Payroll bank accounts: A small business owner’s guide

Separating business and personal expenses is one of the most important steps to take when setting up your business finances, but certainly not the last. Another important step is to separate different business expenses into different accounts or sub-accounts. One such option is a payroll bank account.

This guide can help you avoid common payroll mistakes that hurt your company’s bottom line. A separate payroll account can help business owners—large and small—maintain clear financial records, prevent cash flow issues, and simplify compliance with tax regulations.

What is a payroll bank account?

A payroll bank account is a separate business checking account or sub-account used exclusively for payroll transactions, such as wages and tax withholding.

If you’re using your main account for payroll and other expenses, you might accidentally spend funds you need for one expense on another. A dedicated payroll account or sub-account safeguards you from that outcome by ensuring you set aside what you need to cover your employees’ paychecks.

Setting payroll aside with sub-accounts

With Bluevine Business Checking, you can set up a payroll sub-account and automate payroll transfers with a set percentage or dollar amount. Learn more about how to set up sub-accounts and automatic transfer rules to always make sure you have enough to cover payroll.

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Benefits of a payroll bank account

Here’s a comprehensive breakdown of the benefits of opening a payroll bank account:

• Keeps payroll organized for accurate recordkeeping: Accurate payroll records make labor cost analyses, taxes, and audits much faster and easier.
• Prevents overspending on operational expenses: Owners and managers who allocate payroll funds into a different bank account or sub-account won’t accidentally spend them on other operating expenses, as having a separate bank account for payroll provides clear visibility into available cash.
• Reduces risk of fraud or unauthorized access: Assigning the right user permissions to your payroll account (for example, to your bookkeeper and payroll administrator) keeps your funds safe from other parts of the business that may accidentally use these funds.
• Facilitates compliance and audit preparedness: IRS audits take longer when the auditor needs to search for payroll transactions in your main business checking account. With a dedicated payroll account or sub-account, you can quickly produce a payroll report, tax payment records, and deductions without digging.

How does a payroll bank account work?

Understanding the mechanics of a payroll bank account is straightforward once you see the full cycle. Here’s how money flows from funding to payday:

How to set up a payroll bank account in five easy steps

Setting up a payroll bank account or sub-account is simple, and it starts with finding a trusted banking provider with mobile tools and accounting platform integrations. Here’s how to get started.

Step 1: Open a dedicated business checking account

Find a business banking platform that fits your needs and doesn’t charge ACH transaction fees, as these can add up quickly when processing multiple employee payments. Also, make sure your provider offers unlimited transactions.

To avoid fees, consider how much money you need to keep in your business checking account. Some banks waive monthly charges if you maintain a minimum balance, while others charge fees by transaction volume. Also, check for integrations with your current payroll and accounting systems.

Step 2: Gather employee and contractor banking information

You’ll need routing and account numbers for employees who want direct deposit, as well as Social Security numbers, addresses, and W-2s to set up tax withholding. For independent contractors, you’ll need a contractor agreement from each individual or company working for you. Since these people aren’t employees, you don’t need to withhold taxes for them.

The easiest way to gather all this information is through an encrypted online form or payroll software portal. Never ask employees to email banking information.

Step 3: Establish your payroll schedule

Your payroll cycle can contribute to payroll costs, especially if your banking provider charges you for ACH payments. Most small businesses choose a semimonthly or biweekly schedule because it’s simple, aligns with how most people prefer to budget, and provides steady income for employees and contractors. Check your cash flow patterns and consult with employees and contractors before deciding on a payroll schedule.

Ideally, you’ll want payroll to line up with larger cash inflows, but if your business experiences seasonal dips, use a business line of credit to cover slow periods and provide consistent payment to employees and contractors.

Step 4: Fund your payroll account before each pay period

Many small businesses make this simple mistake. Have enough funds in your payroll account to cover wages, withholding, and benefits at least three days before pay day to eliminate delays. Don’t forget to pay your 7.65% share of employee Medicare and Social Security taxes, plus any state taxes. You’re required to submit both your and your employees’ taxes in a payroll deposit to the IRS.

The tax withholding process means a $12,000 payroll could cost you up to $15,000 when all is said and done. You can confidently cover payroll banking needs without scrambling by maintaining a clear plan for managing incoming and outgoing funds.

Step 5: Connect your payroll software to the account

Modern payroll software allows you to automate payroll processing, which is easier than doing it manually. Once your payroll account is open, connect it to your payroll platform, usually by entering your account and routing numbers. You should also connect your accounting platform, like QuickBooks or Xero. Once connected, all your platforms should record every transaction automatically, allowing you to analyze cash flow and generate reports easily.

Types of payroll bank accounts

Not all payroll accounts are structured the same way. Understanding the different types can help you choose what works best for your business.

