It’s that time of year again — time for holiday parties, sparking lights and decorations, and gifts under the tree. As a small business owner, the holidays can add even more to your already full plate (and no, we’re not talking about your big family dinner). One of the most wonderful times of the year can quickly become one of the most dreaded for small business owners and entrepreneurs because of one little phrase: year-end accounting.
Despite being a hassle, though, year-end accounting serves several important functions. The year-end accounting process helps you prepare for tax time. You’ll also run critical financial reports that give you a clear picture of the financial health of your business. This helps you determine any action you need to take in the future to stay on track, boost your profits, or hit other company-wide goals.
Every business owner needs to do their year-end accounting. The good news, however, is that there are steps you can take to simplify the process. Some of these steps can be done at the end of your company’s calendar or fiscal year, while other steps are performed on an ongoing basis. Integrate these tips into your accounting workflow to save time, avoid overlooking errors, and be prepared for your year-end accounting process.
Use Accounting Software
If your business isn’t already using accounting software, what are you waiting for? Today’s accounting software allows you to keep your transactions organized and automates processes such as reconciling bank accounts or sending payment reminders. Depending on the software you choose, you’ll have access to a variety of accounting features that can help you throughout the year … and at the end of the year. This includes invoicing, estimates, expense tracking, inventory management, and time tracking. Your accounting software also allows you to run important financial reports needed for year-end accounting. If you’re new to accounting, don’t worry — most software is easy enough for anyone to use, even if you didn’t major in accounting! (If you don’t believe us, check out our top easy accounting programs.)
The software you choose should fit the needs of your business. For example, if you operate a small business with a handful of clients and only need basic features like invoicing and reporting, free accounting software may work for you. If you have a larger business with more extensive accounting needs, there are plenty of paid options available that offer additional features at an affordable price.
As the end of the year approaches, selecting and learning how to use your new accounting software can be a burden to a busy business owner. If your end-of-year to-do list is too long to add a new task, take some time to at least explore your options so you can have a fresh start for the new year.
Regularly Invoice Customers
Regularly invoicing your customers is necessary for a number of reasons. Not only does this help improve the cash flow of your business, but it also saves time with year-end accounting. In other words, don’t wait until the last minute to invoice your customers — make life (and year-end accounting) easier by invoicing your customers throughout the year.
The same holds true for invoice reminders. Your customers and clients get busy, too, and can easily overlook an invoice. Sending out payment reminders helps you get paid faster, improving your cash flow and reducing the number of unpaid invoices you have to deal with at the end of the year.
Your invoicing software or accounting software makes it easy to send invoices and payment reminders, as well as receive payments from your customers. Of course, features vary based on the software your business uses, but many programs offer recurring invoices and automated payment reminders that help you get paid faster with less work on your end.
Keep Track Of Your Income & Expenses Throughout The Year
For a business owner, there are few things more stressful than shuffling through receipts, invoices, and bank statements to get your finances in order. Not only does waiting until the last minute create more work for you (or your bookkeeper), but rushing through makes it easier to miss errors that can affect everything from your financial statements to filing your taxes. Don’t wait to track your income and expenses. Simplify your year-end accounting by tracking income and expenses throughout the year.
You can track your income and expenses through your accounting software. At a minimum, you should include the date of the payment, the amount of the payment, and the payor or payee. For further organization, you may even break down your income streams and expenses into categories if this is an option in your accounting software.
Like many of the other steps in this article, the benefit of tracking your income and expenses is two-fold: it simplifies your year-end accounting and also allows you (or your accountant) to more easily find tax-deductible expenses.
Reconcile Your Bank Accounts Every Month
Accounting is all about balance, and reconciling your bank accounts can help ensure you maintain that balance. To put it simply, reconciling your accounts means that you compare documentation (such as invoices or bills) to ensure they match the transactions in your bank accounts. Sound difficult? Not to worry — your accounting software can come to your rescue again.
Sure, you could sit down and manually compare your bank statements with your bills, receipts, and invoices … or you could let the software do the work for you. Many programs offer a reconciliation feature that lets you securely connect to your business bank accounts. The information is compared to transactions that have been input into your software. If the numbers don’t match up, you know that there’s an error somewhere in your accounting — maybe you forgot to enter an expense, for example. Bank reconciliation goes beyond just user error; it is also a way to detect bank errors or even fraudulent activity.
Reconciling your bank accounts should be a regular bookkeeping task that your business performs at least once per month. Balancing the books and detecting errors on a regular basis is far easier and less time-consuming than waiting until it’s time to do your year-end accounting. Plus, if you notice an error at the end of the yar, it may be too late to set it right.
Separate All Personal & Business Expenses
In a perfect world, all small business owners would have their personal and business expenses separated by using different bank accounts. Unfortunately, this isn’t the case for all businesses. If you use one bank account for personal and business expenses, those will need to be separated as part of your year-end accounting process.
Why separate your expenses? Two words: IRS audits. If the IRS has reason to believe that you’re writing off personal expenses as part of your business, you could be audited. And if you don’t have your finances in order, you’ll find it more difficult to get through this audit, potentially paying more money due to poor record-keeping.
Fortunately, some accounting software provides easy, hassle-free options for separating your expenses. If you don’t have separate bank accounts, look for a program that offers this feature, such as Wave. You should also consider opening a business bank account for improved organization heading into the new year.
Count Your Inventory At The Beginning Of The Year
While your accounting software may have an inventory tracking feature, you should never skip over manually counting your inventory. By counting your inventory, you can verify that the data in your software is correct. Your inventory at the beginning of the year should match the closing inventory from the previous year.Â Counting your inventory is also a way to calculate the cost of goods sold, and is required for several tax forms.
There may be discrepancies in your accounting software and your manual count. This isn’t uncommon and could be due to a number of reasons, such as broken products or items that were stolen. Identifying these discrepancies keeps your books accurate and prevents interruptions to your business, such as unexpectedly running out of stock.
You may also find that you need to clear out some stock as you head into a new year. Products that are obsolete or aren’t selling, for example, can be sold at a reduced price or even donated, which may qualify as an additional tax deduction. Need more year-end sales advice? Check out our top holiday sales tips.
One thing to note is that your inventory should be counted on a day that your business is closed. Products should not be shipped or sold until the inventory is counted and reconciled in your accounting software to ensure accurate counts.
Run Year-End Reports
Running financial reports is a critical step in year-end accounting. These reports give you a clear picture of how your business is doing financially. These reports are also used when filing your tax return. In addition to showing how your business performed through the year, you can also use these reports to set budgets and goals for the year ahead.
There are a few reports that you should always run at the end of each year. These include:
Profit & Loss Statement: A summary of costs, expenses, and revenues that show whether the business operated at a profit or a loss.
Balance Sheet:Â Summarizes the company’s assets, liabilities, and equity.
Expense Report:Â A report that tracks expenses necessary for business operations, including reimbursable travel expenses of employees.
Mileage Log:Â A report that reflects the beginning and ending mileage on a vehicle used for business purposes.
Payroll Summary:Â Summarizes data for paid employees, including wages, taxes, and deductions.
Sales Tax Summary:Â A summary of the sales tax you have collected, as well as sales tax you have paid toward your expenses.
