You’ve just received a check in the mail- YAY! You run to your bank to deposit it into your business account (or you see that Pictage has automatically deposited it there) and now you feel like you’ve justified your next big equipment purchase, right? Think again.
If you’re really taking care of your business and your personal life, you’ll divide that money up before you start spending it. To make it super simple, take half of that check you’ve deposited into your business account and transfer it immediately into your personal account (assuming you’re a sole-proprieter business structure with no employees). This quick & easy method helps you make sure that you’re bringing home the bacon while still taking care of business. By maintaining a 50/50 split on your revenue, you’ll gain a clear understanding of when you’re dipping into your personal income to pay for a business expense and when you’re borrowing from your business to pay for a personal indulgence. If you’re like 85% of Americans, you’ll spend whatever you have in your account- so separating the money right from the beginning will help save you headaches later on.
To take this a step further, it’s also wise to set aside 30% of your personal income to pay self-employment taxes as well as any funds that you’d like to set aside for your retirement. You may choose to pay your health insurance out of your personal account or your business account, but liability and replacement insurance are generally business expenses to be paid from your business account. Any credit you give clients toward products, deposits, and retainer fees paid in advance should be set aside in your business account so that they cannot be spent until the service or product is delivered. Sales Tax should also live in a separate business account so that it can be written as a simple check to zero out the account when your sales tax is due.
Here’s a sample breakdown for a $2500 job that requires a $500 retainer and provides $500 in product credit in a state with 7% sales tax:
100% Revenue = $2500
7% Sales Tax = $175
1. 50% Personal = $1250
a. 30% Income Tax Account = $375
b. 10% Retirement Account = $125
c. 60% Household Account = $750
2. 50% Business = $1250 + Sales Tax of $175
a. Sales Tax Account = $175
b. Retainer Account = $500
c. Product Credit Account = $500 (in reality you’ll probably only need to save $200 of this if your products have the appropriate profit, but it never hurts to save more and have back-up funds for emergencies.)
d. Overhead Account (Equipment, Insurance, Rent, Education, Marketing) = $250
With only $250 left to spend on that shiny piece of equipment- you might see why it’s important to save up before the next purchase, or you could just skimp on your groceries and cancel the cable connection instead. It’s all a matter of what’s most important to you!
Written by Anne Ruthmann
Anne Ruthmann is a philanthropist and visionary, who makes a living as an international award-winning wedding & lifestyle photographer. She geeks out about business strategy and finding ways for artists to make a living doing what they love, which is why she feels strongly about developing community at her Boston PUG and sharing information on PhotoLovecat. She also recently started offering the Smarter Business Workshop in order to provide hands-on help to photographers in several different cities around the US. When she isn’t working or helping others, she enjoys traveling the world with her husband and trying foods she can’t pronounce.