If you’re just starting a business and expecting to hire employees, you’ll soon tackle the challenge of payroll. Managing payroll is oftencompli ...
What is A Payroll Account?
Written by: Natalie Fell
Natalie is a writer with experience in operations, HR, and training & development within the software, healthcare, and financial services sectors.
Reviewed by: Daniel Eisner
Daniel Eisner is a payroll specialist with over a decade of practical experience in senior accounting positions.
Updated on October 2, 2023
What is A Payroll Account?
If you’re a business owner with employees on your payroll, you may have been advised to create a separate payroll bank account. A payroll account keeps money allocated for employee wages and payroll tax separate from other business bank accounts.
There are many benefits to having a payroll account as well as a host of considerations. This guide will help you understand what a payroll account is and why good payroll accounting is so important.
Payroll Accounts Explained
A payroll account is a bank account dedicated to the funds your business expects to use for payroll. It’s separate from your main business bank account and the funds inside will be used to pay your employees and relevant taxes each pay period.
You won’t need a payroll accountant to oversee your payroll account. Unlike your business bank account, your payroll account will not be used to accept vendor payments or payment for goods and services.
However, you may provide the account and routing numbers to payroll service providers you work with so they can handle employee direct deposit and issue employee paychecks on your behalf.
In addition to employee wages, a payroll bank account typically also covers your payroll tax liabilities and employer contributions. However, depending on your own particular circumstances, you may also decide to keep payroll taxes in their own dedicated account. In that scenario, your payroll account will only contain your employees’ net wages.
Why You Need A Payroll Account
There are several benefits to keeping a separate payroll account. Let’s take a look at why this is helpful.
Keep Expenses Organized
Opening a separate bank account for payroll allows you to keep better track of your payroll expenditures, separate from your main business bank account. Chances are your payroll expenses will be the largest you have as a business owner.
Trying to keep track of payroll-related transactions within your business bank account can be complicated and confusing. When all payroll-related expenditures are handled separately, you can breathe a little easier knowing your books are organized.
Protect Against Fraudulent Activity
Keeping your payroll account separate from your business bank account is also a great way to protect against theft and fraud. Because a payroll bank account contains only funds related to payroll processing, anything suspicious related to that account will remain isolated.
Your banking information (account number and routing number) is listed on each employee paycheck. If a paper check winds up in the hands of a criminal or even a disgruntled employee, they could potentially use that information to access the entire account.
Although this would still be a huge inconvenience, keeping a separate payroll account would prevent such an incident from endangering all of your company’s finances.
Ensure Accounting Accuracy
Putting your payroll funds into a separate bank account simplifies budget reconciliation. Trying to account for payroll-related expenses and transactions within your main business bank account can be cumbersome and confusing.
With a dedicated payroll account, you can easily keep track of wage, tax, and deduction transactions, making the payroll tax filing process run much more smoothly.
Things To Consider
Although opening a payroll bank account is a smart business decision, there are a few things to keep in mind:
- Keeping payroll funds separate from your main business finances is for each company to decide. There are no specific laws or regulations that require you to do so.
- Adding a payroll account means you’ll have to keep track of an extra bank account – an additional responsibility for business owners and their accounting or HR teams.
- Bank accounts often have fees associated with keeping them open. Adding a payroll bank account means you may be responsible for additional fees, which you’ll need to factor into your budget and bottom line.
As with any financial matter, it’s wise to weigh all the pros and cons before making your decision.
Having a payroll bank account is usually a smart business decision. You’ll be able to easily track payroll transactions, which will make paying wages and payroll taxes stress-free. With a separate payroll account, your books will stay organized and you’ll protect yourself against fraud and accounting errors.