Module 3: Business Banking and Tax Strategy

Your government contracting business needs a separate bank account from day one. Mixing personal and business funds is the fastest way to lose your LLC liability protection and fail a DCAA audit before you even get one.

For small government contractors, Mercury is the strongest choice. Here is why.

Government contracts pay via EFT (Electronic Funds Transfer). This means ACH or wire transfers directly to your business bank account. Mercury offers free ACH transfers, free domestic wires, and no monthly minimums. Most traditional banks charge $15-30 per incoming wire. When the government sends you a progress payment or final payment, you do not want to lose $30 per transaction.

What Mercury gives you that matters for government contracting:

Free ACH and domestic wires. Government agencies pay via ACH. Prime contractors paying subs often use wires. Both are free on Mercury.

No minimum balance requirements. Pre-revenue contractors should not be paying monthly fees while they wait for their first contract award.

API access. When your business grows, you can connect Mercury to your accounting software (QuickBooks, Xero) automatically. DCAA auditors want clean, reconciled books. Automated bank feeds reduce manual entry errors.

Virtual cards for each contract. Mercury lets you create virtual debit cards. You can create one per contract to keep expenses separated by job. This makes job costing trivial and DCAA auditors happy.

What Mercury does NOT do:

Mercury is not a traditional bank. It is a financial technology company that partners with banks (Evolve Bank & Trust, Choice Financial Group). Your deposits are FDIC-insured through these partner banks up to $5M via their sweep network.

Mercury does not offer business loans or lines of credit. If you need contract financing (common for cost-reimbursement contracts where you pay expenses before getting reimbursed), you will need a separate lending relationship.

How to open a Mercury account:

Go to mercury.com. The application takes about 10 minutes. You will need your EIN (from Module 2), your articles of organization, and a government-issued ID. Approval typically takes 1-3 business days. Once approved, you will receive account and routing numbers that you enter into your SAM.gov registration (Module 5) for government payments.

Alternative banks if Mercury does not work for you:

Relay: similar to Mercury, free ACH/wire, no minimums. Good alternative. Novo: free business checking, integrates with QuickBooks. Traditional bank (Chase, Wells Fargo): higher fees, but some contractors prefer the branch access and established lending relationships.

The important thing is separation. Pick one, open it, and never mix personal and business funds again.

The government pays differently than private sector clients. Understanding the payment mechanics prevents cash flow surprises.

The Prompt Payment Act (31 U.S.C. 3901-3907, implemented at FAR 32.9) requires the government to pay proper invoices within 30 days. If they pay late, they owe you interest at the rate published by the Treasury Department (currently around 4-5%). This is not optional. It is federal law.

Here is how the payment cycle works:

Step 1: You perform work and submit an invoice. The invoice must be a "proper invoice" per FAR 52.232-25. This means it includes your contract number, invoice number, description of services/supplies, quantity, unit price, and total. Improper invoices get rejected and the 30-day clock restarts when you submit the corrected version.

Step 2: The contracting officer's representative (COR) reviews your invoice and verifies the work was done. This is called "acceptance." The COR has 7 days to accept or reject.

Step 3: Once accepted, the payment office processes your payment via EFT. The payment goes to the bank account you registered in SAM.gov. This is why your SAM.gov banking information must be accurate and current.

Step 4: Payment hits your bank account. The standard is Net 30 from receipt of a proper invoice. For small business contracts under the simplified acquisition threshold, agencies sometimes pay faster (Net 15).

Cash flow implications you need to plan for:

On a firm-fixed-price contract, you may not invoice until you deliver. If the contract runs 6 months, you may not get paid until delivery plus 30 days. You need enough cash reserves (or a line of credit) to cover 7 months of expenses.

On a cost-reimbursement contract, you typically invoice monthly for costs incurred. This is better for cash flow, but you still have a 30-45 day lag between spending money and getting reimbursed.

On a time-and-materials contract, you invoice monthly (or as specified in the contract) for hours worked and materials purchased. Cash flow is similar to cost-reimbursement.

The single biggest cash flow mistake new contractors make: winning a 6-month firm-fixed-price contract and not realizing they need to fund 7 months of operations before seeing a dollar. Make sure your Mercury account has enough runway before you start performance.

