Mixing Personal and Business Expenses Is More Than a Tax-Time Headache — Here’s Why (And How to Fix It)

Everyone knows that it’s bad form to mix business and personal expenses. Categorizing those expenses can be very time-consuming come tax season, especially if you’ve been ignoring them all year. But mixing personal and business expenses actually comes with more costs than just tax season headaches.

Billing personal expenses to your business account (or vice-versa) can lead to incorrect assumptions about the financial health of your business. So if you’re struggling to keep them separate even though you know it’s a problem, we are here to help.

In this post, we detail a few key reasons to separate expenses that many business owners overlook, along with some tips for keeping them separate, and how to know when to open a business account if you don’t already have one.

At Pilot, we have a team of expert bookkeepers using unique tools to automate the most error-prone aspects of bookkeeping. If you want to keep better books, Try Pilot Now.

Problems with Mixing Personal and Business Expenses

Technically, you can use the same account to fund personal and business expenses. In a pinch, it could be a fast way to cover an expense. And if you are absolutely meticulous about categorizing expenses as business or personal with every single receipt, this system could work for you.

But if you’re not perfect — or your business is growing faster than you imagined — that system breaks down in a hurry. If you’ve used a “spend now, categorize later” approach, the problems could will go well beyond tax season.

Problem #1: Inaccurate Financial Picture of Your Business

Your bookkeeping should reflect the performance of your business.

Let’s say you have a lot of meals coming out of a business account. That could make it look like you’re spending money on meetings with clients and growing your business. But if these meals are actually personal expenses, you could be getting an incorrect picture of what’s going on in your business.

Missing or inaccurate information can lead you to underestimate or overestimate your burn rate, overspend, misallocate funding, or otherwise make unwise financial decisions. You’ve got to make sure your books are up-to-date and accurate, so your financial decisions are based on fact.

Problem #2: Less Time to Run Your Business

Your expense tracking shouldn’t take you hours.

If you can’t check on the status of your expenses at a moment’s notice, you’re stuck in a state of expense reporting limbo. You’ll struggle to understand how much money you really have available (Problem #1). In turn, that impacts your ability to make business decisions, like whether to purchase office furniture or hire an employee.

Manually categorizing expenses means taking time out of your day every time you make a purchase. At minimum, you’ll need to spend hours at the end of each month going through your financial records, categorizing transactions, and determining whether you owe your business money or if it owes money to you.

Problem #3: Losing Track of Reimbursements

You shouldn’t spend all your time reimbursing people.

If you aren’t using a business account and card for employees or co-founders, reimbursement gets tricky. It requires you to recall specific expenses and track down receipts from everybody. Also, it takes time to go through this process, which may not work for employees who want to be reimbursed right away.

Startups with multiple business partners frequently run into the reimbursement problem. By paying out expenses on personal cards and anticipating that the business will cover these transactions later, you set the stage for a potential conflict that could have been avoided.

How to Keep Business and Personal Expenses Separate

First things first: Make sure you set up a business bank account and get business credit cards (we often recommend Brex for growing startups).

But getting a business account and cards isn’t the end of the story. You also need to make sure you develop the right processes and put the right tools in place so you can effortlessly keep business and personal expenses separate. Here are some tips:

 
• Split up the cards. Make sure that all business cards are solely for business use and all personal cards are solely for personal use. There should be no questioning whether a purchase on the business card was for personal use. If anyone does accidentally use a business card for a personal expense, have them write it down immediately and notify whoever manages expenses at your business.
 
• Monitor your accounts with bookkeeping software. Pilot, for example, keeps all bookkeeping information in QuickBooks Online. We’ll set up rules to automatically categorize common expenses. If something out of the ordinary comes up, we work with our clients to create a new rule to categorize it automatically.
 
• Schedule regular reviews for upkeep. Once you’ve streamlined the process, the reviews can be as easy as a quick glance at your monthly expenses. But it’s still essential to check-in and make tweaks every so often to keep your expense-tracking system in shape.
 
• Work with a bookkeeper. Try to find a bookkeeper who can identify any issues and help you build an infrastructure for monitoring business and personal expenses in the future.
 
• Get a tool like Expensify to upload and categorize receipts. Sure, you could keep a big stack of receipts on your desk, but that’s definitely not the best way to build a scalable system for the future. We recommend Expensify to our clients so they can store receipts and manage expenses online.

What to Do If You Already Mixed up Transactions

If you’re already sitting on a list of transactions that need “personal” vs. “business” tagging, it can be a very manual, labor-intensive process that requires you to recall transactions from a long time ago.

Unfortunately, there’s no easy way out. Working with a bookkeeper can ease the process, but it’s still up to you to do the best you can with the information you have. Looking at your calendar to match events up with purchases is a good place to start. You may find it helpful to review the deductible business expenses guidelines to fully understand what you need to evaluate.

Once you have the existing expenses on your books properly categorized, you can implement the solutions above for future purchases.

How Do You Know If You Should Have a Separate Business Bank Account?

It’s almost never too early to set up a business account. And you should always track expenses from the beginning. But if you still don’t have a business account when any one of these three events occur, it’s time to get one:

 
• When you have business partners. A business partnership can turn sour if expenses and financial problems create friction. A separate business account sets a clear boundary between each partner’s individual finances and the company’s cash.
 
• When you start paying out reimbursements. It’s easier to hand an employee a company card for business expenses rather than ask them to make a purchase for later reimbursement.
 
• When expense tracking becomes a burden. Keep an eye on business activity and your growth. The more activity that happens, especially by different people, the more likely it is that you need a different account.

Conclusion

Tagging old personal and business expenses is painful, but it’s a necessary step to take before taxes are due. If you can stay on top of those expenses every month, it won’t just save you a yearly headache. It also means you’ll be better equipped to make decisions based on accurate financial information for your business.

Hopefully this article gave you a few tips that make it easier to keep track of your expenses going forward.

At Pilot, we have a team of expert bookkeepers using unique tools to automate the most error-prone aspects of bookkeeping. If you want to keep better books, try Pilot.