• Operating payroll account: This term applies to the portion of your primary bank account that you use for payroll. An operating payroll account is the simplest type available, and is not recommended for growing companies.
• Separate payroll bank account: This is the primary account type we’ve been discussing in this article, a separate account (or sub-account) for processing payroll transactions only. This is the most common way small to medium-sized businesses handle payroll.
• Payroll clearing account: Keeping too much money in your payroll account can be as problematic as keeping too little. Many companies use a clearing account, essentially an account that redistributes leftover funds to other business accounts after payroll is processed. If you use a Bluevine sub-account for payroll, you can set up an automatic transfer rule to make sure there’s always the right amount in there, and automatically redistribute extra funds to your main account or another sub-account.
• Salary payment account: Some businesses create multiple specialized accounts, one each for gross wages, tax withholdings, and benefits. This level of separation is typically more than small businesses need, but can be valuable for companies with complex payroll.

Best practices for managing your payroll account

Setting up a payroll account is step one toward smart payroll management. Follow these tips to protect yourself from errors, fraud, and compliance issues.

• Don’t mix with other expenses: Keep your payroll expenses separate from the rest of your business transactions. That means no vendor payments, supply purchases, or utility bill payments should be taken from the payroll account. You also can’t use pending employee and contractor pay as an emergency fund—instead, use a business line of credit to cover revenue dips.
• Always calculate and transfer exact payroll funds: Don’t estimate or round up—calculate or automate how much you need for gross wages, employer taxes, benefit contributions, and bonuses, and set that aside.
• Reconcile bank statements with payroll reports: Did all direct deposits clear? Did tax payments go through? Are you responsible for any unexpected fees? Syncing your accounting platforms streamlines reconciliation and helps catch errors. Do this every pay cycle.
• Limit access to authorized staff only: Payroll account access should be limited to you, your bookkeeper, and a payroll administrator. Use different account credentials from your operating account and require dual authorization for large transactions.
• Keep digital records of all transactions: Maintain organized digital records of every payroll run, tax payment, and bank statement. Title files using a consistent format. Keep these records for at least seven years to comply with IRS requirements.

Bluevine Tip

Set up account alerts for low balances and large transactions. Most banks let you receive text or email notifications when your balance drops below a certain threshold or when transactions over a specific amount occur. These alerts act as an early warning system, helping you catch errors or potential fraud immediately.

Set up a dedicated payroll account with ease

A payroll bank account is a simple tool that can dramatically improve how you run your business. The separation it creates between payroll and operating funds protects you from cash flow disasters, simplifies tax compliance, and gives you clear visibility into your labor costs. These insights are essential as you run and grow your business.

Are you looking for a business checking account that works well for payroll? Bluevine Business Checking offers the features small businesses need, including no monthly fees for our Standard plan, unlimited transactions, built-in invoicing and bill pay tools, and integration capabilities with popular accounting and payroll software. Bluevine’s all-in-one banking platform is designed to help you manage your money efficiently, whether you’re paying employees or covering operational expenses.

Easily set up sub-accounts and automatic transfer rules with Bluevine Business Checking.

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Payroll bank account FAQs

What are the best bank accounts for payroll for small businesses?

The best payroll accounts offer no or low monthly fees, unlimited transactions, ACH transfer capabilities, and integration with payroll software. Bluevine Business Checking meets these criteria with zero monthly fees for our Standard plan and robust digital banking features like sub-accounts, built-in invoicing and bill pay tools, and much more.

See how Bluevine compares to traditional banks and other fintechs.

What is paid from a payroll bank account?

• Employee wages and salaries: This includes regular pay, hourly wages, and salaried compensation for all W-2 employees.
• Overtime, bonuses, commissions: Any additional compensation beyond base pay, including overtime premiums, performance bonuses, sales commissions, and incentives.
• Employer payroll taxes (Social Security, Medicare, FUTA/SUTA): Your share of Social Security (6.2%), Medicare (1.45%), federal unemployment tax (FUTA), and state unemployment tax (SUTA).
• Withheld employee taxes: Federal income tax, state income tax (where applicable), and the employee portion of Social Security and Medicare taxes that you withhold and remit on their behalf.
• Benefits (healthcare, retirement): Employer contributions to health insurance premiums, 401(k) matching, HSA contributions, and other benefit programs you offer.
• Garnishments/child support: Court-ordered wage garnishments, child support payments, tax levies, and student loan garnishments that must be withheld from employee paychecks and remitted to appropriate agencies.

Should payroll taxes be kept in a separate account?

While not legally required, keeping payroll taxes in a separate account—or in your dedicated payroll account rather than your operating account—is a smart practice. Payroll taxes represent money you’re holding in trust for the government, not your own business funds. Separating them prevents the temptation to “borrow” from tax money during cash flow crunches.