for work and personal driving: date, start and end point or miles, and the business purpose of each trip. The IRS lists travel and transportation expenses among the records to keep; ask your accountant how your vehicle use will be handled.

How long to keep them: the IRS’s general rule is 3 years, with longer periods in some situations. Two matter for contractors: employment tax records for at least 4 years after the tax is due or paid, whichever is later, once you have employees; and for property such as a truck, tools and equipment, the IRS says to generally “keep records relating to property until the period of limitations expires for the year in which you dispose of the property.” In practice: keep equipment receipts for as long as you own the equipment, and then some. Ask your accountant which periods apply to you.

Two kinds of money move between you and your business, and neither is a sale or a normal expense:

• Money you put in (often called an owner contribution): for example, your savings moved into the business account to buy equipment.
• Money you take out: what you move to your personal account to live on. Depending on your structure it may be an owner’s draw or a salary through payroll.

Record each one as what it is, with the date and amount. How they’re treated for tax depends on your business structure, so ask your accountant how to record them in your setup.

Example: a cleaning business buys equipment with the owner’s savings
The owner moves $1,200 of savings into the business account, and the business buys a commercial vacuum and supplies for $1,200.
That’s two records, not one: owner contribution $1,200 and equipment and supplies purchase $1,200.
If it’s recorded as one purchase with no contribution, the books show money that came from nowhere.
The numbers are an example. The startup budget guide shows how to plan purchases like this before you make them.

Three habits that keep this simple:

• Pay yourself on a schedule, for example a fixed amount every two weeks, instead of taking money whenever the account looks full. Your accountant can tell you how this works for your structure.
• Set aside money for taxes before you pay yourself, in a separate savings account. The IRS says individuals, including sole proprietors, partners and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed, and that estimated tax covers self-employment tax too. Ask your accountant what share of each payment to set aside and when to pay.
• Treat a materials deposit as the materials’ money. If a customer pays a deposit for materials, buy the materials before that money goes anywhere else.

The SBA says to consider hiring a certified public accountant (CPA), a bookkeeper or an online service, and notes that a bookkeeper can provide basic day-to-day functions at a lower cost. Starting out, a common split is:

Whoever does it, the books should be up to date at least once a month. If you use a bookkeeper, hand over the same three things every month: the bank and card statements, the receipt folder, and the list of invoices sent and paid.

Pick the same time every week, for example Friday afternoon, and go through this list. It’s the “keeping records” line of your business plan in practice:

1. Match this week’s receipts to the bank and card transactions
2. Send invoices for every job finished this week
3. Follow up on every invoice that’s past due
4. Check the cash balance against the next four weeks of bills
5. Move the tax set-aside to its savings account
6. Pay yourself, if it’s a pay week

A simple four-week cash view makes the fourth item take two minutes. Decide first the minimum you want in the account at all times; in this example it’s $1,500:

Example numbers. Week 2 is the one to watch: nothing comes in and the balance ends at $1,100, below the $1,500 minimum. Seeing it at the start of week 1 gives you a week to chase an invoice that’s due, ask for a deposit on the next job, or move a purchase to week 3.

• With my business structure, how should I record money I put in and take out?
• What share of each payment should I set aside for taxes, and when are the payments due?
• Which records do you want from me, how often, and in what format?
• Which purchases should I keep extra proof for, such as tools, equipment and vehicle use?
• What bookkeeping software do you work with?
• What should I have ready before our year-end meeting?

This week:

1. Ask two banks the questions in step 1 and open the business account.
2. Set up one place for receipt photos and photograph every business receipt from now on.
3. Record any money you’ve already put into the business as an owner contribution.
4. Put the weekly money hour in your calendar, on the same day and time every week.
5. Book a first meeting with an accountant and bring the questions above.

The SBA says you’ll need a business bank account no matter what kinds of payment you choose, and to open one as soon as you start accepting or spending money as your business. A separate account also keeps your business records clean, whatever your structure.

Money you take out of the business for yourself. Whether it’s called a draw or pay, and how it’s taxed, depends on your business structure. Record every transfer with the date and amount, and ask your accountant how to treat it.

It depends on your income, your structure and your state. The IRS says individuals, including sole proprietors, partners and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. Ask your accountant for a percentage to set aside from every payment, and move it to a separate account each week.

MotionOps is field service software for contractors that keeps job money in one place: AI Receipt Capture reads supplier receipts, Field Expense Tracking records costs against each job, and Invoicing & Payments tracks what’s billed and paid. It also syncs clients, invoices and payments to QuickBooks Online for your bookkeeper or accountant.

See all features or compare plans. When you’re ready for your first jobs, book a MotionOps demo.

Contractor Starter Hub: Start Your Contracting Business, lesson 4 of 5

• Previous lesson: Contractor License Requirements: Licenses, Permits, Insurance and Bonds, Explained
• Next lesson: How Much Does It Cost to Start a Construction Company? Build Your Launch Budget and Checklist
• All five lessons: Start Your Contracting Business