You may opt to run additional reports to have a more comprehensive view of the financial state of your business, such as a Statement of Cash Flows or Sales By Item. You should also consult with your accountant to find out about other reports that may be required for filing your tax return.
Most accounting software allows you to easily run at least basic reports, such as P&L Statements and Balance Sheets. For more advanced reporting, a software upgrade may be required. Always make sure to check each report for accuracy. Once you’ve confirmed that your reports are accurate, it’s time to analyze your business performance. Did you meet your financial goals? Are there areas for improvement? Use this data to set a budget and financial goals for your business for the year ahead.
Take Care Of Year-End Payroll
As the end of the year approaches, you can tackle year-end payroll tasks. While some tasks are better reserved for the month of December, you can actually get a jump on completing these tasks by starting in October or November.
To get started, first verify that your company information, such as tax ID numbers and mailing address, are accurate. Next, verify the information of your employees and contractors. This includes taxes, wages, Social Security number or Tax ID, filing status, and mailing address. If information is incorrect, an employee or contractor should review and submit an updated W-9 or W-4.
Also make sure that you prepare in advance for payroll periods that fall during the holidays so there isn’t a delay in payments. In December, you can also run payroll for employee bonuses and make any necessary adjustments.
The Payroll Summary that was mentioned in the previous section should be used to verify that all information is correct. Once you’ve confirmed that all employee information and payroll summary data is correct, you can gather the documents you need to send out 1099-MISC forms and/or W-2s in January. If your payroll processor or accountant will be sending out these tax forms, make sure that everything is in order and you have all required documentation in order to have the forms prepared and mailed out prior to the deadline.
Lock Your Closing Periods
Once you’ve completed your year-end accounting, it’s time to lock your closing periods — or close the books. Once you’ve locked your closing periods, you will be unable to add or make changes, so make sure that you’ve completed all of the necessary steps of year-end accounting before closing your books. Many accounting programs allow you to lock closing periods quite easily just by selecting a date.
If you did find that you made an error, all hope isn’t completely lost. Some software, such as QuickBooks Pro, allows you to set a password that can be used to add, remove, or update transactions.
Start Fresh In The New Year
This all may seem a bit overwhelming, but it’s worth it to have a fresh start for the new year. You’ll be ready for tax time, have new goals in mind for your business, and have a better understanding of your company’s current financial situation.
While some of these steps may be time-consuming (I’m looking at you, inventory counting), knowing what needs to be done and tackling tasks throughout the year will save time and help ease the stress that comes with year-end accounting. Good luck!
The post Simplify Your Small Businessâs Year-End Accounting With These 9 Easy Tips appeared first on Merchant Maverick.
You’ve done it. You’ve come up with a business idea, you’ve drafted your business plan, and you’ve started estimating costs and seeking funding to get your small business off the ground.
Or maybe you’re further along in the process. You’ve launched your business, and you’re working hard to ensure it’s a success. Good for you!
But wait … are you sure you’ve thought about all the key components of running a profitable business? For example, have you thought about how you’re going to do the accounting for your new business? If your doors are already open, do you have an accounting system in place?
If your answer is no, this article is for you. While it’s important to create a business plan, shop around for vendors and suppliers, and deliver exceptional products or services to customers, few things are more important than accounting for your business. Without good accounting, you’re putting your business at risk of failure by not keeping a close watch on your financials.
As a new business owner, you already have a lot of expenses that can pile up quickly. Adding an accountant to the mix just isn’t feasible for most businesses in their beginning stages. Fortunately, there are options available that make accounting simple … and are easy on the wallet. In this post, we’re going to talk about small business accounting. We’ll start off with the basics, then take a step-by-step look at how to use accounting in your business. We’ll explore accounting software options, the financial statements your business needs, and the tax deductions that can save you money come tax time.
Whether you’re a new business owner or haven’t gotten off the ground yet, whether you know a little about accounting or you’re completely in the dark, you’re in the right place. Welcome to Accounting 101.
What Is Accounting?
Merriam-Webster defines accounting as:
The system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results.
In other words, accounting is a process used by business owners and entrepreneurs to keep track of the financial transactions of a business, from purchasing supplies and inventory to the revenue that the business makes. Accounting allows you to analyze the financial health of your business to determine where money is being spent, how money is being made, and how these numbers affect the business.
The Basics Of Accounting
Whether you’ve dabbled in accounting in the past or you’re brand new to it, every business owner should have an understanding of the basics of accounting. These concepts may be very new to you or seem confusing at first. However, take the time to learn them so that you can tackle your company’s finances head-on and reap the benefits of good accounting.
The Accounting Equation
We can’t discuss the fundamentals of accounting without first discussing the accounting equation. Knowing and understanding this principle is essential for double-entry accounting, which we’ll discuss a little later. For now, though, let’s familiarize ourselves with this basic equation.
The accounting equation states that:
Now, let’s break down each of these terms to ensure that you have a full understanding of the accounting equation.
Assets: Assets are everything that your business owns. This includes the cash in your business bank accounts, commercial real estate, equipment, inventory, and accounts receivable.
Liabilities: Liabilities include everything that your business owes. This includes accounts payable, loans, and other debts.
Owner’s Equity: Owner’s Equity (also known as shareholder’s capital) includes all investments of capital by the owners of the business.
The accounting equation keeps everything in balance. Each side must be balanced. If each side isn’t balanced, there is an error that must be found and corrected.
The Importance Of Double-Entry Accounting
Many businesses use what is known as double-entry accounting. Double-entry accounting simply means that transactions are recorded to two or more accounts. This system of accounting provides more accuracy and helps keep your books balanced. The accounting equation we discussed earlier is the foundation of double-entry accounting.
Double-entry accounting gives you a better view of your business finances. Single-entry accounting only uses income and expenses, whereas liabilities and assets are recorded using double-entry accounting. Not only does double-entry accounting give you a better understanding of the net worth of your business, but it offers additional benefits. Double-entry accounting makes it easier to spot errors and also comes in handy when it’s time to run financial reports.
This is a very basic overview of double-entry accounting. To learn more about how it works and why your business should use double-entry accounting, check out our post, What Is Double-Entry Accounting (And Do You Need It)?
Debits & Credits
In double-entry accounting, transactions are recorded as debits or credits.
You’re probably already familiar with debits and credits if you use a debit card from your bank or a credit card. That said, you’ll need to forget everything you think you know when learning accounting, because these concepts are completely different.
If this sounds like a foreign language to you, don’t worry. Let’s break it down so it’s easier to understand.
Debits: A debit increases assets and expenses and decreases liabilities.
Credits: A credit decreases assets and expenses and increases liabilities.
Total debits must equal total credits or there is an error that needs to be found and corrected.Â Remember, it’s all about balance.
Let’s take a look at an example. Say your business has purchased a piece of equipment at a cost of $15,000. You borrowed the money to purchase the equipment. Because you gained an asset, this is recorded as a debit of $15,000. However, you have to pay back the money you borrowed, which creates a liability. Therefore, you will record a credit of $15,000 under accounts payable (liabilities).
Totals Debits = $15,000 Total Credits = $15,000 â
Both sides are equal and balanced.
