7 Reasons Freelancers Need a Separate Credit Card for Business Expenses

Freelancing can be a tough grind. You’re responsible for a lot more than providing goods or services; you also need to market yourself, manage client communications, and do the bookkeeping.

When you’re a one-person show, it might seem easier to put both business and personal expenses on the same credit card and figure out the charges later. But this can end up causing headaches in the long run.

Here are seven reasons freelancers need a separate credit card for business expenses.

1. Monthly Budgeting

You probably have a monthly budget for personal expenses—or at least a general idea of what you can afford to spend. Doing the same for your business is a smart freelance strategy.

But it’s hard to keep track of spending when your personal and business expenses are mixed. You have to either diligently save receipts or pore through your credit card statements each month. Sticking to a budget is much easier when there’s a clear line drawn between your personal life and your business.

2. Filing Your Taxes Correctly

When you file taxes, you’ll have to report business activity, including revenue and expenses. Fortunately, many business expenses qualify for full or partial tax write-offs. But if your business and personal spending is mixed in one account, you’ll have to go through a year’s worth of statements or receipts to identify the business expenses you need to report.

Joshua Zimmelman, president of Westwood Tax & Consulting, confirms the importance of separate accounts: “When you’re self-employed, operating as a sole proprietor, there is no legal obligation to keep business and personal expenses separate unless operating as an LLC. However, come tax time, it might be quite difficult to distinguish if that Uber expense was a night on the town or a trip to a client site. Therefore, it is much easier to keep a separate credit [card] for business transactions.”

3. In Case of Auditing

If the IRS or your state government decides to audit you, it’ll perform a thorough investigation of your finances to determine if you’re complying with the tax code. Audits can be frustrating and stressful, but if you’ve carefully separated your business and personal expenses, accounting for your business activity will be much easier.

“If [my] business expenses were commingled with all my personal expenses, not only would I have a hard time . . . calculating profitability, but I am concerned that in case of [an] audit I would have a harder time justifying my expenses,” says Russell Rivera, president of Voice Wealth Management. “[When I keep] the worlds walled off from each other, I believe that not only am I being ethical, but I am also prepared in case of outside review.”

4. Tracking Your Business Performance

To track business performance, you need to do more than track sales. You’ve got to weigh incoming money against your business expenses. When you have a credit card dedicated to your business, you can easily track spending and measure the true performance of your business. And if you ever need a business loan, having your accounting in order will help you get the funding you need.

“A separate account (I usually suggest keeping them at a separate bank) will make it simpler for you to account for [your business performance],” says Rivera.

5. Optimizing Credit Card Rewards

If you have a rewards credit card for personal expenses, you already know that you can earn miles, cash back, or other rewards as you use your card. But if the types of purchases you tend to make for your business are wildly different, you might be leaving rewards on the table when you use the same card.

If you have a separate card for your business, you can choose one that specifically rewards your business expenses. For instance, if you often make deliveries or drive around town to meet clients, a card with cash back for gas purchases might be a good fit.

6. Getting a Business Credit Card

Personal credit cards for individuals can often handle the spending needs of solo freelancers. But if your business starts growing rapidly, you might need to upgrade to a business credit card. Business cards come with different sets of rewards, business-specific features, and other possible advantages.

7. Incorporating Your Business

Incorporating your business into an entity, such as an LLC, offers many advantages. For one thing, your personal finances will be protected if you ever get sued. If you incorporate your business, you’ll need a separate credit card.

“If you do indeed operate your freelancing gigs as an LLC, you are legally required to keep business expenses completely separate,” says Zimmelman. “The LLC offers the advantage of legal protections. If business and personal accounts become commingled, then the legal protections disappear and the corporate veil is now pierced.”

Regardless of your specific business needs, many credit cards require good to excellent credit to apply. Before you sign up, take a look at your credit to see if you’ll qualify for the card you want. You can check your credit report free at Credit.com.

Image: Izabela Habur