Key takeaways
- When your business earns interest in a business savings account, you’ll need to report those earnings on your company’s — and likely your personal — tax return.
- In addition to tracking your interest earnings, monitor every expense for your business to help lower your tax bill.
- Your tax obligations and how you report the interest will vary based on the structure of your business.
Every successful business needs a financial safety net. When market conditions change, clients leave or unexpected expenses arise, having funds in a business savings account can mean the difference between weathering the storm and closing your doors. But as your reserve funds earn interest, it’s important to understand the tax implications of that growth.
The best business savings accounts offer competitive interest rates to help your money work harder for your company. However, those interest earnings come with tax obligations. Here’s what you need to know about paying taxes on the interest your business savings generates.
How business savings accounts work
Business savings accounts function similarly to personal savings accounts but are specifically designed for company funds. They’re ideal for money not needed for immediate expenses while still providing liquidity when required. There are three main types to consider:
Traditional business savings account
Some of these pay interest, and often have minimum balance requirements to avoid monthly service fees. Some financial institutions provide ATM cards for cash deposits, while others only allow electronic transfers in and out of the account.
Business money market account
Business money market accounts share some similarities with standard savings accounts but offer additional transaction capabilities, such as check-writing privileges and electronic payments. Some banks have limits on monthly deposit amounts without incurring fees, so carefully evaluate your business’ cash flow needs to avoid extra costs.
Business certificate of deposit
Business CDs offer a guaranteed rate for a specific term. Unlike savings and money market accounts with variable interest rates, a business CD locks in a fixed return on your company’s savings. However, you’ll need certainty that the funds won’t be needed before the maturity date to avoid potential early withdrawal penalties.
Are business savings accounts taxed?
While features vary between financial institutions, all business savings accounts share one common factor: Interest earnings must be reported on your company’s tax filings. The IRS treats interest income the same as other business revenue — it’s taxable income.
The tax rate on your interest earnings depends on your business classification:
- Sole proprietors pay taxes on savings account interest income at their ordinary income tax rates.
- Partnerships, S corporations and multi-member LLCs generally use pass-through taxation, where each partner or member is responsible for paying taxes on their share of the interest earned during the calendar year on their individual returns.
- Corporations pay the corporate tax rate of 21 percent on interest income.
Reporting interest income for businesses
Exactly where you’ll report your interest income varies by the type of business you run. As a sole proprietor, business income and expenses need to be included on a Schedule C that accompanies your personal return. If that income includes interest, that interest would be reported on a Schedule B, rather than a Schedule C.
If you’re involved in a partnership, LLC or S corp, you’ll likely need to complete a Schedule K-1 form. And for corporations, interest income will be included in the corporate tax return.
Given the complexity of tax regulations, it’s advisable to work with a tax professional regardless of your business structure. While interest income is just one component of your overall tax picture, it’s essential to report it accurately.
Strategies to optimize business savings taxation
Estimate your quarterly earnings
Some business owners must submit quarterly tax payments rather than paying one lump sum annually. Include projected interest earnings when estimating these payments to avoid underpayment penalties. By the time you file your annual return, you should have already paid most of what you owe.
Account for every expense
Maintain detailed records of all business expenditures — large and small — to maximize deductions that lower your tax liability. Major expenses like office rent and equipment purchases are obvious, but smaller costs matter too.
For example, if you earn interest on a savings account but pay banking fees, those fees may qualify as deductible business expenses.
Interest works both ways
While you’ll pay taxes on interest earned, you can typically deduct interest paid on business credit cards or mortgages for business-owned properties. Be sure to claim all eligible finance charges as deductions.
Take advantage of tax-advantaged accounts
Consider directing some of your interest income into retirement options designed for self-employed individuals and small businesses. For example, if your LLC earns $1,000 in interest this year, depositing it into a qualifying retirement account could provide tax advantages while building your future financial security.
The bottom line
Maintaining a business savings account is a fundamental financial strategy for entrepreneurs. It provides essential reserves for challenging times while generating interest income. Just remember to plan ahead for the tax implications of that interest and consult with a tax professional to ensure compliance and optimize your tax position.
Frequently asked questions
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