Debits and credits are not used in single-entry accounting. While it may seem easier to simply skip this and forego double-entry accounting, remember the benefits that we discussed earlier. Using double-entry accounting gives your business a clearer, more complete view of your finances. And before you get too worried, most accounting software handles the double-entry accounting for you behind the scenes, so you won’t have to do everything manually.
Ultimately, understanding these concepts may be difficult, but you’ll find that the benefits of balanced books are well worth the effort.
An important piece of the accounting pie is the general journal. This is where all business transactions are recorded in order by date. Each journal entry should include four things. Those are:
The date of the transaction
The account(s) and amount(s) credited
The account(s) and amount(s) debited
A memo describing the transaction
When recording a journal entry, debits are recorded in the left column, while credits are recorded in the right column. Each side will be balanced, meaning that the total amount of debits on the left should equal the total credits on the right. Let’s look at a quick example.
You purchase $500 worth of inventory for your business. This inventory was purchased with cash. You have inventory (an asset) in your possession, so $500 is recorded in the left column of the journal since this is a debit. Because you paid with cash, your cash account is decreased by $500. Therefore, a credit in the amount of $500 is posted in the right column.
The Chart Of Accounts
Another key accounting concept to remember is the chart of accounts. A chart of accounts lets you see exactly where your company’s money is going. While it may seem confusing initially, understanding how a chart of accounts is organized helps the numbers make sense.
While we won’t dive too deeply into this concept, you should walk away from this article with a basic understanding of what a chart of accounts is. Typically, a chart of accounts is divided into five sections: assets, liabilities, equity, income, and expenses. These categories are further divided into accounts, such as utilities, advertising, accounts payable, cash, and materials and supplies.
Here’s an example of what a chart of accounts looks like:
Your chart of accounts is important for a number of reasons. In addition to breaking down your expenses, your chart of accounts helps you have a clear picture of where your money is going to and coming from. Your chart of accounts also helps you track inventory and can be extremely beneficial come tax time. If you remember our journal entry example from earlier we spent $500 cash on inventory, you’ll see this reflected in the chart of accounts above where the “cash on hands” account reads -$500.
To learn more about this accounting concept, check out our post, How To Set Up A Chart Of Accounts.
Now, let’s pause, take a breath, and let all of this information sink in. Understanding these concepts and key accounting terms certainly helps you dive into your company’s accounting with more confidence. Rest assured, however, that you don’t have to know everything about accounting to balance your own books. Gone are the old days of paper journals and ledgers and manually writing down every transaction. Today, there are lots of accounting software options available. While you do have to learn how to use your chosen software and may still have to do some tasks manually, accounting software does a lot of the heavy lifting for you, from automatically posting transactions from your business bank accounts to calculating depreciation on assets to sending out recurring invoices.
How To Do Small Business Accounting
With an understanding of basic accounting concepts under your belt, it’s time to put that knowledge into practice. From the first steps you need to take before launching your business to picking the right software for your business to hiring an accountant, we’ll cover it all in this section.
Set Up Your Business Entity
Before you start your business, you must set up your business entity. This determines your legal structure and influences how you file and pay taxes, your personal liability for the debts and liabilities of the business, how you can raise money for your business, and various requirements that your business must meet. Consider the needs of your business and future goals when selecting your legal structure. The main business entities include:
Sole Proprietorships:Â A sole proprietorship is an unincorporated business that is owned and operated by one person. This is the easiest entity to set up and does not require formal registration. Business profits or losses are reported on the owner’s personal income tax return. A sole proprietor is held liable for the debts and obligations of the business.
Partnerships:Â Partnerships are legal structures for businesses with two or more owners. Formal registration is not required to form a partnership, although there should be an agreement between partners. Business profits and losses are passed through to the owners and filed on their personal income tax returns. The owners in a partnership may be responsible for the debts and obligations of the business based upon the type of partnership that has been formed.
Corporations:Â Corporations are the most expensive and complicated of all legal entities. Corporations have regulations that other legal structures don’t have, such as establishing bylaws and holding meetings. Corporations may also be subject to corporate tax rates and may face double taxation. However, there is limited liability on the owners, and corporations also have more opportunities for raising large amounts of capital through the sale of stock.
Limited Liability Company:Â A limited liability company (or LLC) combines the benefits of multiple entities. Owners of LLCs have limited liability, so personal assets aren’t at risk if the business goes under. The owners of the LLC can also determine how business revenue is taxed.
Check out our post, Types of Business Structures: The Complete Guide, to learn more about the different business entities, and consider speaking to an attorney to determine which choice is best for your business.
In addition to setting up your business entity, there are a few other steps you need to take in these early stages. The first is selecting a name for your business. As a sole proprietor, you aren’t required to register your business if you’re using your own name. However, some small business owners opt to file a Doing Business As, or DBA. A DBA is a fictitious name that is registered with the county or state where the business will operate. If you select another legal structure, such as an LLC or corporation, you’ll register your business name when you file other paperwork with state and local authorities.
The next step is obtaining any licenses and permits required to legally operate your business. Your local chamber of commerce or Small Business Administration office can help you find out what your business needs and how to obtain these licenses and permits.
If you plan to hire employees for your business, you will need to obtain an Employer Identification Number (EIN). This is available at no cost by registering with the Internal Revenue Service.
Other steps that you may need to take before opening your business may include purchasing business insurance, hiring employees, buying or leasing commercial space, and advertising your business to bring in customers.
Open A Business Bank Account
When you start your own business, you need a business bank account. This should always be one of the first steps you take before launching your business. However, if you’ve already gotten your business off the ground and don’t have a separate account, it isn’t too late to head to your local branch to open a business account.
There are a few reasons why opening a separate bank account is so important for your business. First of all, it simplifies bookkeeping and filing taxes. You won’t have to pick apart every transaction to determine which ones were personal and which were for business purposes.
Speaking of taxes, keeping a separate business bank account could prove to be extremely helpful in the event that you’re audited by the IRS. Sloppy bookkeeping and jumbled expenses could very easily turn a simple audit into a drawn-out nightmare.
Finally, if you plan to apply for any type of business funding, such as loans or lines of credit, a lender typically only deposits funds into a business bank account. By opening a business bank account, you also establish a relationship with a bank, which could provide you with low-interest funding further down the road.
Choose Your Accounting Method
Now, if accounting didn’t seem confusing enough, we’re about to throw another curveball your way. There are actually two different methods of accounting. Before you get frustrated, though, just know that the two types are very easy to understand and differentiate from each other.
The first (and most common) method is accrual accounting. Accrual accounting recognizes revenue and expenses or sales or bills are incurred, not when the cash switches hands. With this type of accounting, accounts payable and accounts receivable are recorded.
Accounts Payable: Expenses that you owe but haven’t yet paid (think bills).
Accounts Receivable: Revenue that your customers owe but haven’t yet paid (think invoices).
Let’s take a look at an easy example. Let’s say that you’ve received $5,000 in payments from your customers and $1,000 in outstanding invoices. You also have paid bills totaling $500 and $100 in unpaid bills.
Using the accrual method, your total profit for this time period would be $5,400. You would add the revenue you have received ($5,000) plus your accounts receivable ($1,000). Then, you would subtract your expenses ($500) and your accounts payable ($100) because your accounts receivable (unpaid invoices) and accounts payable (unpaid bills) are already recognized as part of your profit/loss.
