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Does my small business need multiple bank accounts?

Do you really need that other bank account?

I have read multiple articles by a variety of sources: HR Journals, Bankers, News Outlets, etc. explaining the need to be able to track specifically how you are spending the PPP Loan money. Yes, you will likely need receipts, payroll journals, canceled checks—all the good stuff. Then I read (and heard directly from a high-level local banker): “You should also open a new account just track it.” Did you hear that noise? That is alarm bells in my head going off.

For years, bankers have been promoting the need to open new accounts for specific needs (highlighted most recently by the Wells Fargo scandal). Savings account paying 0.01% Interest? Check. Payroll account to track those 4 payroll transactions every month. Check. For most small business owners, all this does is add to my invoice every month.

There is some merit to having a separate savings account and it is not about interest but rather preservation of capital. If you write someone a check and then get your account hacked, your checking account could be drained. But if you only keep the bare minimum in your checking account and keep most of it in savings, then you severely reduce your risk of having your account drained completely before the banks can figure it out. But this situation is ideal for businesses with low volume but high balances, not high volume but low balances. Those payroll accounts, however, nothing good can come from that.

I remember a conversation I had when I was just starting out as a new business owner. I have no problem mentioning that I bank at United Bank here in the Tysons area and when I started out, I was in Arlington. Why United Bank? I have no idea—seriously. I know I had a PNC account until they charged me a monthly fee—and then I did not have one anymore. United Bank had a branch nearby and so that is what I chose—sometimes just being present is all you need to land a new account. Over time, I ended up developing a relationship with that bank manager and stayed there ever since.

This theory of mine that payroll accounts are pointless is not a new revelation. I had been wondering “why bother” ever since I saw my first client have the separate account and I was forced to reconcile this account which seemingly was unnecessary. Then one day many years ago, I was depositing checks at the bank and that bank manager asked me: “Are you interested in opening a payroll account today?” I smiled and asked her right back: “If you can tell me the benefit of doing so, I’d gladly consider it.” She struggled with a response and mentioned simply that it would allow me to keep my transactions separate. As an accountant this has no benefit, especially for payroll: If you are with ADP or Paychex, you need to adjust payroll figures anyway to be accurate. If you are importing your data, then it flows through to your Profit and Loss anyway so why separate it?

Now is a good time for me to be upfront:  I have never worked at a bank. I have no idea what banks need to be successful other than people with money depositing it into accounts in their bank. There is probably a research paper somewhere that was distributed 50 years ago to bankers saying, “the more accounts you have your clients open the more money you’ll make.” This is all probably likely, true, and correct. But what is also true is that if you ask banker “should I have an account for (insert reason here)” that banker will say yes.

This is not like planting seeds in a garden where if you plant two seeds in the same location, you will only get 1 plant but if you plant two seeds in two different locations you can get two plants. That is not how money works. So regardless of how many accounts you have the sum of the amount of money you have will be the same. Always.

There is one exception where your money actually could decrease: Banks can charge fees (sometimes hidden by reducing interest paid) based on the number of accounts you have. I have seen those fee disclosures and they are not easy to read, and I have way too much stuff to do to figure out why I only received $9 in interest last month rather the usual $12. Multiply that by 10,000 every month and this is how banks make their money.

That brings me to another topic about how money “works:” Cash is fungible (I googled that and came up with “mutually interchangeable”). Essentially if you give me a $10 bill to spend only on Chipotle, but I pocket that $10 and then use my debit card to pay for Chipotle instead—that essentially sums up how that concept works.

So, let us circle back to the PPP Loan topic again, do you need that new account? First there has been ZERO REQUIREMENT to do so by the SBA. They will want documentation for forgiveness but do not mention anything about a separate account.

These articles I have read state that you should get new checks created to use specifically for this purpose. I do not know about you but the last few times I’ve ordered checks it has taken weeks for them to arrive. Plus, that is one more cost not forgivable by that PPP Loan so if we do not have to pay it, why would we? You are not going to get that PPP money and then wait 3 weeks to spend it because you do not have the checks. You will take advantage of the “cash is fungible” principle and spend it out of any account, because you cannot wait on someone else to send you those checks.

And what about payroll? Before running your next payroll, you would have to go through the process of changing the bank account from which the money comes from. Let us go into that process because most small business owners have not had to do that in a very long time. And for this we will talk about payroll as two separate transactions: 1) The act of paying staff and 2) The act of paying taxes.

For large payroll companies like ADP or Paychex, they act as a clearing account and take all the money from you for both transactions before paying your staff. They take 2 drafts one for wages and one for taxes so changing the account is usually not more than changing your bank info. There could be a delay for a couple business days as they might need to authenticate that account again by making two sample deposits. I can handle a couple days, so this is not a huge problem if you plan ahead.

But smaller payroll companies like Intuit or myself (even though I’m trying to get out of it) rely heavily on the infrastructure to make payments. Bank accounts are tied specifically to PIN numbers and changing your bank account with takes at least 7 days to receive a PIN by mail. Have you ever not received one? I have, and then you must wait again! I do not recommend changing EFTPS bank accounts unless necessary. Also, the IRS isn’t exactly open right now so will you get the PIN notice by mail?

Moving on, there are also other transactions that assuredly qualify for PPP Loan forgiveness but just will not come out of that account. Utilities for example are routinely set on autopay with a credit card. By changing accounts, you would no longer get those credit card points!! Ok, not a big deal but still a hassle.

There are many instances where business owners pay rent to themselves and have those buildings in LLCs (aka Real Estate Holding Companies). Now that rent payment is not forgivable for PPP but if that LLC pays a mortgage then the interest paid on that loan should count (at least as of today’s writing). You are not going to be able to change that source account where the mortgage payment is made on that separate LLC to your new bank account.

So all of these examples I’m bringing up are there to illustrate one point: There is a very strong chance that even with a separate account, and doing the best you can, very likely you will have transactions that don’t come out of that account. Knowing that, why go through the hassle of the remaining transactions?

If for you to receive that PPP Loan a bank REQUIRES you to make an account or banking relationship (for example: new accounts), then 100% you need that account because you need that money. But if you already have an account and you are going to need source documents anyway, I will re-ask that question: Do we really need that separate account?

According to the SBA regulations, it is not a requirement. If you ask a banker, they are going to tell you yes, always. If you ask me, as an accountant, my opinion is: Do not waste your time.

For more information on how your business can minimize the Paycheck Protection Program Loan, please contact Lipsey and Associates.