What is a payroll account? Definition & benefits

How many different bank accounts—checking accounts, savings accounts, money market accounts, etc.—does your business currently have? If the answer is “just one,” then you could be missing out on a number of benefits that come with having multiple accounts for different purposes.

One such account you might want to consider? A payroll account.

Below, we take a closer look at what a payroll account is and how they work. We also discuss the different ways that businesses can benefit from payroll accounts and walk through the key steps involved in opening one.

What is a payroll account?

A payroll account is a bank account, typically a checking account, that a business uses specifically to cover expenses related to payroll. In addition to regular wages paid to employees, payroll accounts can also be used to disburse tips, bonuses, benefits, and other payments due to employees. They can also be used to pay an employee’s freelancers and contractors.

While a payroll account can also be used to cover taxes related to payroll—state and federal income taxes, Social Security and Medicare contributions (FICA), etc.—many businesses choose to have a separate bank account for taxes. Ultimately, which account you use to handle payroll taxes will depend on your own personal preferences, as well as any state and local laws.

It’s also important to note that payroll accounts are typically not used to cover a business’s other expenses. Vendor contracts, supplier invoices, and other bills should ultimately be settled by separate accounts.

How do payroll accounts work?

At its heart, a payroll account works just like any other checking account.

Businesses periodically fund the account with enough money to cover employee payroll. Then, the business uses the account to dispute payment to its employees, contractors, and freelancers according to whatever payment schedule has been agreed upon—whether weekly, biweekly, net 30—less any payroll taxes and withholdings for health insurance coverage, retirement contributions, etc. These payments can be made by paper paycheck, direct deposit (ACH), or even by payment card.

How manual or automated this process is will depend on your own internal payroll process and the tools and software your business uses. A number of options for payroll software exist that can automatically handle both the payments and withholding portion of payroll.

Reasons to open a payroll account

While it’s possible to cover all of your business expenses out of a single checking account, doing so can quickly become complicated, especially as your business grows. There are many reasons you may instead want to consider opening a payroll account, including:

Less complex records

You already know the importance of accurate bookkeeping, so we won’t belabor the point. Having a checking account specifically dedicated to payroll means you’ll always have a clear record of who you paid, how much you paid them, and when they were paid—without needing to sift through other charges or expenses.

These records are always important, but can be especially so if your business is ever audited by the Internal Revenue Service (IRS) and needs to prove its payroll expenses. It can also aid in disputes you have with employees, contractors, or freelancers regarding compensation. Likewise, a dedicated payroll account lends itself to more accurate reporting.

Easier budgeting

When all of your business’s cash is in a single checking account, it can be easy to forget which expenses each dollar is earmarked for. This results in a slush fund which can be difficult to manage over the long haul.

A dedicated payroll account allows you set aside funds that you know are earmarked specifically for payroll expenses, which are business critical for your business. This also makes it easier to know how much cash you have to deploy on other expenses and priorities.

More transparent liquidity management

In order to remain solvent, your business always needs to have enough liquid assets on hand to cover its short-term liabilities—including your payroll expenses, which can be significant.

A payroll account can facilitate more transparent liquidity management, simply due to how it works. The moment you transfer funds into your payroll account, you know that they are earmarked for these expenses, preventing you from mistakenly spending them elsewhere on other expenses. As a result, you can focus your attention on other short-term liabilities, such as debt payments and obligations, to ensure adequate liquidity.

Increased security

If you issue physical paychecks to your employees, those checks include sensitive information about your business; namely, your checking account number and bank routing number. If this information were to fall into the wrong hands—for example, if a paycheck is intercepted in the mail or your employee were to misplace it—then a fraudster could use it to attempt to drain funds from your account. This risk may be a larger concern for a small business, but businesses of every size can be affected by it.

A payroll account helps to minimize this risk because it insulates the rest of your business’s assets from incursion. Even if a fraudster was able to access your payroll account and make a fraudulent withdrawal, the rest of your organization’s money, held in a separate account, would be safe.

How to open a payroll account

Opening a payroll account is a fairly straightforward process for most businesses:

1. Choose a bank or financial institution. If you want to keep things simple, you might choose to open your payroll account at the same institution that you keep your other accounts. Alternatively, you might shop around for an account elsewhere with lower fees, minimum balances, etc. Alternatively, you might look for a payroll service provider or payroll company that offers payroll accounts.
2. Submit the application. You’ll need to provide information about yourself and your business. Usually this will include your company’s address, phone number, and documentation proving the existence of the business (such as an employer identification number, business charter, or Secretary of State registration). You may also need to provide a personal ID, such as a driver’s license.
3. Identify the account owners. If more than one person in your business will be listed as an authorized user or account owner, you must notify the bank.
4. Fund the account. Once your payroll account is open, you’ll need to fund it. Most banks will require you to have a minimum balance in the account in order to waive any bank fees (like monthly maintenance fees). Accounts that do not meet these minimum balance requirements may be closed.

