Do you need a business bank account if you're self-employed?

If you’re self-employed, whether as an independent contractor, freelancer, consultant or another type of small business owner, chances are you have a lot of questions about how to best handle your finances. Among them: “Do I need a business bank account if I’m self-employed?” 

The answer in many cases is “yes” and we’ll explain why here, as well as offer advice for choosing the best business bank account if you are self employed. 

Do you need a business account if you are self employed?

While you technically do not need a business bank account if you are self-employed and operate as a sole proprietor, you may find yourself later regretting your decision not to get one. A separate business bank account can be helpful in myriad ways. It allows you to:

1. Track income from freelance or independent contractor or consulting work,
2. Itemize expenses you may be able to deduct,
3. Make bookkeeping and tax time less stressful, 
4. Budget for taxes and recurring expenses, and
5. Get financing in the future. 

If you want to be successfully self-employed, setting up a business bank account is one step in creating a financially healthy independent business.

For those who have formed an LLC, S Corp or other legal business entity, then you absolutely should get and use a business bank account. Not using one can put your personal assets at risk. 

What about if you’re an independent contractor: Do you need a business bank account? Again the answer is “probably yes.” As an independent contractor you will likely report your income and expenses to the IRS on a Schedule C form. (That can vary, though, depending on the type of business structure you choose.) Having a separate business bank account makes it easier to keep track of that information. 

Compare business bank accounts for self employed

If you are self employed, including working as an independent contractor, finding the best business checking account will be different than it will be for a larger small business with employees. Here are some options to consider. 

Bank of America® Business Advantage Banking

Chase, Uline, Novo and American Express are also options you may want to consider.

What kind of bank account do I need for self employed?

Yes, you can get a business bank account if you are self-employed. Before you open a business bank account, it is a good idea to first get a taxpayer identification number (TIN) or employer identification number (EIN) as some financial institutions will require that. (Note the financial institution will also ask for your Social Security number as banking regulations require them to verify your identity.) However, you do not have to have a corporation or LLC to get a business bank account as many financial institutions; operating as a sole proprietorship can be just fine. 

Most business owners will start with a business checking account. This will also give you access to a business debit card which you may need to withdraw cash or make cash deposits at an ATM. 

As your income grows, you may also want to get a business savings account.

Another option is an account that allows for subaccounts, so you can put some of your money aside for taxes or recurring expenses. These work similar to the envelope budgeting system, allowing you to save money toward specific expenses. 

Make sure you understand the cost of the account. Even free business checking accounts are going to have some some fees associated with them.

• Will there be monthly fees and if so, how can you avoid them? 
• What other fees does the account charge?

Review the features that are important to you, such as:

• How robust are the mobile banking and online banking features?
• Can I deposit checks on the mobile app?
• Does it integrate with my bookkeeping software?

Keep in mind, lenders also have their own criteria when determining if you qualify to open a business bank account. Having a separate business bank account can also demonstrate financial stability to lenders if you're looking to apply for funding.

Can I use my personal bank account for business?

Yes, you can use your personal checking account for your business if your business is not incorporated. (If you have created a separate legal entity for your business such as an LLC, S Corp or C Corp, you absolutely should use a business bank account to help protect the integrity of your corporate structure.) 

If you’re a startup or you have a side hustle, you’ll likely be tempted to stick with your personal banking account simply because it’s easier than opening a new bank account. 

But if you mix business and personal transactions all kinds of problems can arise. You may lose track of business expenses that may have been tax-deductible, or you may accidentally claim personal expenses that shouldn’t have been deducted. (The IRS requires you to clearly document business income and expenses.) 

You may have trouble budgeting for periodic expenses in your business. 

And most importantly you may lose track of how much you’re actually making as an independent contractor, freelancer, consultant or small business owner.

In short, if your goal is to remain self-employed you should separate your business and personal expenses, and that means getting a separate bank account for your self-employment income and expenses. 

Tips on managing finances when self employed

The most important thing a self-employed business owner can do to better manage their finances is to separate their business and personal finances. This step alone will give you valuable insights into how much you’re actually making in your business. That’s because you’ll be able to see business income and most or all of your business transactions in one place, rather than guessing. 

When you have your own business, another crucial step is to set up a proper bookkeeping system from the start, even if you are operating as an independent contractor or freelancer. Invest in accounting software and either take a class or hire someone to set it up properly for you. You can always hire a bookkeeper to help as your income grows, but having it set up right from the beginning will save you a lot of headaches. 

Get a business credit card for your business purchases. A credit card can help with cash flow by giving you extra time to pay for business purchases and you may be able to earn lucrative perks with a rewards card. The good news is that even new business owners may qualify based on personal income and personal credit. 

Make sure you to use your business bank account to document business income. If you get income through multiple sources (invoicing, Paypal, Amazon etc.) try to have it all deposited into your bank account. That way, if you try to get a small business loan in the future you’ll be able to show the lender how much money your business is bringing in. This can be crucial for qualifying for many types of small business financing.