Key takeaways
- The IRS recommends opening a separate business checking account and keeping it apart from your personal one.
- For costs that are partly personal, only the business share can be claimed, in both the US and the UK.
- A statement shows that money left your account, but not on its own that the cost was a business one, so keep the receipt or invoice too.
- Fix mix-ups at the end of each month with a ten-minute review, not at the end of the year.
When you work for yourself, your business and your life share a wallet. Lunch, software, a train ticket and a family subscription can all land on one card. To separate business and personal expenses, you need a dedicated account, a rule for mixed costs and a short monthly review. Do those three things and tax time gets much easier.
This post shows how, with US and UK notes. It's general information, not tax advice.
Why it matters
Only business costs can be deducted from business income. The IRS says the personal part of an expense is generally not deductible. If business and personal spending sit in one account, you have to pick them apart later, one transaction at a time, from memory.
Separation also protects you in the other direction. Clean records show what the business really earns and spends, which matters if you apply for a loan or hand your books to an accountant.
Step 1: Open a business account
The IRS puts it directly in Publication 583: one of the first things to do when you start a business is open a business checking account, kept separate from your personal checking account.
A separate account does three useful things:
- Every transaction in it is a business transaction, so the statement is nearly a ledger.
- Business income lands in one place.
- You can give your accountant one set of statements instead of marking up your personal ones.
If you also use a card, use a dedicated business card for the same reason. In the UK, GOV.UK's record-keeping guidance for sole traders asks you to keep records of your business income and expenses; a separate account makes those far easier to keep.
Step 2: Make a rule for mixed costs
Some costs won't split cleanly: your phone, your internet, a car, a room at home. For these, the rule in both countries is to claim the business share only.
GOV.UK's example is a mobile phone with £200 of bills in a year, of which £70 relates to business calls. The allowable amount is £70.
Choose a method and write it down once:
| Cost | A reasonable way to split it |
|---|---|
| Phone | Business calls and data from the itemized bill |
| Internet | A fixed share, noted with the reason |
| Car | A log of business trips |
| Home office | The space used regularly and exclusively for work; see IRS Publication 587 |
Whatever the method, you should be able to explain it. The IRS's rules for vehicles and a home office have their own requirements, so read the publication for your tax year before you claim anything.
Step 3: Keep the paper trail
An account statement tells you that money went out. It does not tell you what it was for. IRS guidance says that proof of payment alone doesn't establish that the expense was deductible, and that expense records should identify the payee, the amount, proof of payment, the date and a description.
So for each business cost, keep:
- The receipt or invoice.
- A note when the purpose isn't obvious ("client lunch, Dana, project kickoff").
- For mixed costs, a line saying how you worked out the business share.
If you have to store receipts somewhere, a Drive folder with a naming rule is enough. Our guide for freelancers and sole traders explains how to have receipts filed as they come in.
Step 4: The ten-minute monthly review
Once a month, open the statements and look for mix-ups:
- Business costs on the personal side. Mark them and find the receipt.
- Personal costs on the business side. Record them as personal, not as expenses, and ask your accountant how to treat the money.
- Charges you don't recognize. Subscriptions are the usual suspects.
- Missing receipts. Ask the vendor for a copy while the purchase is still recent. Most online sellers can resend one.
This takes minutes when done monthly and an afternoon when done annually. Honest tidying also helps: don't turn a personal cost into a business one to make the numbers look better.
When you already have a mess
If you've mixed everything for a year, don't start over. Go back through the statements, mark each line business, personal or mixed, and collect receipts for the business lines. Write down your split rules for mixed costs. Then separate the accounts from today. An accountant can help with the old months.
What to remember
Separate accounts, one rule per mixed cost and a monthly look are the whole system. For what counts as a deductible cost in the first place, read what you can write off as a business expense. And keep your records for the period that applies to you, as set out in how long to keep receipts.
For your own return, a tax professional can tell you what applies to your situation.
Frequently asked questions
Do I need a business bank account as a freelancer?+
The IRS recommends one for anyone starting a business. It isn't the only way to keep records, but it makes the separation clear and your statements easier to read.
What if I paid for something business-related with my personal card?+
It can still be a business expense. Keep the receipt, mark it as a business cost, and record how you paid. Many people move the money between accounts afterward so the books show it clearly. Ask an accountant how to record that in your situation.
Can I claim part of my phone or internet bill?+
Generally only the business share, if you can work it out reasonably. GOV.UK gives the example of £70 of £200 in annual phone bills being business calls, so £70 is claimable. Keep the bill and a note of how you split it.
Sources
General information, not tax, legal or financial advice. Rules differ by country and change over time — check with an accountant or your tax authority for your situation. How we write.