After you’ve opened your payroll account, you can go about actually setting up your payroll:

1. Collect your employees’ banking information. This will be required if you plan to pay your employees via direct deposit. At a minimum, you’ll need to collect their bank account number, routing number, and the name of the bank.
2. Determine your payroll schedule. Will you pay your employees weekly, biweekly, or according to some other schedule? What about freelancers and contractors; will you aim to close out invoices net 15 or net 30? If possible, base these decisions around your expected long-term cash flows so that you don’t have to worry about liquidity issues.
3. Sync your payroll account and payroll software. If you use a payroll software, sync it to your account according to whatever payment schedule you have settled on. This will make it possible to actually run payroll and keep track of payments.
4. Fund the account as necessary. Prior to the pay period, it’s important to ensure that there is enough money in the account to cover all of the payments. If there isn’t, you may incur overdraft fees—or worse, the payments may fail, hurting your reputation with employees and contractors.

Payroll account FAQs

Below, we’ve answered a number of the most frequently asked questions that small business owners have about payroll accounts.

What is a payroll account for?

A payroll account is a business checking account that is separate from a business’s other accounts, which the business uses to pay its employees, freelancers, and contractors. These payments may be related to wage, salary, benefits, and bonuses.

Is a payroll account a checking account?

Generally speaking, yes. The point of a payroll account is to pay your employees and contractors. To do so, the account must have payment functionalities typical of a checking account. A savings account does not have such functions and would not be a good choice for a payroll account.

Is a payroll account different from a savings account?

Yes. A business savings account is just like a personal savings account: It’s an account where companies can park their cash and other business funds for safekeeping, while earning a bit of interest. Payroll accounts, on the other hand, are used to pay employees.

Why do you need a payroll account?

Handling payroll through a separate account has a number of benefits for your business. It makes it easier to keep track of your payroll expenses, increases transparency around liquidity, makes it easier to budget, and offers additional security against fraudsters vs. having all of your company’s funds in a single business account.

How Ramp streamlines payroll management with automated expense tracking

Managing payroll involves more than just cutting checks—you're juggling expense reimbursements, tracking employee spending, and ensuring every dollar is accounted for. When payroll-related expenses are scattered across multiple systems, reconciliation becomes a monthly headache that eats up valuable time and increases the risk of errors or fraud.

Ramp's expense management software directly addresses these challenges by centralizing all employee spending in one place. Instead of manually collecting receipts and matching them to payroll deductions, Ramp automatically captures and categorizes every transaction. When employees make purchases with their Ramp cards, the platform instantly logs the expense and prompts for receipt upload through the mobile app. This real-time tracking means you always have a clear picture of outstanding reimbursements and can process them accurately with each payroll run.

The platform's advanced controls add another layer of security to your payroll process. You can set specific spending limits for each employee or department, ensuring that payroll-related expenses stay within budget. Need to restrict certain merchants or expense categories? Ramp lets you create custom rules that automatically decline non-compliant transactions before they happen. This proactive approach prevents unauthorized spending from inflating your payroll costs and eliminates the awkward conversations about expense policy violations after the fact.

Perhaps most importantly, Ramp's automated accounting sync ensures that every expense flows directly into your books with the correct coding. This integration eliminates the manual data entry that typically bridges expense management and payroll processing, reducing errors and saving hours each pay period. By combining real-time visibility, preventive controls, and seamless accounting integration, Ramp transforms payroll from a complex administrative burden into a streamlined, secure process that practically runs itself.

Facilitate payroll with Ramp

Beyond expense tracking, Ramp helps you build the foundation for smooth payroll operations. When you bring on new team members, Ramp automatically onboards new hires and collects critical payment details—account numbers, routing information, and tax documents—so you can get them into your payroll system fast.

Need to pay contractors and freelancers? Ramp's accounts payable software lets you choose the payment method that works best—ACH, check, or card. Plus, with direct integrations to your HRIS, payroll, and accounting software, employee data flows seamlessly between systems without manual updates.

Ready to learn more? Try an interactive demo and see how can help modernize your payroll operations.