How to set up EFT in SAM.gov:

During SAM.gov registration (Module 5), you will enter your bank routing number and account number. The government does a small test deposit to verify the account. Once verified, all contract payments go to that account automatically. If you change banks, you must update SAM.gov immediately. Payments sent to a closed account bounce and take weeks to resolve.

If you sell software or SaaS products alongside your government contracting work (or if ClariFAR itself is part of your revenue model), you need to understand SaaS sales tax. This is not optional. States are actively auditing SaaS companies.

The rules as of 2026:

States that tax SaaS: approximately 30 states tax SaaS, including New York, Texas, Pennsylvania, Ohio, and Washington. Each state has different rules about what "SaaS" means and whether it is taxed as tangible personal property, a service, or a digital good.

States that do NOT tax SaaS: notable exemptions include California (SaaS is not taxable), Florida (SaaS is not taxable as of current law), Virginia, and Georgia. These states either exempt SaaS specifically or classify it as a non-taxable service.

When do you need to collect sales tax?

You only collect sales tax in states where you have "nexus." Nexus means a sufficient connection to that state. There are two types:

Physical nexus: you have an office, employee, or inventory in the state.

Economic nexus: you exceed a revenue or transaction threshold in the state. After the 2018 Supreme Court ruling in South Dakota v. Wayfair, most states set thresholds at $100,000 in revenue or 200 transactions per year in that state.

For a small government contracting contractor who also sells SaaS: you probably do not have nexus in more than 1-2 states early on. Monitor your revenue by state. When you approach $100K in any state, that is when you need to start collecting.

Government contracts are generally exempt from state sales tax. When you sell to the federal government, you do not charge sales tax. The government provides a tax exemption certificate. This is a significant advantage of government contracting.

However, if you sell the same SaaS product to commercial customers AND government customers, you need to track which sales are exempt (government) and which are taxable (commercial, in states with nexus).

Action items for Module 3: - If you only sell to the federal government, sales tax is not your problem right now - If you also sell commercially, register for sales tax in your home state (if it taxes SaaS) and set up Stripe Tax (next lesson) - Keep a spreadsheet of revenue by state so you know when you approach economic nexus thresholds

If you use Stripe for payment processing (as most SaaS companies do), Stripe Tax automates sales tax calculation and collection. Here is when and how to set it up.

When to set up Stripe Tax:

You need Stripe Tax when you sell to commercial (non-government) customers in states that tax SaaS. If 100% of your revenue comes from government contracts paid via EFT, you do not need Stripe Tax yet. Government sales are exempt.

If you sell a SaaS product, online course, or digital subscription to commercial customers, set up Stripe Tax from day one. It is much harder to retroactively calculate and remit sales tax than to collect it from the start.

How Stripe Tax works:

Stripe Tax uses the customer's billing address to determine the applicable tax rate and whether the product is taxable in that jurisdiction. You configure your product tax codes (SaaS is typically "txcd_10501000" in Stripe's taxonomy), and Stripe calculates the tax automatically at checkout.

Stripe Tax costs 0.5% of the transaction amount on top of Stripe's standard processing fees (2.9% + $0.30). On a $199/month subscription, that is an additional $1.00/month in fees.

What Stripe Tax does NOT do:

Stripe Tax calculates and collects the tax, but it does NOT file your sales tax returns. You still need to file returns in each state where you collect. Options for filing: - Do it yourself through each state's revenue department website (free, time-consuming) - Use an automated filing service like TaxJar ($19/month and up) or Avalara (enterprise pricing) - Have your CPA handle it (included in many small business CPA retainers)

Multi-state nexus tracking:

Stripe provides a dashboard showing your revenue by state. Check this quarterly. When you approach $100,000 in revenue in any single state, you need to register for a sales tax permit in that state and begin collecting.

For most new government contracting contractors: this is a future problem. Your first year will be focused on winning contracts (government sales, exempt from sales tax). If you also run a commercial SaaS product, set up Stripe Tax at launch and let it handle the complexity.

Key takeaway: government contract revenue is sales tax exempt. Commercial SaaS revenue may be taxable depending on the state. Keep them separate in your accounting from day one (Module 4 covers this in the chart of accounts setup).