The benefit of using the accrual accounting method is that it gives you a clear view of your income and expenses.Â On the flip side, though, it doesn’t give you a clear picture of the cash flow of your business. While your books may show that you have earned a bigger profit, you might not have as much available cash because of unpaid invoices.
The other method that you may use for your business is cash basis accounting (or simply cash accounting). Cash basis accounting recognizes revenue and expenses when cash changes hands. This method does not use accounts receivable or accounts payable. Instead, only revenue that has been received and expenses that have been paid are calculated.
Let’s go back to the previous example. Remember, we have $5,000 in revenue, $1,000 that we haven’t yet received, $500 in expenses, and $100 that we owe. Using the cash method, your total profit would be $4,500. You would simply subtract your expenses that have been paid ($500) from the revenue that your business has received ($5,000) because cash basis accounting does not include your accounts receivable (unpaid invoices) or accounts payable (unpaid bills).
The benefit of using the cash basis accounting method is that you can more easily track your cash flow at any time. However, you won’t get the longer-term overview of your revenue and expenses through the accrual method and most accountants do not recommend this form of accounting.
There are some other differences between the two methods of accounting, such as how income is reported for tax purposes, but this is just a basic overview. If you want to learn more to help you decide which method is right for your business, check out our post, Cash VS Accrual Method: Which Is Better For Your Business?
Find The Right Accounting Software
Our modern, tech-filled world makes it easier than ever to operate a business. This includes accounting software that eliminates the tedious tack of paper accounting. While this software doesn’t do all the work for you, it does keep your financial information organized in one spot, automates some tasks, and simplifies the accounting process. In other words, you don’t have to have a degree in accounting to do your own books if you have the right accounting software. If you don’t have the funds to hire a bookkeeper or accountant for your business (and most new businesses don’t), accounting software is a cost-effective way to keep your finances on track.
So, how do you know which software is best for your business? There are a few considerations to keep in mind:
Price:Â Before searching for accounting software, have a budget in mind. What can your business comfortably afford? In some cases, you may not be able to afford anything — and that’s okay! There is free accounting software available. However, free software may come with lots of ads, fewer features, or allow for no more than one user. If you have complex accounting needs, multiple users, or have other specific needs, there are options available at all price points.
Features:Â Consider the needs of your business when choosing accounting software. If you’re running a larger business, for example, or need software specific to your industry, free software with basic features won’t be a good fit. You may want the whole gambit: invoicing, contact management, accounts, payable, time tracking, project management, and more. However, if you run a smaller business, have only a few clients, and don’t need a ton of added features, a basic and easy-to-use program is a good choice.
Online & Offline Options:Â Most business owners and entrepreneurs these days use online accounting solutions. There are many benefits, including no installations required, automatic updates, integration with apps, and access from multiple devices, such as your smartphone. However, there are also desktop-based options that may work for you, such as in locations that don’t have fast and reliable internet connections.
Your Accounting Skills: Before choosing accounting software, keep in mind your accounting skills. If you’re new to the game, look for software designed with the beginner in mind that offers an easy-to-use interface and has great customer service. If you have some experience in accounting, you can certainly dive right into one of the more complex programs.
Add-Ons:Â Some accounting software offers additional add-ons for an extra fee. Payment processing, for example, may be an additional feature that benefits your business. Again, consider the needs of your company and shop around your options for software that best fits these needs.
Not sure where to start? Compare some of the top options available to your business.
Stay On Top Of Bookkeeping
Accounting software certainly simplifies accounting and bookkeeping tasks, but it’s important to remember that it doesn’t do all the work for you. You will still have to keep on top of certain bookkeeping tasks. The specifics of your bookkeeping requirements vary based on the needs of your business, but some common bookkeeping tasks you may have to perform include:
Creating and sending invoices to customers
Reconciling bank statements
Reviewing expenses and income
Reviewing aged receivables
Sending payment reminders or setting up automated reminders
Analyzing and updating inventory
Reviewing and paying invoices to your suppliers and vendors
Running and reviewing financial statements
Run Financial Statements
Running and reviewing financial statements is made easier with accounting software. Financial statements not only help you stay on top of your business finances but also help when filing your taxes and may be required if you apply for a loan or other funding.
Let’s discuss some of the most common financial statements you need to run for your business.
Balance Sheet:Â A balance sheet reports assets, liabilities, and equity for a set period of time. This report provides an overview of owner investments, what the company owes, and what the company owns. The balance sheet uses the accounting equation we discussed earlier and is used in conjunction with other reports to analyze the financial health of the business. The balance sheet can also be used to calculate ratios, such as the debt-to-equity ratio.
Profit & Loss Statement:Â A profit and loss statement (also known as P&L or income statement) shows the profit or loss of a business over a specific period of time, such as quarterly or annually. The cost of doing business — including cost of goods sold and operating expenses — are deducted from the revenue (or top line) of the business. The difference between the two is known as the net income, or the bottom line, and shows whether the business had a profit or a loss.
General Ledger:Â The general ledger contains every financial transaction that occurs within a company. Transactions are broken down into accounts, which include assets, liabilities, equity, income, and expenses. The chart of accounts that we discussed earlier is typically the first page of the general ledger.
Statement Of Cash Flows:Â A statement of cash flows (or simply cash flow statement) shows how money comes into and goes out of the business. Cash inflows from operations, financing, and investments are recorded on this statement. Cash outflows are also recorded. This includes investments and expenditures for business activities. A statement of cash flow gives you a view of the financial health of your business, helps you analyze how your money is made and spent, and helps you plan for the future to ensure you have cash available to keep your business in operations.
These are just a few of the financial statements that you can run using accounting software. While these are the major reports that every business should run, the software you select may also offer additional reports that are important for your business like job costing reports, annual budgets, reports of sales by product, and other financial documents.
Don’t Forget Tax Deductions
It’s time to discuss the moment that most small business owners dread: filing and paying taxes. With good accounting, though, filing your taxes (or getting through an IRS audit) won’t be quite so painful.
The rates and requirements for filing taxes are based on the legal structure of your business. For example, a sole proprietor simply files the business income or loss on their personal tax return, while certain corporations may face double taxation wherein tax is paid on the income of the business and on the dividends received by the owners.
While filing your taxes can be scary, especially if your business made a profit, you can ease your tax burden by taking advantage of the tax deductions available to small business owners. This can include:
Furniture & expenses
Marketing & advertising expenses
Salaries & wages
These aren’t all of the tax deductions available to small business owners. Working with an accountant or tax professional can ensure you take advantage of all the deductions available to your business.
Know When To Hire An Accountant
While it is possible to handle much of your own accounting for your small business, there comes a time when many businesses need to enlist the help of an accountant. There are a number of reasons that business owners choose to hire an accountant. As the business grows, you may become too busy to handle the financial side of things and would prefer to focus on other activities within the business. An accountant is also extremely beneficial to have on board when it’s time to file your taxes. If you plan to acquire or sell a business, an accountant can provide advice and help determine if the transaction is a smart financial move. When you want to expand your business, an accountant can give advice and help you create a business plan.
