Key Insights:
- A business savings account can help you separate company funds, earn interest and plan for future expenses like taxes or emergencies
- Business savings accounts differ from personal accounts in ownership, reporting and requirements, making them better suited for managing business finances
- Comparing account types, interest rates, fees and access helps you choose a savings account that fits your business’s cash flow and goals
A business savings account is designed to help businesses set aside money, earn interest and prepare for future expenses. If you’re a business owner, you might consider setting one up to improve financial organization, planning and tax management.
Let’s explore what business savings accounts are, how they differ from personal savings accounts and whether they’re taxed.
What is a business savings account?
A business savings account is a deposit account that allows businesses to earn interest on funds not needed for daily operations. A business savings account helps businesses:
- Save for taxes or large purchases
- Build emergency reserves
- Separate operational funds from long-term savings
There are several types of business savings accounts designed to meet different needs.
- Standard business savings accounts: Standard savings accounts typically offer a variable interest rate and help businesses save for short-term goals.
- Business money market accounts: Money market accounts are savings deposit accounts that allow your business to earn interest on funds. They may also have some features of checking accounts, like check-writing or debit card access.
- Business certificate of deposit (CD) accounts: A CD account enables businesses to earn a guaranteed interest rate in exchange for keeping a set amount of money deposited for a specific term.
Business savings vs. personal savings
A business savings account differs from a personal savings account in purpose, ownership, reporting and limits. Let’s take a closer look at the differences between the two types of accounts.
Purpose
The primary difference between a business savings and personal savings account is its purpose. Business accounts are designed to set aside company funds, whereas personal savings are for individual goals.
Ownership
Business savings accounts are opened under your business name and tax ID (EIN). Personal savings accounts are opened under your full name and Social Security number. This separation of assets is important to protect your personal assets from business liability.
Reporting
Business savings accounts simplify tax preparation and bookkeeping for business owners. You’ll report income from a personal savings account on your personal tax return. Keeping business and personal funds separate helps businesses maintain compliance and accounting accuracy.
Limits and access
Businesses may face different transaction limits, fees and documentation requirements than individuals with personal savings accounts. To open a business savings account, you may need to provide documents like your articles of incorporation, fictitious or assumed name certificate or Employer Identification Number (EIN) or an operating agreement.
Should you have a business savings account?
For most small businesses, the answer is “yes.” A business savings account helps in financial management and provides several benefits to businesses, including:
- Storing funds for short-term goals or tax obligations: Business savings accounts let businesses store money for future expenses or taxes. If the bank has FDIC insurance, deposits are insured up to FDIC limits.
- Building financial stability: Savings accounts are also ideal for building financial stability and developing reserves. It’s important to have a surplus of funds set aside for unexpected business expenses.
- Earning interest while keeping cash accessible: One of the best things about a standard business savings account is that funds earn interest over time and are readily accessible.
- Showing lenders or investors that the business manages money responsibly: Keeping funds in a savings account can demonstrate your financial stability and responsibility to lenders and investors.
Are business savings accounts taxed?
Yes, the interest earned on business savings accounts is taxable income, reported on your business’s tax return.
If you earn more than $10 in interest, you should receive a Copy B of Form 1099-INT to report those payments to the IRS. You should receive this form from your bank, but all taxable and tax-exempt interest must be reported on your federal tax return even if you don’t receive a Form 1099-INT.
Your business’s tax rate and entity type will determine how the interest earned is taxed. Keeping clear records of your business transactions can help you file accurately during tax time.
Benefits of a business savings account
There are many benefits to opening a business savings account for your small business.
- Financial separation: The separation between business and personal funds is important to protect personal assets as a business owner. Also, financial separation makes filing taxes simpler.
- FDIC-insured savings: Most business savings accounts are FDIC insured, up to $250,000 per depositor, per ownership category at a given bank. Keeping your business’s surplus cash in a savings account can give you peace of mind.
- Interest earnings: Savings accounts allow businesses to earn interest on idle money. Interest can help your business build reserves for future purchases or payroll needs.
- Easier budgeting: Savings accounts are excellent for budgeting for future expenses or seasonal fluctuations.
How to open a business savings account
Now that you understand what a business savings account is and its benefits, let’s discuss how to open one. Follow these steps to open a business savings account at your preferred bank.
Gather business documentation
You will need to provide documents like your articles of incorporation, fictitious or assumed name certificate, Employer Identification Number (EIN) or an operating agreement to verify ownership of the business.
Compare banks and interest rates
It’s ideal to compare banks or credit unions to find one that best suits your needs. Compare interest rates, fees, transaction limits and minimum balance requirements.
Choose an account with terms and fees suited to your cash flow
Once you’ve evaluated the terms and fees, choose an account that fits your business’s needs.
Link your business checking account for easy transfers
After opening your business savings account, be sure it’s linked to your business checking account for internal transfers.
