My business and personal money share one account. Where do I begin?

The question

An illustrative letter.

The answer

My dear, first, congratulations. A bakery that turns a profit is a real achievement, and the late nights at the counter are part of how you got there. Now let's make the money side as orderly as your kitchen, so tax time stops being chaos.

Why one account makes tax time chaos

When every sale and every grocery bill run through the same account, your bank statement becomes a puzzle. At tax time you, or your accountant, have to sort each line by hand: flour or family dinner, oven repair or car payment. It takes hours, things get missed, and it is hard to see whether the bakery is truly making money.

Mixing the two can also cost you. Business costs you cannot show may never be deducted. And if your business is set up as a company, keeping its money separate is part of what keeps your personal money apart from the business's debts. A CPA or attorney can tell you how that applies to you.

Step one: a separate business account

Open a checking account used only for the bakery. Every sale goes in: cash deposits, card payments and online orders. Every business cost comes out: ingredients, rent, equipment, wages and fees. Nothing personal goes through it, in either direction.

If you use a card for supplies, keep one card for business costs only and pay it from the business account. Banks usually ask for some paperwork to open a business account, depending on how the business is set up, so ask what to bring before you go.

From that day on, the business account statement is a clean record of the bakery's money, and your bookkeeping gets simpler at once.

Paying yourself: a set amount, not whatever's left

Many owners take money out whenever the personal account runs low. It feels natural, but it makes both sides unpredictable. Instead, choose a set amount and move it from the business account to your personal account on a set day, perhaps once or twice a month.

Start with an amount the bakery can afford in a slow month, not a busy one. Look back at what the business has earned over the last several months, leave room for taxes and for the costs that always come up, and pay yourself from what remains. You can raise it as the business grows.

How that pay is treated for tax depends on how your business is set up. Some owners take a draw, and others pay themselves a salary through payroll. A CPA or attorney can tell you how it applies to you.

Setting money aside for taxes

When you work for yourself, nobody withholds tax from your pay. As a general rule, self-employed people pay estimated tax to the IRS during the year, usually four times a year, to cover income tax and self-employment tax. Many states expect estimated payments too. Leave it all until April and you can owe a large bill at once, plus penalties.

The simplest protection is a separate savings account just for taxes. Each week, move a share of that week's sales into it, and pay your estimated taxes from it. Treat that money as already spent. The right share depends on your profit, your business structure and your state, so ask an accountant to help you set the percentage. A CPA or attorney can tell you how the rules apply to you.

Keeping the books in an hour a week

You already do the books at the counter every night. Give yourself back those evenings by moving to one set hour a week instead, on the same day each time.

In that hour, match your receipts to the business account, sort each cost into a category such as ingredients, rent or equipment, and check that the tax account has its share. Simple bookkeeping software or a plain spreadsheet both work. The habit is what matters. Keep receipts in one place as you go, on paper or as photos.

At the end of each month, look at three numbers: what came in, what went out and what is in the tax account. Those three tell you more about the bakery's health than a shoebox of receipts ever could.

What to ask once you're profitable

Profit opens new questions, and a good accountant is worth meeting before tax season, not during it. Questions worth bringing:

• Is my business set up the right way for where it is now?
• How much should I set aside for taxes, and when are my estimated payments due?
• Which of my costs can the business deduct, and what records do I need to keep?
• How should I be paying myself?
• What could I put aside for retirement as a business owner?

You built something from flour and long hours. Giving its money a clear shape is how you make sure it keeps paying you back.

One thing to do this week

List every business cost that came out of your personal account last month.