Back-to-Business: A Taxing Situation III - Bank Run

The Back-to-Business Series: Index

So, my last post left you with a little tease... I mentioned a way for you to get all your business income and expenses for the year tabulated on a sheet of paper, and sent to you in the mail (or electronically) every month. Of course you probably already have something like that sheet of paper... it's called a bank statement. Now, the bank statement you receive is most likely for your personal bank account - it's not going to help you separate out your business expenses, though -unless you set up a separate bank account for your acting business.

Now, a lot of my new business coaching clients freeze up when I suggest they open a separate business account... it sounds complicated; it sounds like a lot of work; it sounds expensive! Before you start to hyperventilate over the idea, think about it - does the CEO of Target pay his company's business expenses out of the same account he pays his family's grocery bill with? That'd just be silly - and improper... the IRS frowns on people dipping into company funds to pay for private expenses! I think they have a word for that... starts with the letter E...

Lets go at it from a different angle - does a plumber buy his supplies out of the same account s/he pays the rent with? S/he could... but there are a lot of costs associated with running his/her business - does s/he really want to come up short on the rent next month because s/he had to buy a few too many flapper-valves? Sounds like risky business... and not the kind with Tom Cruise and Rebecca De Mornay. S/he keeps the business funds separate from his/her personal funds - and s/he "pays him/herself" periodically out of the business funds to cover personal expenses.

Remember what I said last week about 1099 income and "Schedule C's" - if you're reporting to the IRS on a Schedule C, they think of you as a business. That means you have to behave like a business - just like the CEO of Target or our hypothetical plumber. Otherwise, our friends at the IRS might not accept your income as business income. They might decide that its "hobby" income instead... and like I said a while back, a model train collector can't write off his/ her tracks.

Besides, it's not really all that complicated... most banks or credit unions will let you open a second checking account for little or no money. Your business account doesn't necessarily have to be what your bank calls a "business account" - an account which often has extra fees associated with it. If you're running a Schedule C business (as opposed to a corporation or LLC), all you need is a separate checking account to put your 1099 income into, and to pay your 1099 expenses out of.

Paying your acting expenses out of your business account has an added advantage - aside from seeing all your business income and tax deductible expenses laid out every month on your bank statement. It gives you a fund to save up for those business expenses. How many times have you heard an actor say that s/he needs new head shots, but doesn't have the money for them? If you put all your acting income into a separate account, and leave a portion of that income in the account after taking a "draw" for you personal expenses (that's an accounting term that I'll go into in more detail later)... then you'll build up the money needed to get those new head shots. Or that new PDA. Or to pay for that demo reel. Or... you get the picture.

But wait a minute... What about W-2 income and expenses? Remember the difference between 1099 (or Schedule C) income and W-2 income... 1099 is "self-employment income", and W-2 is "Wage" income. If you get paid as a W-2 employee, you can still take expenses related to your career off on your taxes (the rules for this are a lot more restrictive, though - consult a tax professional in your area about this). The income you receive, however, is categorized by the IRS as the same type of income you might get from a restaurant, or as a temp - it's not "business" income in the IRS's view. They expect that pay check to go right into your personal checking account.

A lot of actors still want to get a statement of their acting expenses every month, though - even if they're primarily paid W-2 income. They use a credit card for this purpose - they simply charge all their acting expenses to the credit card, and they pay the card from their personal account. Depending on the way your taxes are structured, you might even be able to deduct the fees and interest on that credit card - but again, these rules are very restrictive, and you should really check with a licensed tax professional on the details.

I myself am not the biggest fan of credit (and by extension, debt) - I've seen too many people get in over their heads by thinking they can charge something now and pay for it later... and later... and later... all the while getting buried in interest fees. If you decide to go this route, be sure that you've got the money to pay off your credit card balance at the end of the month. Don't get dragged down paying off debt you've accrued, when you could be putting that money towards saving up for the tools you need to do the job - and the tools that make doing the job easier.

Here's the thing, though - how are you going to know whether you have enough money to pay off that credit card balance at the end of the month? We'll go into some tools to help you keep track of your money - both W-2 and 1099 - in next weeks post... and these tools will make next year's taxes even easier! I'll see you then - remember, you can always email me your questions, or pose them to me on Twitter. I answer reader questions each Wednesday (or, some times, I write a whole new post around them!) For now...

Lets get to work!

-Harold