There are several situations where hiring an accountant is in the best interest of your business. Even though this is an additional expense, it is often a critical move if you want to grow a successful and profitable small business. Learn more about when you should hire an accountant for your business.
The Benefits Of Good Accounting
We’ve established that every small business should have an accounting system in place. But why is it important to have good accounting? At the risk of sounding melodramatic, the success of your business depends on it — quite literally. Here are the benefits of good accounting:
Budgeting & Planning:Â Good accounting can help you set company budgets for your business and plan for upcoming projects.
Financial Health:Â As previously mentioned, having your numbers organized allows you to assess the financial health of your business to determine what you’re doing right … and what needs to be changed.
Track Payments: Without good accounting and bookkeeping, it’s difficult to keep up with customers that haven’t yet paid you for your products or services. By staying on top of your accounting and bookkeeping, you can easily send out invoices, payment reminders, and even collect payments.
Tax Time Benefits:Â Keeping accurate records makes it easier to file your taxes or go through an audit by the IRS.
Funding Opportunities:Â If you seek capital from investors or lenders, having accurate financial statements is critical to securing funding — and some lenders (like Fundbox) even require that you use accounting software to be approved.
Major Purchases:Â If you’re considering a major purchase to grow your business, the numbers can help you determine if it’s the right time to make the purchase, or if it makes more sense financially to hold off on spending the funds.
Cash Flow:Â Good accounting lets you assess the cash flow of your business to determine where you need to make changes to boost profitability.
Revenue Forecasts:Â With the right financial reports, you can more accurately forecast future revenues of your business.
Maximize Business Growth:Â Accounting allows you to track the growth of your business, allowing you to make important decisions and changes to help maximize growth.
The Bottom Line
Every business is different, but one thing should remain constant: good accounting. Whether you’re a sole proprietor running a business from your home office or you visualize running a large international corporation, all business owners and entrepreneurs should make accounting a priority. With so many great software programs and tools at your disposal, it’s easier and more affordable than ever to track your company’s finances. Take a look at the Best Accounting Software For Small Businesses to start your journey on finding the perfect accounting software.
Ready to learn more about accounting? Check out our eBook, The Beginners Guide To Accounting. It’s free to download and is a must-read for any business owner or entrepreneur that’s ready to master the basics of accounting.
The post Accounting 101: Understanding Small Business Accounting appeared first on Merchant Maverick.
Most people don’t like the idea of taxes in general, not to mention the excruciating minutia of what goes into calculating how much to pay the government and when. And if you do like those things, then you are probably an accountant or a payroll tax expert already. God bless you, you don’t need this article. However, if you are a small business owner who is entering the world of payroll, understanding payroll taxes can feel daunting. It’s true: there’s plenty to learn and making a mistake can result in costly fees. Using payroll software might take the guess-work out of the process and do the calculations for you, but it’s still important to have a rudimentary understanding of payroll taxes, especially if employees have questions about their paychecks.
In this post, we’ll cover what payroll taxes are, who’s responsibility it is to pay them and when, how to calculate them, and more.
What Are Payroll Taxes?
Payroll taxes are the money an employer withholds from an employee’s earnings to pay taxes to the state and federal governments. How much an employer takes out and sends to the government is based on the employee’s salary and wages, and it is the employer’s responsibility to manage these taxes. There’s only one exception: 1099 contractors are in charge of their own taxes! Contractors, freelancers, and small business owners pay a self-employment tax which is the equivalent of employee/employer payroll taxes.
Payroll taxes make up a substantial part of government revenue and are the second-leading money generator for the United States. (And we can often look to payroll in America as indicators of how our economy is growing or receding, too, as payments reflect growing trends in hiring and stagnation.) When an employer runs payroll, the process involves calculating the employee’s net pay. Net pay is the take-home paycheck employee’s receive on payday, and how you calculate that net has to do with how much state and federal taxes you, as the manager of the payroll, take out, collect, and pay to the appropriate agencies. It’s a detail-oriented process that has multiple opportunities for missteps and steep penalties for mistakes.
Bear in mind that when someone says “payroll tax,” they are lumping together all of the various taxes paid out of a person’s paycheck for services, but in the next section I’m going to breakdown where those payroll taxes go.
Types Of Payroll Taxes
When an employer removes taxes from an employee’s paycheck, that money is earmarked for state and federal services. Here’s how payroll taxes breakdown individually:
Federal Income Tax Withholding:Â Federal income tax is based on income level and the rates are progressive, meaning that as you make more income, your rates move, and your income tax increases as you travel up the tax brackets. There are currently seven tax brackets that tax income at: 10%, 12%, 22%, 24%, 32%, 35% and 37% as income increases.
Social Security Tax:Â This tax is also called the Old Age, Survivors, and Disability insurance, and it’s a flat-rate tax of 12.4% of taxable income. Both the employee and the employer are responsible for paying half (6.2%) of the social security tax.
Federal and State Unemployment Taxes: The Federal Unemployment Tax is a mandatory tax paid quarterly versus monthly. State requirements differ widely.
Medicare Tax:Â This tax is also a flat rate of 2.9% with the employer and the employee splitting the cost at 1.45% each.
State Income Tax Withholding:Â There are currently seven states that do not have a state income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming) but for everyone else, income taxes work similarly to federal income tax withholdings. The tax rates are very specific to each state, so check the withholding tables on the state government website where your business is located.
Local Taxes:Â Local taxes are very specific to city and state. Most states have a state unemployment tax that is accounted for in this local taxes section. These taxes are based on local tax laws and the tax rates vary, so small business owners need to check/verify those taxes through the state’s tax department.
Payroll Tax VS Income Tax
Payroll taxes include FICA taxes (social security and medicare) and local taxes withheld, and the additional percentages provided by the employer.
Income tax specifically refers to the federal, state, and local income tax rates
So, running taxes for your payroll involves collecting both payroll taxes and federal/state income taxes. When people say “payroll taxes” they are providing an umbrella term for all collected tax, but the term “payroll tax” refers to FICA taxes (social security and medicare) and local taxes withheld from an employee’s paycheck, plus the additional percentages provided by the employer. Income tax specifically refers to the federal, state, and local income tax rates. Even though the two are joined together in one lump, payroll taxes are specifically earmarked for certain programs. Income tax, on the other hand, is delivered to its respective federal or state governments and is used to manage the budget.
Who Pays Payroll Tax?
The burden of managing payroll and sending payroll tax payments is on the company, and the burden for paying those taxes falls on both the employee and the employer. Each state has different regulations and requirements for how state income tax is paid to the government, and the federal government collects payroll taxes quarterly.
Employer Tax Responsibilities
Okay. You are a small business owner and it’s time for payroll. What tax responsibilities do you have?
Social Security: You will pay your half of the 6.2% and you will withhold 6.2% from wages for your employee’s portion.
Medicare:Â You will pay your half of the 1.45% and you will withhold 1.45% from wages for your employee’s portion.
Federal Unemployment Tax:Â This tax is employer-paid and the current rate is 6% on the first $7,000 earned by an employee.
