A NOW account, short for Negotiable Order of Withdrawal account, is an interest-bearing checking account that federal regulation limits to a specific set of depositors: individuals, sole proprietors, nonprofit organizations, and government entities. For-profit businesses are not allowed to hold one. If you qualify, the account lets you write checks, make electronic payments, and earn interest on the balance at the same time.
Who Can Open a NOW Account
Federal regulation 12 CFR 204.130 sets the eligibility rules, and the list is narrower than most people assume.
- Any individual can open a NOW account, regardless of how the money will be used. A person who deposits business revenue into an account held in their own name still qualifies.
- A sole proprietor operating under a trade name (a DBA) qualifies, and the account can be opened in either the individual’s name or the DBA name.
- Nonprofit organizations operated primarily for religious, charitable, educational, political, or similar purposes qualify. The regulation specifically includes groups described in IRC Sections 501(c)(3) through 501(c)(13) and 501(c)(19), political organizations under IRC Section 527, and homeowners or condominium associations under IRC Section 528.
- Federal, state, and local government bodies qualify, including counties, municipalities, school districts, and political subdivisions, as well as U.S. territories such as Puerto Rico, Guam, and American Samoa.
Pension funds, escrow accounts, and security deposits held under agency agreements also qualify, so long as the entire beneficial interest belongs to individuals or other eligible entities.1eCFR. 12 CFR 204.130 – Eligibility for NOW Accounts
Who Cannot Open a NOW Account
The regulation draws a hard line against for-profit enterprises. Corporations, partnerships, associations, business trusts, and any other entity “organized or operated to make a profit” are prohibited from maintaining a NOW account.1eCFR. 12 CFR 204.130 – Eligibility for NOW Accounts
That exclusion applies across the usual business structures. C corporations and S corporations are out. Partnerships and LLCs taxed as partnerships or corporations are out. Even a nonprofit loses eligibility if it is actually operated for profit rather than for its stated charitable or educational mission.
A for-profit business that wants an interest-bearing checking account has to look elsewhere. Since 2011, ordinary interest-bearing checking accounts have been available to businesses, but a NOW account specifically is not one of the options.
How the Interest, Fees, and Minimum Balance Work
NOW accounts pay interest on the deposited balance at a rate the bank sets. Most institutions calculate interest daily on the actual balance and credit it monthly. Rates are variable and sometimes tiered, so larger balances can earn a slightly higher annual percentage yield.
The rates tend to be modest. High-yield savings accounts frequently pay 50 to 100 basis points more, because they’re built for money you touch less often. For funds you need available for daily transactions, a NOW account earns something rather than nothing, which is the main point.
Most banks require a minimum balance to waive monthly service fees, commonly somewhere between $500 and $5,000 depending on the institution. If you fall below that threshold, the monthly fee can easily wipe out the interest you earned that period. Before opening a NOW account, compare the minimum against your typical balance. If you routinely dip below it, the fees will cost more than the interest pays.
One technical quirk worth knowing: banks can legally require seven days’ written notice before a NOW account withdrawal. Virtually none ever enforce this, and in daily use the account behaves exactly like a checking account.
How a NOW Account Differs From a Regular Checking Account
For decades, the distinction was simple. NOW accounts paid interest; standard checking accounts could not, because federal law prohibited interest on demand deposits. Section 627 of the Dodd-Frank Act repealed that prohibition in 2011, and banks became free to pay interest on any checking account, including accounts held by the for-profit businesses excluded from NOW accounts.2Federal Register. Prohibition Against Payment of Interest on Demand Deposits3Federal Reserve Board. Section 19 – Bank Reserves
Many banks still label their interest-bearing checking products for individuals as NOW accounts. The customer experience is the same as any other checking account: a debit card, checks, direct deposit, electronic transfers. “Negotiable Order of Withdrawal” simply refers to the check itself, which clears like any other check. The practical distinction that remains is the eligibility restriction.
Deposit Insurance
NOW accounts at FDIC-insured banks are covered by federal deposit insurance up to $250,000 per depositor, per ownership category. The FDIC explicitly lists NOW accounts among the deposit products it insures.4FDIC. Deposit Insurance at a Glance Coverage includes both principal and any accrued interest, as long as the total stays within the limit.
Ownership category matters if you hold more than one account at the same bank. An individual NOW account, a joint NOW account with a spouse, and accounts held through a revocable trust each fall into separate categories, each insured up to $250,000.5FDIC. Understanding Deposit Insurance At credit unions, the National Credit Union Administration provides equivalent coverage through its Share Insurance Fund, also at $250,000 per member per ownership category.6NCUA. Share Insurance Coverage
Taxes on the Interest You Earn
Interest earned on a NOW account is taxable as ordinary income in the year you receive it. You owe federal income tax on every dollar of interest, even small amounts. Your bank will send you IRS Form 1099-INT if the interest paid during the calendar year reaches $10 or more.7Internal Revenue Service. About Form 1099-INT, Interest Income If you earn less than $10, you still owe tax on it; you just won’t receive the form. Report the interest on your return either way.