If you’re self-employed or running a small side business, you might ask yourself: “Do I really need a business bank account, or can I stick with my personal one?” It’s all about the costs, right? If your business brings a relatively small amount of profit, do you really need to pay for a separate business bank account? Or you can save on bank fees by using a free personal bank account?
Let’s break down the scenarios where a business account is necessary and when you can get away with using a personal one:
1. Sole Proprietor? A Business Account Isn’t Always Necessary.
If you’re a sole proprietor without a DBA (Doing Business As) or employees, you can get away with a personal bank account. Nowhere on the IRS website it says that a sole proprietor must have a proper business bank account. The IRS is very understanding. All they care about is that you pay your taxes, and they even accept cash payments in person! That’s right—whether you’re running a legit business or involved in questionable activities (yes, even criminals must pay taxes), the IRS is happy to accept cash. You can look it up here. It is not in the IRS job description to dictate how you run your business or what type of bank account you must use.
However, keep this in mind: some banks have rules against using personal accounts for business purposes. You’ll want to double-check your bank’s fine print. Let's face it, they’d rather move you to a business account where they can charge fees.
If you accept payments via Stripe or other payment platforms, this generally works fine as long as your name on the bank account and SSN match your Stripe info. As a solo proprietor, you operate under your SS number and the name in the processing platform should match to what you indicate when setting up your checking account. Even if the bank stops the payment, the payment platform will keep the funds until you figure out a way to withdraw them. But this is how Stripe and other payment platforms operate. You also need to remember about bank requirements and you should watch out for bank policies designed to nudge you toward a business account.
2. Get a Separate Bank Account (does not always have to be a business account) for Easier Recordkeeping.
It is a very good accounting practice to keep your business income and expenses separate from your personal expenses. Again, you don’t need to have a business bank account to keep your business income and expenses separate. You can use a personal bank account for all your business activities and make sure that you don't charge any personal expenses on the same card. If you want to spend money you earned, simply transfer it to another personal account and use that account for personal expenses. This accounting practice will make your bookkeeping and tax filing so much easier. Instead of going through multiple bank statements looking for tax deductions at tax time, you can easily find them all in one account in a much more efficient manner.
3. Tax Pro Tip: Keep your receipts!
By the way, bank statements alone aren’t enough to support your tax deductions. For example, a $1,000 charge from Costco on your bank statement doesn’t explain if it’s for an office chair or family groceries. In the case of an IRS audit, you will have a hard time proving that this was indeed an office chair because you simply didn’t keep the receipt. So, keep receipts for big purchases and for anything related to meals or travel. It’s a little extra work, but you’ll thank yourself if the IRS comes knocking.
4. When a Business Account Is Necessary:
- DBAs: If you’re operating under a DBA (Doing Business As) but still filing taxes as a sole proprietor, you would need to open a business account. There is a high probability that the bank may reject your clients’ payment if the payment invoice states your DBA name but the accepting bank has your personal name. It also appears more professional from a presentation standpoint—your clients know you as a DBA and expect to pay the business and not you personally.
- Employees: Payroll payments are tied to your company’s EIN, not your SSN. If you hire an employee, you will need to get an EIN and open a business account under this EIN to pay wages.
- Credit Card Processing: If you’re accepting credit card payments in a retail or point-of-sale setup, you will need a business bank account, since the credit card processing feature is not offered in personal accounts. However, if you’re invoicing through payment processing software (the same Stripe) or accepting payments via PayPal, Venmo, Zelle, or cash, a personal bank account usually accepts these types of payments without problems.
- Business Loan: If you’re looking to secure a business loan, lenders usually expect you to have a business account. However, in our experience, many lenders are flexible and will let you open a business account during the underwriting process.
- LLC or a Corporation. While the IRS doesn’t care where you hold your money, state laws do. To maintain your corporate veil, you need to keep your business finances separate, and that means opening a business account.
- Partners: If you have a business partner (other than your spouse), many banks won’t allow two debit cards, separate logins, or multiple email addresses on one personal account. On most cases a business account is necessary for shared access.
The Bottom Line
Do you really need a business bank account if you are self-employed? My unswer is probably unorthodox. If your self employment income is modest, and you don’t need payroll or a point-of-sale system, a personal bank account can work just fine (as long as your bank allows it). As your business grows, and you find yourself hiring employees, setting up a complex point of sale system, forming an LLC, or adding partners, that's when it’s time to upgrade to a business account.
Many business owners move between accounts as they grow, and that’s perfectly normal. Just make the switch when it makes sense for your business.
And now a little bit of self-promotion. If you ever need help with your business, please keep us in mind. We’ve helped hundreds of business owners to sort out their accounting and tax issues. You can find our services here.