Keeping track of your expenses is part of being a business owner. You probably heard it said that you need a separate business bank account in addition to your personal bank account. But, you might not be familiar with a payroll account. What is a payroll account, and should you consider opening one for your small business?
What is a payroll account?
A payroll account is a separate bank account for your business that is strictly used for payroll. Instead of lumping all your business expenses into one account, you will pay employee wages with your payroll bank account.
The money going into the payroll account will only be used for payroll. For example, you won’t write checks to vendors from your payroll account. You would make checks out from your main business bank account.
Companies can choose to separate business income and expenses by account. In some cases, a payroll account covers employee wages, payroll tax liabilities, and employer contributions. However, companies might want to separate employee wages from payroll taxes.
If the payroll account is just used for employee wages, you would withhold taxes and deposit into a separate account. Then, you would deposit only the employee’s net wages into the payroll account.
Benefits of a payroll account
Many business owners prefer to separate their payroll expenses from other types of business expenses for a variety of reasons.
With a payroll bank account, your business’s expenses will be more organized. Instead of constantly spending money from one bank account, you delegate a separate bank account just for payroll.
Payroll can be your biggest expense as a small business owner, so it makes sense that it would get its own account.
You might pay some employees with checks. If that is the case, your bank account and routing number appear at the bottom of the check. When you don’t separate payroll and main business bank accounts, you put your entire business income at risk for payroll fraud.
If an employee were to misplace a check and it ended up in the wrong hands, that person could have access to all the funds in your bank account.
By separating your accounts, you can limit the accessible funds to just the payroll account. That keeps the rest of your business funds secure.
With a payroll account, you only need to deposit enough money to cover payroll. You do not need to worry about an overdraft since you can predict payroll expenses.
Because payroll expenses are consistent, you can regularly deposit the same amount into the account to stay on top of payroll. And, you can expect the same amount to be withdrawn on payday.
Reconciling your bank statement compares the account to your accounting books to make sure the records match. Having payroll in your main bank account could mess up your records.
For example, you might pay your employees with checks. If an employee does not cash their check by the time you reconcile your bank statement, it will show that you have more money than you actually do. This could make your records look inaccurate.
By separating your payroll and main business accounts, you don’t need to worry about your payroll expenses messing up your books.
Let’s say you have one bank account for all your business expenses. You have one employee who earns $3,000 per pay period. On April 28, you give them a paycheck. They do not cash it for another week.
Your end-of-the-month bank statement says that you have $33,000, but your accounting books say that you have $30,000. Your bank statement gives you a skewed picture of your cash balance because your employee has not yet cashed their check.
By separating your accounts, you only need to look through your payroll bank account to find where the adjustment needs to be made, as opposed to sorting through other transactions.
Keep in mind
Before opening a payroll account, there are a few things you should consider. First, multiple accounts mean multiple bank fees. Most likely, you will need to pay more monthly fees to have an additional account for payroll.
Second, you will need to track both accounts (main business account and payroll account) diligently. Adding another account to track could be seen as a burden to small business owners.
You are not required to open a separate payroll account. But, doing so is a great way for many small business owners to stay organized, keep their business funds secure, and keep accurate records.
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This article has been updated from its original publication date of July 19, 2017.This is not intended as legal advice; for more information, please click here.