If you are self-employed or working under contract, you are the employer and the employee and it’s your responsibility to pay for both sides of the payroll taxes. That means that contractors need to withhold the full 12.4% for social security and 2.9% for Medicare, and withhold their own state and federal income taxes (saving 15-20% of each check to cover these taxes is the recommended practice). Some states also charge additional taxes for small businesses that become the responsibility of a contractor, as well. When contractors file their taxes, they will pay their portion of these taxes then.
When Are Payroll Taxes Due?
Once you have collected the payroll taxes for your small business, they are due on either a monthly or semi-weekly deposit. Semi-weekly deposits are primarily required just for large businesses with a large payroll tax revenue, so it is most probable that you will deposit your withholdings monthly. Payroll taxes are due on the 15th of every month (unless that falls on a weekend, then the next available Monday).
If you are self-employed, you most likely will file estimated quarterly taxes (although some states accept yearly payments if you make under a certain amount). Check your state’s specific rules and tax brackets for the most accurate information.
How To Calculate Payroll Taxes
Calculation of payroll taxes uses all the great basic math skills: multiplication, addition, percentages. Be aware that if you make a mistake or are late processing a payment, the government likes to slap fees around. (I mean, no doubt, fees are a source of revenue for the government, too.) While you can do payroll calculations by hand (and many do, including an adorable 80-year-old woman on Facebook who chastised me for suggesting someone run payroll using anything other than their head, a pencil, some paper, and the numbers), there are many great payroll software options that can do this part for you: Gusto, Square, Paychex, and ADP are all reputable companies that you can use to outsource payroll.
However, maybe you really want to tighten the budget and only have a few employees and you’re not gonna let me convince you to give the computers their chance at this one. Okay. Pencil. Paper. Calculator. Spreadsheet with equations, maybe?
You’ll need to know how many times you are paying/withholding taxes from your employees before you can run payroll, so determine whether you are running payroll, weekly, biweekly, or monthly. Then you will need to decide if you’d like to pull taxes using the wage bracket system (recommended by most tax experts for small businesses) or the percentage method (not recommended for small businesses attempting payroll on their own).
When you onboard employees, you will have them fill out a W-4. You will use that W-4 to note the employee’s withholdings and whether they are filing single/jointly/head of household. This is the data you need to calculate federal income taxes. The following image is from the IRS Publication 15 for the 2019 tax season and gives the step by step numbers for calculating the federal income tax withholdings through either method.
After you withhold the money for federal income taxes and any additional pre-tax deductions (retirement, worker’s compensation, healthcare), then you calculate the FICA (social security and Medicare) taxes. To calculate the social security tax, you will take your employee’s gross pay (the amount your employee receives before payroll taxes are removed for that pay period) and multiply it by .062 — the product is the amount of money to be withheld from the paycheck and matched by the employer.
You would do the same thing for the employee’s portion of Medicare by taking the gross pay for the pay period and multiplying it by .0145%. The product is the amount you’ll withhold and match for Medicare.
All state and local taxes are calculated on a state-by-state basis.
How To Report & Pay Payroll Taxes
When you run payroll, calculating the taxes and discovering your employee’s net pay (aka their take-home pay or the amount they make after payroll taxes are removed) is only the first part of the process. After you’ve run your payroll numbers, you face the important task of getting those taxes into the right hands and accounting for your payroll to the government. As a small business owner, it is your responsibility to:
Withhold all payroll taxes and submit them on time (the 15th of every month, or next available business day) to state and federal agencies.
Report income, withholdings, matching of payroll taxes to the government quarterly.
Keep records of yearly payroll for state and federal reporting agencies.
Send W-2s and 10-99s to employees and contractors listed with the correct amounts of their gross/net pay and tax withholdings.
When you have the monthly deposit to submit, you must submit the funds electronically (barring special circumstances allotted to small businesses only) using one of the following methods: via a third-party (through a software/payroll service like ADP, Gusto, or Paychex); through your bank’s Automated Clearing House (ACH) network; or by the Treasury Department’s free Electronic Federal Tax Payment System online/over the phone.
Some small businesses, especially those with low liability, can opt-in to a yearly payroll payment. This requires filling out a Form 944. Check the government’s website to check for current eligibility requirements.
Your Federal Unemployment Taxes are due to the government quarterly. Form 941 is your guide to reporting income, withholdings, and payroll taxes to the government, and the tax forms are due on the last day of the month after the end of the quarter. For example, quarter one ends March 31 and the report is due by April 30. And at the end of the tax year, you have until January 31 to deliver the necessary tax forms to your employees, former employees, and contractors, so they can file their taxes correctly.
If you are self-employed, you’ll need to gather your 1099-MISCs and file a Schedule C when you file your taxes (due April 15).
For both small business owners and the self-employed, it is imperative to maintain impeccable records of your state and federal payroll taxes, whether by hand in a notebook, in an old spreadsheet document, or by using online software.
Payroll Tax Penalties
Alright, here’s the big scary number: 100%. If you fail to withhold the proper amount from your employees, you the employer are 100% liable and will need to furnish the missing monies from your own pocket in addition to any legal penalties and fees you face. Look, people get real serious when you don’t give them the correct money owed. Also, these funds go toward employee services, so sometimes your employees can’t access these services if the account is behind. Employer error is costly because tax laws say that the onus for accuracy is on you, the business owner. And if you can’t pay those fees? That trickles down into every aspect of your business in a cycle: higher consumer costs, decreased employee wages, a hiring freeze. Not to mention that it erodes the trust between an employer and an employee.
If you don’t pay your payroll taxes on time, every month, you incur a 2% penalty for 1-5 days late; 5% penalty for 6-15 days late; 10% for 16+ days late or within 10 days of first hearing from the IRS. The maximum is 15%.
Also, the government doesn’t care if you outsource these jobs — if a third-party isn’t paying on-time (your payroll service or your bookkeeper), you still hired them and will receive the penalty all the same.
There are other ways you can be penalized, too, like if you miscategorize employees or you make an error on your reporting. There are too many potential errors to explain them all, so it’s important small business owners meet with tax attorneys or other tax experts for a full understanding of the myriad ways things can go off the rails.
Payroll Tax Deductions
But hey…those Statutory Payroll Tax Deductions (all the things we just talked about above: federal and state income tax, social security, Medicare, unemployment taxes) are not the only payroll tax deductions you’ll need to make as you process payroll. In addition to the mandatory deductions, you also have Voluntary Payroll Tax Deductions. These are things like health care, retirement benefits, worker’s compensation, or any other pre-tax deductions. As a small business owner, you might offer some of these programs and benefits but some of the cost can (and does) trickle down to employees.
Nothing concludes this post better than this: payroll taxes are complicated. But, they don’t have to be.
If you have a handful of employees, and you want to calculate payroll taxes yourself, then yes you can! You now know the basics of which payroll taxes you are responsible for, how to calculate them, and how and when to pay them. People have been processing payroll manually for longer than they haven’t been.
Or, you can opt for payroll software to help handle the calculation for you. Even if you do have a software program or an online program helping you, it’s great to know what those numbers mean and where that money is going. There are also free online calculators to use in lieu of a software program, or a regular calculator, or an abacus. All in all, these payroll taxes — while they may be an added stressor to the laundry list of small business owner responsibilities — are what pay into great social programs and protections. The most important thing to remember is that rates and guidelines can change yearly depending on inflation and tax laws, so keep up with current literature on the tax brackets from the IRS Forms. Know your state’s laws, file accurately and promptly, pay on time, and report on time. And if you want someone else to do it for you, check out our reviews of some of the leading payroll service vendors out there: Gusto, Square, ADP, Paychex.
