Can You Use Your Business Earnings to Pay for Personal Expenses?
It can be tempting to use your business earnings to pay for personal expenses when you’ve been self-employed for a while. This is especially true if your business income has increased significantly and you need funds now more than ever. But before taking this step, you must answer some essential questions.
Is the money coming in from the company or just an individual? What percentage of your income comes from your company? How much money are you spending on non-business-related items each month? Suppose you have children from a previous marriage. Should you continue paying child support out of your company account even though child support is not technically business-related? These are all critical considerations when deciding whether it’s okay to spend your earnings on anything. Here are a few things you need to know before you spend your business’ earnings on your personal expenses:
1. What Percentage of Your Income Comes from the Business?
What percentage of your income comes from your venture? This number will tell you how much you’re using the company to meet your personal needs. It’s imperative to know this number before spending any money on personal things with your company’s earnings. You won’t be taking an income, at least in the beginning. But suppose you have a small percent coming in from your company. In that case, it’s probably best to keep most of that money for personal transactions. A few business leaders think 35 percent is a decent number to pay yourself for personal expenses.
2. Track Your Income and Expenditures
Tracking the income and expenditure of your company is vital for many reasons. You need to know how much money you have coming in and going out and how the two compare with one another. This task means that you will want to keep track of all money coming into the company’s account, including child support payments.
But remember, personal expenses are not business expenses. In addition, you will want to keep track of all money going out from the company’s account, including personal expenses. This might mean that your personal expenses are a business expense you can’t claim as a tax deduction. So it’s best not to use your money for personal expenses.
3. Spend Only on the Essentials
Spending on the essentials means you won’t go beyond your means and won’t affect your company’s income. However, you must decide what’s considered essential and what’s not before you spend the money. Food is vital, but what about your gym membership? Rent is necessary, but what about cable television? Identifying your needs, wants, and wishes will also help you decide whether the expense is essential.
4. Keep Separate Accounts for Personal Expenses vs. Business Expenses
It’s best to keep the business’ account separate from your personal transactions, especially if you’re using it to pay for your needs. If you’re unsure how much money to withdraw from your business account, try taking an amount that makes you comfortable.
You want to make sure that you are not spending more than your company can afford on personal needs. It’s also crucial that you don’t mix the money. Or else, you can’t claim anything as a tax deduction. But it’s also important to remember that this money is not coming directly from your company’s account. Using your company’s income for personal expenses is not the best strategy. The money comes straight from your business, and your bookkeepers will have difficulty separating the personal from the business expense.
5. Know Your Personal Income Tax Obligations
Using your company income to pay for personal expenses can get complicated, especially if you’re not tracking what’s coming into or going out of the account. Suppose you are using business earnings to meet your personal needs. If that’s the case, you should consider this money as earned income that you should include on your tax return. But using money from a business account for personal needs is not the only issue you will face when filing taxes; how much of it can you deduct?
In some cases, you might be able to deduct expenses paid through the company’s account, such as business-related meals, supplies, and other costs. But the rule is that the expenses must be necessary for you to operate your operations.
Suppose you’re using money from your company’s account for personal needs, such as a home renovation or college tuition. In this case, this is considered income, which you should report on your tax return. It’s best to use your personal earnings for personal expenses and keep the business earnings to use on business-related purchases, so you don’t have to worry about paying taxes.
It’s okay to use your business income for personal expenses if it falls under a certain percentage of the total revenue. However, you cannot claim personal expenses cannot as tax deductions. But you can still keep track of them by maintaining separate accounts for each one.