How to Manage Your Bank Accounts When Self-Employed

Female small business owner looking at a notebook with a laptop open.
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Working for yourself has many benefits, including setting your own hours, being your own boss, not having to ask for a day off or vacation time, and being in complete control of your business. With any advantage, though, comes a disadvantage.

As anyone who is self-employed knows, one major challenge of running your own business is handling the finances. It’s typically worth the trouble, but you need to figure out how to handle the following:

  • When you work for yourself, you don’t have a paycheck coming in every two weeks. Some weeks might bring zero revenue or require that you invest heavily in the business.
  • You need to open bank accounts, accounts with state and local authorities, and manage business finances (as opposed to doing the work you love—and generating revenue).
  • You need to track income and expenses carefully so that you don’t miss tax deductions.
  • Your employer doesn’t withhold taxes for you or help you pay those taxes.
  • You typically don’t get bonuses, and taking time off means you might not get paid.

Knowing how to correctly manage a business bank account when self-employed can be tricky. Whether you’ve been self-employed for the past 10 years or you’re brand new to the self-employment world, these tips can help you keep your finances in order.

Keep Business Expenses Separate from Personal Expenses

Do you need a separate bank account if you're self-employed? While it's not technically required, it's a good idea. You should consider having a separate checking account and savings account for your business. While it might seem confusing at first, having separate accounts streamlines your accounting procedures and simplifies your taxes. Plus, it’s much easier to keep track of exactly what you’re spending and what you’re bringing in when all your business expenses and income are funneled separately into their own account.

Where to Open Bank Accounts

Several banks and credit unions offer affordable accounts for self-employed business owners. Fee structures for these accounts are typically different than fees for personal accounts, so ask about fees for business accounts, and describe how you plan to use your account. Here are your options for opening business bank accounts.

  • Local credit unions: Credit unions are often a good option for inexpensive financial services. Those customer-owned institutions tend to focus on low fees and competitive rates, but some credit unions have roughly the same pricing model as big banks.
  • Small banks: Smaller, regional banks have a community focus similar to many credit unions. Plus, they may help you develop local relationships. Small banks and credit unions might seem quaint, but most institutions have enough horsepower for all but the largest businesses.
  • Online banks: Online banks tend to keep prices low and offer attractive rates. You won’t be able to do as much in person, but you can probably accomplish everything you need if you’re relatively self-sufficient.
  • Big banks: Large, national banks get a bad rap, but they have an extensive presence and all of the services you’d ever want as your business grows. US Bank is one bank that offers free checking to small companies, and other banks offer free accounts if you qualify for fee waivers.

Use a Tax Savings Account

Running your own business doesn’t mean you won’t have to pay taxes. Unlike a wage-earning employee who has taxes withheld, you’re 100% responsible for paying federal, state, and other taxes. That can be a shock if you spend most of the money you bring in.

To avoid fines and penalties, you may need to pay quarterly estimated taxes. To keep everything organized, consider creating a separate bank account just for taxes. Depending on your income, location, business structure, and other factors, you’ll probably want to transfer between 15% and 30% of your profit into your tax savings account.

An experienced accountant can help you determine how much to set aside for taxes. While the fees might seem high, getting professional, personalized advice is often worth the investment.

Create a Zero-Sum Budget

A zero-sum budget is an extremely specific budget that leaves no money left over at the end of the month. By carefully monitoring your expenses every month, you tell all of your money where to go, leaving nothing left once all expenses have been paid.

To get started, list all of your fixed expenses for the month. Then, track your expenses for the next three months to see what your variable expenses are. Find a number that works for you each month and transfer that amount from your business checking to your personal checking account—this is your personal income. Any new business revenue that comes in goes directly into your business account. At the beginning of each month, you transfer the amount you need again and start over.

For example, you determine that it costs $4,300 to live each month including fixed and variable expenses. Throughout the month, your business takes in $6,500. At the beginning of the following month, you transfer $4,300 from business checking into personal checking. You also move 25% of profits into your tax savings account ($1,625) and use the remainder ($575) to invest back into your business or save for retirement.

Use Budgeting Software

To go along with your zero-sum budget, you could use budgeting software for both your business and your personal life. There are many programs that allow you to track your spending, create categories for different areas of spending, track your net worth, follow your investment accounts, and more. Budgeting software can help keep you on track each month and help you monitor your spending.

Managing your bank accounts doesn’t have to be complicated when you run a small business. With your finances and bank accounts running smoothly, you’ll be able to devote more of your time to what really matters—your business and your clients.

Article Sources

  1. IRS. "Frequently Asked Questions: Income and Expenses 1." Accessed May 2, 2020.

  2. MyCreditUnion.gov. "What Is a Credit Union?" Accessed May 2, 2020.

  3. US Bank. "Business Checking Accounts." Accessed May 2, 2020.

  4. Discover. "What Is Zero-Sum Budgeting and Can It Work for You?" Accessed May 2, 2020.