The post What Are Payroll Taxes? And How Do You Calculate Them? appeared first on Merchant Maverick.
You’ve probably already heard of the terms “debit” and “credit.” After all, most of us no longer carry cash and use our debit or credit card to make purchases. When related to accounting, though, these terms take on completely different meanings.
Confused already? You’re definitely not alone. The concept of debits and credits can be difficult to grasp if you don’t have prior accounting experience. In this post, we’ll break down these accounting terms in their simplest forms, helping you understand debits and credits and why they’re so important to accounting. So, sit back, push aside everything you thought you knew about debits and credits, and get ready to learn more about this basic bookkeeping concept.
First, The Accounting Basics
Before we dive headfirst into debits and credits, it’s critical to understand a few other accounting terms. Don’t get overwhelmed with all of this terminology — we’ll tie it all together as you move further into this post.
Double-entry accounting is an accounting system where each transaction is posted in a minimum of two accounts. Though more time-consuming, double-entry accounting offers many benefits to small business owners; notably, it ensures more accurate reporting and makes it easier to spot errors.
Let’s step away from the numbers for a second and look at double-entry accounting on a more scientific level. Sir Isaac Newton’s Third Law states that “For every action, there is an equal and opposite reaction.” Though this typically applies to motion, we can also use this idea to understand double-entry accounting.
Let’s take a look at a basic example. Your business purchases supplies that are needed for operations. You spend $5,000 from your business checking account. You now own $5,000 in supplies, which you’ll record in your books. However, double-entry accounting requires each transaction to be posted to at least two accounts. So, while you now have supplies, the cash in your account decreased by $5,000 — equal but opposite.
How do debits and credits tie into all of this? We’ll get to that in a minute. For now, though, you should have at least a basic understanding of double-entry accounting. If you want to learn more, be sure to check out our post What Is Double Entry Accounting (And Do You Need It)? which dives into this concept in greater detail.
Double-entry accounting means that transactions are posted to two or more accounts. But what exactly is an account? A simple way to explain it is by thinking of accounts as categories that are used to organize your transactions. Sorting your transactions by account helps you easily track how money is coming into your business, as well as where it’s being spent.
There are five main types of accounts, although these can be further divided into sub-accounts. For now, though, we’ll focus on five core accounts that every business owner should know: assets, liabilities, equity, revenue, and expenses.
Assets:Â Assets are everything that is owned by your business. This includes but is not limited to your equipment, commercial vehicles, commercial real estate, computers, and cash. These are known as tangible assets — in other words, physical property. There are also non-physical assets — or intangible assets — that belong to your company. Examples of intangible assets include your logo and trademarks.
Liabilities:Â Liabilities are your debts, or money that you owe to other people. Some examples of liabilities include a business loan from a bank or other lender, money that you owe to your suppliers, or payroll taxes. Accounts payable (or money that is owed but is not paid upfront) is considered a liability.
Equity:Â Equity reflects the owner’s interest in the business. In addition to retained earnings, equity also includes stock.
Revenue:Â Revenue, or income, is money that is earned by your business. This is typically through the sales of products or services, but the business may also receive other types of revenue, such as earned interest.
Expenses:Â Expenses are costs that are needed to keep your business in operation. Expenses may include office supplies, insurance, and rent. While liabilities are paid in the future, expenses are paid immediately.
When posting transactions to your accounts, debits and credits are used to balance your books. In the next section, we’ll take a look at debits and credits, what they are, and how they’re used in accounting.
What Are Debits & Credits?
A debit is an accounting entry made in your books that reflects an increase in assets, revenue, or expenses. A debit is also used to record a decrease in liabilities or equity. Debits are recorded in the left column of a journal or general ledger.
A credit the exact opposite. It is an accounting entry that is recorded to show an increase in liabilities or equity. A credit also reflects a decrease in assets, revenue, or expenses. Credits are recorded in the right column of a journal or general ledger.
How Do Debits & Credits Work?
Now, let’s start tying debits and credits back into double-entry accounting. Remember, when using double-entry accounting, transactions are posted to a minimum of two accounts. When recording these transactions, at least one debit should be recorded in the left column, while at least one credit should be recorded in the right column. The left column and the right column — your debits and credits — should be equal.
If, for example, you obtain a loan to purchase a piece of equipment, you now have the equipment as an asset. Since your assets increased, a debit is recorded in the left column. Now, we need to balance this out with a debit. Because you obtained a loan from your bank, you now have a liability. Since your liabilities have increased, a credit is recorded in the right column. Your transactions should always balance out. If not, an error has been made somewhere in the process and will need to be corrected.
An Example Of Debits & Credits In Action
Now, let’s circle back to the example that was used when explaining double-entry accounting to see how debits and credits work. You purchased $5,000 worth of supplies using funds from your checking account. Remember that money is an asset, and an asset that decreases is recorded as a credit in the right column.
Because double-entry accounting requires you to post each transaction under two accounts, we need to balance this out. Since supplies are an expense, your expenses have now increased. Therefore, the $5,000 is posted as a debit in the left column.
Now, both columns are balanced.
Subcategories such as “Cash” and “Supplies” may be used to further sort your transactions. However, even when using subcategories, the credit and debit in this example remain the same.
Let’s change the example a bit. In this instance, you have purchased $5,000 in supplies. However, you don’t pay your supplier upfront and will receive an invoice at a later time. The supplies also still an asset, but the credit would be recorded under the “Accounts Payable” subcategory instead of “Business Checking.” Because “Accounts Payable” is still an asset account, your supplies are still entered as a debit.
Now, what if you paid some money down to receive your supplies? For example, let’s assume that you paid $1,000 from your checking account now, and $4,000 will be due to the supplier at a later time. The supplies are still an asset and would be recorded as a debit. The full $5,000 would be entered under your Supplies subcategory on the left side. However, the right column (your credits) would now have two entries. The $1,000 paid from your own account would be recorded under the subcategory “Business Checking,” while the $4,000 that will be invoiced would be entered under the subcategory “Accounts Payable.” Both debits and credits remain balanced.
The Importance Of Debits & Credits
We’ve established what debits and credits are, but why are they so important? One of the reasons that debits and credits are so important is because using them helps maintain balance. Let’s take it back to the basics by looking at the accounting equation. This equation states:
Assets = Liabilities + Equity
By using the system of debits and credits, we can maintain this balance.
What if the accounting equation — or our books — aren’t equally balanced? Then there is an error somewhere that will need to be corrected. With the double-entry accounting system, recording your credits and debits allows you to quickly spot errors and easily correct them. While using debits and credits doesn’t eliminate errors completely, it does reduce them and make errors easier to identify.
Using debits and credits also gives you a more accurate picture of your finances. By tracking your revenue and expenses in an organized way, you’ll have a clearer view of the profits and losses of your business.
