How many bank accounts

[Pacun]

I have noticed that most corporations have a payroll account and a checking account. If the corporation only issues payroll checks to 3 people, do you really need that payroll bank account?

I believe it makes sense for a large C corporation to have more than one bank account, how many employees should the corporation have in order to start having 2 or more bank accounts?

[Medlin Software, Dennis]

I'll bite. Why is the corp using separate accounts? What are they trying to accomplish?

[Pacun]

I'll bite. Why is the corp using separate accounts? What are they trying to accomplish?

My question is aimed at the ideal setup. What should I suggest to a C corporation with only 2 employees and the 100% owner vs to a corporation with 10K employees?

[ILLMAS]

Here is a good reason as to why some large companies maintain a seperate account, but with 2 employees they should have any problems having one account:

The principle reason for a business to have a separate special payroll checking account is for internal payroll control and management. “ Small businesses that employ people other than the owner or partners are required by the IRS to keep detailed payroll records.” If a business only has one account that includes payroll, expenses and income, it is much harder for management to keep track of how much money the company has. By keeping payroll accounts separate from operating and expense accounts a manager can see very easily how much the business has paid out to employees for payroll weekly, monthly and yearly. Employees are usually very sensitive when it comes to their pay, so a special account also helps a business to make sure the money is there to make timely and accurate payments to employees. (A business might overdraw an expense account, but by funding a payroll account separate, employees do not have to worry about their paycheck bouncing.) Another advantage of a separate payroll account is the ability for a manager to easily find errors, stolen checks and possible employee misuse of the account.

Source: Unknown

[Medlin Software, Dennis]

If someone is to sign checks for some things, and not others, then additional accounts may be needed. If the same people can sign for any item, then one account is perfectly fine.

A separate account does nothing to ensure payment, unless a separate line of credit is available for the payroll account. Many times a deposit/transfer has not taken place before payroll was processed.

Any "security" reason is a waste of time at best. Checking accounts are not secure and can't reasonably be made any more secure than cash. A separate account does zip to keep someone from accessing company funds improperly.

Some might say every additional account adds a level of complexity and less security than a single account.

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Like for home use, I think a business should have at least two accounts (at two different banks). If something happens to one account, having a second, with enough funds in it to get by for several business days, keeps things rolling until the mess is fixed.

[Catherine]

I'll chime in with another reason that I like to see small companies with a separate payroll account. We've _all_ seen small businesses run afoul of the payroll tax payments - late payments, missed payments -- usually because they spent the money on another bill before the PR tax was due.

If they get into the habit, early, of depositing every nickel needed for paychecks and PR taxes into that separate PR account, the money will not get spent on a new piece of equipment, or the rent, or to get the 2%/10 discount from Vendor XYZ.

[Medlin Software, Dennis]

To add to Catherine's reply, I like it when the actual deposits are done every payday, even if not "required". If you cannot afford to pay the complete payroll every payday... you cannot afford to have the employee(s).

If you can afford the employees, and want to spend time trying to make use of float (hard to see how it can be profitable on a per business scale these days), that is different.

[Catherine]

To add to Catherine's reply, I like it when the actual deposits are done every payday, even if not "required". If you cannot afford to pay the complete payroll every payday... you cannot afford to have the employee(s).

<snip>

I have a couple of clients currently who can afford the _employees_ just fine -- as long as they go without pay! There have been some very interesting gymnastics as they wait for late payments from their customers while trying to keep their own mortgage current.

[Gail in Virginia]

I have a client that uses a separate payroll account for confidentiality reasons. They use QuickBooks for their accounting and several employees have access to it for different reasons. They hired us to do the payroll, and want the payroll account that shows up on the accounting at their location to only reflect totals as opposed to showing each individual paycheck. We keep the detailed records here and reconcile the checking account for payroll. I think they could accomplish much the same thing with the proper use of passwords and assigned authorities within QuickBooks, but they prefer doing it this way. :dunno:

[Medlin Software, Dennis]

I have a couple of clients currently who can afford the _employees_ just fine -- as long as they go without pay! There have been some very interesting gymnastics as they wait for late payments from their customers while trying to keep their own mortgage current.

It is brutal when you don't own a business, but "own" a "job" that is not paying you because you are working so others can get paid.

[Catherine]

It is brutal when you don't own a business, but "own" a "job" that is not paying you because you are working so others can get paid.

It sure is. Some of them are in areas where, in a few years, they should be positioned to make decent money. Others have been hit by this recession and are reeling. None of them are having fun, and a bunch are hanging on through sheer cussedness and/or lack of offers for a "real" job, with regular wages and benefits for themselves and their families (the employees are getting benefits, as mandated by state law). Only one of them, fortunately, has employees who gripe about how their "rich" boss isn't paying them enough.

[JohnH]

I advise anyone to set up a separate payroll account if they have more than one employee. Then, each payroll period they transfer the gross payroll, plus matching FICA/med, unemployment tax, and workers comp into the payroll account. I usually give them a "gross up" figure to apply to the gross payroll (generally around 12%) and we recheck it periodically during the year. This makes sure they always have funds on hand to pay all payroll- related expenses. It helps to isolate those funds from operating accounts and provides a better snapshot of available cash at any given time nice there aren't residual unpaid taxes inflating the balance in the operating account. I've never seen tone who used this method have any rot of problem with payroll taxes.

[Medlin Software, Dennis]

EDITED to add: Please don't say "matching" (smile). Since FICA was split into separate calculations, EE and ER have had separate calculations, which may or may not be the same. For 2011, SS calculations for EE and ER are different, with many employers not realizing they cannot "double" or "match" the EE contribution to get the proper ER contribution.

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Be careful of any flat percentage amount to add to the gross to cover employer liabilities.

12% sounds a little low to me. 6.2% for SS, 1.45% for Medicare lowers the rest of the reserve to 4.65%. Could work over the long haul if a low WC rate class for all employees, but Q1 could be tough with SUI and FUTA, depending on when WC payments are made.

If one sets up a separate account, it should take no effort to print a report showing actual liabilities instead of a percentage of gross estimate.

CA example:

SUI 6.2% (first 7k)

ETT .1% (first 7k)

FUI .8% (first 7k)

SS 6.2%

Medi 1.45%

WC 8.0% (average over classes of employees and earnings for this particular employer)

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22.75%, with at least 15.65% on most wages.

WC rates vary widely, office work is under 2%, roofing work is over 50%.

[JohnH]

You're right on all counts. I was simplifying with the 12% - I generally run the actual numbers for any client using this method and then adjust quarterly if needed. The 12% works quite well for many if they have a w/comp rate under 5% and a SUTA rate in the 2% range, which is what I often see with service-type businesses who have a good SUTA experience rating. Technically they are putting in slightly less than enough to cover everything in the early part of the year. However, by the time they reach mid-year and into the 3rd quarter they have maxed out SUTA and then the balance begins building up to cover the w/comp shortage from earlier in the year. The system does need a little hand holding, though.

Whatever the case, I'd rather be dealing with a small shortfall when the w/comp bill comes than to be wrestling with the client over Fed Tax Deposits.