a man holding a stop sign sayig beware mixing finances.

a cartoon of a woman making cupcakesLet’s begin by imagining Sarah…

a small business owner who runs a cozy little bakery. Like many entrepreneurs, Sarah has been mixing finances by using the same checking account for both personal and business needs. One sunny day, she uses the same debit card to buy flour for her bakery and a new blender for making smoothies at home.

Fast forward a few months to tax time, and Sarah struggles to remember which purchase was for the bakery and which was for her home. Why? Because her bank statement doesn’t provide enough details. YIKES 😬

Suddenly, what should’ve been a smooth tax prep season turns into a headache of epic proportions, leading to:

❌ Missed deductions
❌ Accidentally claiming personal expenses as business ones (uh oh!)
❌ Delays in filing taxes, which could lead to penalties
❌ Wasted time and money going back and forth with her bookkeeper and/or tax pro
Unnecessary stress trying to dig through a mountain of receipts for proof of business purchases

All of this chaos happened because Sarah made one of the most common small business mistakes—commingling (fancy words, right?). In other words, she mixes finances between personal and business transactions, a guaranteed recipe for overcomplicated bookkeeping + tax prep.

The Hidden Dangers of Mixing Personal + Business Transactions

a cartoon of a woman looking at a magnifying glass

You may have been there yourself if you’re a small business owner like Sarah. You’re at the store, you grab something for your business, and while making a b-line for the checkout lane, you throw in some snacks for the kids because they’re hungry…again LOL!

Seems innocent enough, right?

But come tax season, it’s like trying to solve a puzzle with half the pieces missing. Keeping personal and business transactions in one account is a sure way to complicate your bookkeeping. Here’s how mixing finances can hurt your business:

  1. Missed Deductions: When personal and business expenses are mixed, you’re more likely to miss out on deductions you could have taken for your business. That means you’re paying more in taxes than you should. Ouch!
  2. Risk of an Audit: Mixing your personal and business finances raises red flags for the IRS. If they see something fishy, you could be looking at an audit, and trust me, you don’t want that kind of attention.
  3. Piercing the Veil: Sounds rather ominous, doesn’t it?! Well, it should because it’s a BIG deal. When you’ve formed an LLC to protect your personal assets and then put personal transactions in your business account, you’re potentially ‘piercing’ the protection you’ve built around your personal assets. Those personal transactions in your biz account can open up your non-business assets to legal issues linked to business woes. We strongly suggest a conversation with your attorney so you fully understand the risks that come with piercing the veil.
  4. Bookkeeping Nightmares: Trying to sort out which transaction belongs where takes way more time than it should, making life harder for both you and your bookkeeper. And let’s be real, nobody likes extra work, especially when it costs you money! This is why you need a solid monthly bookkeeping routine.
  5. Tax Filing Delays: The longer it takes to figure out your finances, the closer you are to missing deadlines. Filing late can lead to penalties, and nobody wants to pay the IRS more than they have to.

a cartoon of a woman with her arms crossed

Jamie: The Smiling 🙂 Small Business Owner

Now, let’s switch gears and meet Jamie. She is another small business owner, but unlike Sarah, she keeps her personal and business finances strictly separate. Jamie has a clear system: a dedicated bank account and credit card for her business and separate accounts for personal expenses.

When tax season rolls around, Jamie is smiling and cool as a cucumber 🥒.

Why?

Because her finances are in order! Her accountant doesn’t have to spend hours sifting through transactions + receipts, so Jamie gets her taxes filed on time or maybe even a little early. No more stress around tax extensions or late filing fees. VICTORY!

Plus, if the IRS ever comes knocking, Jamie’s ready to show them exactly where her business expenses are.

Jamie’s smart biz choices not only save her time and money but also boost her business’s credibility. After all, no small business owner wants to explain to the IRS why they accidentally claimed a family vacation as a business trip 😅. Would you? Of course not! At least we hope not…but whatever floats your boat LOL!

The Simple Fix for Small Business Owners

Ready for the good news?excited dancing cartoon man

Avoiding the headache of mixing finances is easier than you think 🎉! 

We strongly recommend all small business owners open separate bank and credit card accounts for their business.

Yes, it might feel a little overwhelming to set up new accounts, but trust me—the time and stress you’ll save will be well worth it.

Just ask any small business owner who’s had to pay for an expensive bookkeeping clean-up or spend hours going through their bank statements looking for business expenses. They’ll tell you, “Get those accounts set up ASAP!”

Here’s why this simple change can make a big difference:

✅ Clearer Financial Reports: By keeping your business transactions separate, you’ll have a much clearer picture of your business’s financial health (having a bunch of expenses going to owner’s draw distorts your business’s equity on reports). Clear + accurate financial statements are a large portion of what good bookkeeping is all about. PLUS, they will 100% help you make smarter business decisions and make tax prep a breeze.

✅ Saves Time + Money: Your tax pro will thank you! When your finances are organized, it takes less time for them to get your books in order, which can save you on tax prep fees.

✅ Avoids Risky Mix-Ups: Keeping personal purchases out of your business accounts helps you avoid the risk of claiming personal expenses as business ones. On the flip side, keeping business purchases out of your personal accounts makes sure you don’t accidentally miss claiming a business deduction.

 

a red background with white text

If you already have separate accounts for your business, you’re ahead of the game 🙌! Just make sure you’re not accidentally mixing personal purchases with your business ones. But hey, if you do, no need to panic. Let your bookkeeper know, and they’ll make sure it’s handled the right way.

Don’t have a bookkeeper (or need to make a change)? It’s time to consider investing in one (hint, hint 😉). A professional bookkeeper can help you keep everything organized and stress-free so you can focus on growing your business instead of wrestling with numbers.

Let’s Take the Next Step Together!

Need recommendations for business-friendly banking options? Want some advice on how to get started with separating your finances? Reach out to us today, and let’s get your business on the right track!

Contact us today and let’s make tax season a little less stressful—and a lot more successful ✨ Drop us a line on our contact page OR schedule a call using the button below 👇

 

Nab your FREE, 30-minute strategy session today!

Amanda Wylie

Amanda Wylie – Certified QuickBooks Online ProAdvisor

Owner/CEO

I love the Lord and live way out in the country with my wonderful husband and my 8 children still at home. Besides everything bookkeeping, my passions and interests include gardening, chickens, herbal remedies, coffee and learning new things!

Follow me on:

Related Posts

Bookkeeper OR Tax Pro? Find Out & Unlock Financial Clarity!

Bookkeeper OR Tax Pro? Find Out & Unlock Financial Clarity!

It’s a question that comes up all the time, "What is the difference between what a bookkeeper does and what my tax preparer does?" For small business owners, navigating the world of finance can be daunting, especially when it comes to understanding the roles of...