Do I need a business bank account if I’m self employed?

When you’re self employed, you are your business in the eyes of the IRS. As you can imagine, that makes untangling your business and personal affairs a bit tricky, especially if you’ve been a bit lax on the subject so far. If a freelancer and their business are one and the same, many self employed folks are left wondering: “Do I need a business bank account if I’m self employed?”

The short answer is, no, you don’t need a business bank account for freelancing. In fact, you can easily use a personal bank account for a sole proprietorship for years without any problems. but, there are benefits to having a separate bank account if you’re self employed.

While there are millions of us self employed folks out there, there’s unfortunately little information out there about how to manage your bank accounts when self employed. That’s where we come in.

Up next, we’ll talk discuss if you can use a personal bank account for a sole proprietorship and about the benefits of a business bank account for freelancers. Let’s get to it!

Do I need a business bank account for a sole proprietorship?

If your self employment business is set up as a sole proprietorship, you may be confused about whether or not you can keep using your personal bank account for your freelance business. Unfortunately, being self employed makes handling your finances a whole problem onto itself, so you may be thinking about opening up a business bank account for your freelance gig.

The question is: Do you really need to?

The fact of the matter is, there’s no law dictating that you need to open a business bank account to handle the finances of your sole proprietorship. Why is that?

Well, according to the United States Small Business Administration:

A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.

U.S. Small Business Administration

That means when you own a sole proprietorship, there’s legally no distinction between you as an individual and the business you run. In the eyes of the IRS, you and your business are taxed together as the business’ income is your own.

Thus, unlike another kind of small business owner, you don’t technically have to formally separate your personal finances from your business finances because they are one and the same.

The only exception to this rule is that you must have a separate business bank account if your sole proprietorship operates with a DBA (doing business as) name. For example, if your name is Frank Smith and your business is called “Frank’s Freelance Writing,” you need a separate business account.

Can I use my personal bank account if I’m self employed?

Okay, so we just said that you don’t have to have a separate business bank account if you’re a freelancer, but does that mean you can use your personal bank account if you’re self employed?

Well, we wouldn’t go that far. While, sure, you can continue to use that one checking account that you’ve had since you were 15 for your sole proprietorship, it’s not really recommended.

Especially if you freelance only as a side gig, using your personal bank account to handle your business income and expenses means everything will easily get tangled. When you have paychecks getting deposited and bills being paid for personal reasons outside your business into your bank account, it can be tricky to determine precisely what’s an expense and what’s income for your Schedule C at the end of the year.

So, what should you do about your bank accounts when you’re self employed? Well, you have two options:

  • Choose one of your personal checking and savings accounts to be solely for your freelance business (or open new personal checking and savings accounts for this purpose)
  • Apply for a business bank account

What are the benefits of a business bank account?

If you’re considering opening a business bank account for your freelance gig, you might be wondering what the benefits this kind of account offers for your business. Here are some of the top benefits of a business bank account for sole proprietorships:

  • Better organization of accounts. When you have one account that’s solely dedicated to the income and expenses of your freelance work, it’s easy to keep good accounting records. If you have a separate business bank account, you don’t need to worry about accidentally counting a W-2 paycheck as business income or your cell phone bill as an expense. Accounting simply becomes a whole lot easier.
  • More accurate tax filing. Tax season is already hectic, so why would you add to your stress by having a messy bank account situation. In the off chance that you’re audited, you want to be able to show the IRS that you’ve been doing everything by the books. Having a clear distinction between your personal life and your business makes this simple.
  • Increased awareness of your spending. No business ever got anywhere without spending, but you don’t want to consistently be in the red quarter after quarter. If your personal finances are mixed in with your business books in one bank account, it’s easy to overspend on your business’ dime.

Simply put, by separating your finances into separate personal and business accounts, you can avoid the headache that comes with inaccurate bookkeeping and messed-up taxes.

That being said, you don’t necessarily need to open a business-specific account, unless you have a DBA, partnership, LLC, or other business structure outside of a simple sole proprietorship. For many freelancers, using a regular ol’ checking account will do just fine – you just might want to have one for your personal business and one for your freelance work.