In addition to traditional business checking accounts, many banks offer high-yield accounts to empower businesses to earn interest on their operating balances. This means that instead of needing to move money back and forth between checking and savings just to earn a little bit of interest, you can go about your day-to-day banking while earning on your checking balance.
High-yield business checking accounts sometimes come with a requirement or activity goal you need to fulfill to qualify for the interest rate.
Can a business checking account earn interest?
Yes, business checking accounts have long been able to earn interest, though the interest rates paid by traditional banks have typically been low and unattractive to small business owners. Online-only banks and banking service providers have less overhead than brick-and-mortar banks, so they’re able to offer higher interest rates.
Without buildings, staff, maintenance, and all the other costs associated with having physical branches, online banks are in a stronger position to offer higher interest rates with their business checking accounts.
What does high-yield checking mean?
High-yield checking means you can earn more interest than a “regular” business checking account, making your money work harder for you. As mentioned earlier, you may need to meet specific requirements or activity goals to qualify for interest earnings.
Historically, business checking accounts have paid less than 1% interest, which has generated little enthusiasm from business owners. When the Federal Reserve raises interest rates, banks not only charge borrowers a higher rate on loans, but they also pay a higher interest rate to business checking account holders.
Some high-yield business checking accounts offer as much as 50x the national average interest rate.
Are interest earnings taxable income?
Interest you earn from personal checking and savings accounts is taxable, and interest you earn on high-yield business checking is no different. Each year, financial institutions notify the Internal Revenue Service (IRS) of any interest they’ve paid out, so you’ll be expected to pay taxes on your gains.
Be sure to include your interest earnings on your business tax filing, and work with your accountant to figure out how to get the highest return possible.
The benefits of high-yield checking accounts for small businesses
While the most obvious benefit of a high-yield checking account is the higher annual percentage yield (APY), there are plenty of other benefits:
- Daily compounding: Most high-yield accounts compound interest daily, which over time will lead to more money paid out than interest compounding monthly. Accounts may still pay interest out monthly, though.
- Fewer fees: High-yield business checking accounts are almost exclusively available through online banks, which have much lower overhead expenses. This allows them to offer a higher APY and charge fewer fees than traditional banks.
- Easy access to funds: High-yield accounts are easily accessible through online banking, which is important if your business is facing an emergency. Easy access to funds to pay regular expenses, such as quarterly taxes, also benefits your business.
- Online checking account tools: Since online banks offer most high-yield checking accounts, they usually have robust account management tools. These include mobile apps that enable account holders to view account balances, pay invoices, transfer funds, etc.
FDIC insurance: Like personal accounts, high-yield business checking accounts are federally insured up to $250,000, including any interest you earn.