Why You May Need a Business Credit Card… Even If You Don't Run a Business
With the explosion of opportunities to make money online, even cubicle commandos might earn a little self-employment income. If you want to keep as much of that income as possible, you need to track the expenses that helped you acquire it. No, you can’t deduct the cost of the expensive eye cream that made you look good for your blog’s head shot. You can, however, deduct ordinary and necessary expenses which are aimed primarily at supporting your business and not your personal life.
Maybe you’ll start by making a bit of money from advertising on your blog or by taking on occasional freelance work. Because the web has made it so convenient to raise your professional profile online, a little bit of work like that can lead over time to more and more outside work or even to full-time self employment. Meanwhile, you’ll be so busy working that you won’t want to hassle any more than you have to with managing and tracking your expenses. Enter the small business credit card.
A business credit card separate from your personal one will provide detailed reports of purchases you made during specific time periods, for example quarterly or yearly. This can be extremely helpful in organizing your deductions at tax time, which comes four times a year not just once if you are subject to paying estimated taxes. You could create a Google Spreadsheet to maintain your own list of transactions, but why spend the time, if someone else will do it for you?
Even if you do use a business credit card, you must still retain your receipts: get a receipt for every printer cartridge, for each taxi ride you take while attending a conference, for your monthly web hosting cost, and for any other reasonable purchases you make in support of your self-employment earnings. If you use some of your equipment and supplies for both personal and business use, keep a log of that use for at least a month so you can prorate your deduction for that expense at tax time.
Just like in the personal credit card space, there are a seemingly infinite number of business credit cards. Take some time to choose carefully, then make sure you use that card every time you buy something for your business–and switch all your online accounts for business-related purchases such as web backups to using that card.
When it’s time for you to report your income and expenses to the IRS, you’ll be glad to have itemized lists of expenditures along with yet one more piece of evidence that you are not just a hobbyist in the new economy. For more about self-employment taxes, see our post Six Things You Must Know About Self-Employment Taxes.
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There are a couple of huge problems I see with your article.
First of all, you DON’t need a credit card for business. A debit card will work just fine and will have all the abilities of a credit card with the exception of putting you on a mountain of debt.
Second, not only should you have a separate spreadsheet for expenses, but you should have a totally separate bank account for your business. In addition, instead of spreadsheet, you might it beneficial to use a professional accounting system such as Quickbooks to manage all of your stuff.
Finally, too many of todays businesses are in a financial wreck or got started because they were given a loan. I use the theory that if you can’t buy it with cash, then you don’t need it right now. But then again, I started the business on 100% cash basis and have never had any debt with it.
For those of you that are looking for great money advice, check out http://www.daveramsey.com. He can change your life. I listen to his show every day as it is free on the net.
Good luck!
Aaron, debit cards can be problematic because they lack some of the protections of credit cards, especially if you are using them online. However, some business cards as well lack those protections so this is something to check into.
Of course everyone should be careful about taking on too much debt–but the point I made here is that a credit card can help with recordkeeping for deductible expenses. I did not argue for using it for spending money you don’t have.
Personally I never run a balance on my credit cards–so a separate business credit card doesn’t mean I rack up more debt, it merely means I have a better way to track expenses. It also makes me more aware when I am spending money to make money versus spending money because I want something personally. That’s good awareness to have.
Anne, Thanks for linking to Brazen Careerist.
I thought I’d point out that most small businesses are started on credit cards, and I think it’s a pretty big stretch to say that people shouldn’t use credit for that. Would surely limit the type of people who can start businesses, and the type of businesses people start.
And, as someone who has the typically complicated tax return of a freelancer, a separate card for deductible expenses has, in the past, saved me hours and hours of tax preparation work.
So good advice, Anne!
Penelope
Anne,
I’m sorry, but you’re wrong about the protections of debit cards vs. debit cards, especially if you use a Visa debit card.
In its terms of use on Visa’s web site, it clearly outlines how debit and credit cards with the Visa name have the same types of protections. You’re perpetuating a myth about debit cards that really needs to stop.
Oops, I mean credit cards vs. debit cards. Control-z, where are you?
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Most people do not realize that business cards are tied to them personally and that is the biggest turn off for me about them. If you wind up having to go bankrupt it will be with you personally.