Sound Complicated? Let Accounting Software Handle Debits & Credits For You
If you’re still feeling overwhelmed, you’re definitely not alone. Accounting concepts can be difficult to grasp, especially when trying to learn them while also running your own business. Fortunately, it’s rare that you’ll have to manually handle debits and credits if you have the right accounting software. Today’s accounting software does most of the heavy lifting for you, meaning the double-entry accounting and the balancing of debits and credits happens behind the scenes. All you have to worry about is setting up your chart of accounts, and entering your income and expenses into the appropriate account categories.
Ease of Use
Small – Large
$20 – $150/mo
$9 – $29/mo
Medium – Large
$9 – $60/mo
$15 – $50/mo
Sage Business Cloud
Small – Medium
$10 – $25/mo
It is, however, important to have a grasp of these accounting concepts. This allows you to be able to spot potential errors, understand the numbers on your financial statements, and be able to select the software that’s best suited for your business. Not sure of what software to check out first? Take a look at our accounting software reviews to see which options are out there. And if you want to get into the nitty-gritty of accounting and expand your knowledge, download our free Beginner’s Guide to Accounting.
The post What Are Debits And Credits? appeared first on Merchant Maverick.
There are lots of tasks you have to perform to keep your business operating. Ordering supplies and inventory, marketing to your customers, and — perhaps most importantly — getting paid. Getting paid for your services or products is critical to keeping your business on track. And to get paid, you have to invoice your clients — a task that’s made simple using invoicing software.
Invoicing software allows you to create and send invoices directly to your customers. But today’s software options take things a little further, providing you with a variety of tools that simplify getting paid and running your business. These options include creating estimates and proposals, tracking time and expenses, and integrating with payment gateways, so you’re no longer waiting on a paper check in the mail.
If you’ve explored invoicing software in the past, the many options out there can be overwhelming. That’s why we’ve created this guide. We’ve narrowed down the choices to seven of the best options on the market today. We’ll dissect each option, giving you the most important information, such as pricing and features. We’ll also look at the factors you should consider when making your choice. Invoicing software simplifies invoicing your clients, and this guide is designed to simplify choosing the best software for your business. Let’s get started!
What To Look For In Good Invoicing Software
The good news is that there are lots of invoicing software options on the market. The bad news? Choosing which one is best for your business can be a challenge. While forever-free options and free trials make it easy to shop around, know what to look for before you sign up by considering these factors.
Price: Nothing in life is free…or is it? Fortunately, there are plenty of invoicing software options available at no cost. What’s the catch? It depends on the software. Some software is ad-supported, while others place limitations on the number of clients you invoice or lacks features found in paid options. While free software may work in the beginning stages of your business, you may need a more robust program as your business grows. In this case, an upgrade may be an order. Be aware, however, that if your subscription costs more than $30 per month, there are more affordable options out there. Or you can use those funds to invest in full accounting software instead.
Strong Features:Â Any software you select should have a strong feature set. Specific features that you need vary based on your preferences and the needs of your business. At a minimum, though, every business should look for software that offers powerful security features, good mobile apps, a user-friendly interface, and a well-organized client portal.
Automations:Â Some invoices will need to be sent manually. Others can be sent automatically with software that offers invoice automation, allowing you to set up recurring invoices, send out reminders, and schedule other tasks. The more automations, the more smoothly your business runs, so you can get back to doing what you love most.
Integrations: The software you choose should integrate with third-party apps and software. For example, if you already use bookkeeping or accounting software, look for an invoicing solution that syncs with this software. It’s also important that your chosen software integrates with multiple payment gateways, allowing your customers to pay their invoices online easily.
Good Customer Support:Â There may come a time when you have a question about your software, need troubleshooting advice, or simply want to upgrade your subscription. All of this is made much easier with strong customer support and good customer service. Look for software that offers multiple ways to get in touch, has fast response times, and provides resources to help you get the most out of your software.
Best overall invoicing software for small businesses. Ideal for businesses needing strong features, great invoicing automations, and international invoicing.
Zoho Invoice, introduced in 2008, has grown to become one of the most popular invoice software options on the market today. This cloud-based software offers some great features ideal for small- to medium-sized businesses and offers multiple pricing options, including a free version for business owners on a budget.
In addition to boasting such features as customizable templates and support for multiple languages, Zoho Invoice goes beyond merely invoicing. Through this program, you can create estimates, track time and expenses, manage contacts, and create and manage projects. Zoho Invoice also has a very user-friendly interface and excellent customer support. It should come as no surprise that Zoho Invoice has gotten overall favorable reviews from its users.
There are, however, a few drawbacks, although these are minimal. If you need an extensive inventory tracking system, look elsewhere, as Zoho Invoice only has a basic item list available. This software also falls a little short in terms of integrations, although that number is on the rise. At this time, Zoho Invoice has ten payment gateways and 14 integrations. For most businesses, though, this shouldn’t pose a problem, and the many positive aspects of this software overshadow the few negatives.
What makes Zoho Invoice’s offerings stand out from other invoicing software solutions? There are quite a few benefits to selecting this software, including:
Unlimited invoices and estimates
16 customizable invoice templates
Easy to use
Invoicing in 14 languages
Excellent customer support
Well-designed client portal with real-time notifications
Expense and time tracking
Exceptional customer support and resources
Multiple mobile apps
Zoho Invoice offers four pricing plans. The Free Plan allows one user to invoice up to five customers at absolutely no cost. For $9 per month, the Basic Plan gives one user the ability to invoice up to 50 customers. Upgrading to the Standard Plan at $19 per month gives access to three users and allows you to invoice up to 500 customers. The Professional Plan costs $29 per month, can be used by up to ten users, and has no limitations on the number of customers that are invoiced.
Best for small businesses that want to save money with free software.
Small business owners — especially new ones — often look for ways to cut expenses. One way is to take advantage of free software, such as the invoicing software offered by Invoice Ninja. Since 2014, over 90,000 small business owners have signed up with Invoice Ninja for its great features at no cost — and no, there isn’t a catch.
This forever-free software boasts features you would find with paid software, including invoices and estimates, time and expense tracking, item lists, contact management, and project management. An especially unique feature is Invoice Ninja’s voice commands, which allows you to send invoices and perform other tasks using your voice. If you need assistance, Invoice Ninja offers multiple ways to get in touch and exceptional customer support. The software has overall received excellent reviews from past and present users.
The free version of Invoice Ninja is best for small businesses and freelancers that serve 100 or fewer customers. If you have more than 100 customers, you will have to upgrade to one of the paid (but still affordable) software options. If you also have more than one user, you will need to upgrade your subscription, as the free version only allows access to a single user.
Invoice Ninja is one of the top options for forever-free invoicing software. If you need additional features, you can upgrade to one of the paid subscriptions. However, many small businesses will find everything they need with the no-cost plan. All plans include the following benefits:
Unlimited invoices and estimates
Over 40 payment gateways
Excellent customer support
Cloud-based and self-hosted options
Strong mobile apps
Available in 30 languages
Up to 10 invoice templates
Recurring invoices and payment reminders
The Forever Free Plan is truly free and gives you access to all of the previous benefits. This plan allows one user to send invoices to up to 100 customers. If you have more than 100 customers, you can sign up for the Ninja Pro Plan. At $8 per month, you’ll be able to send invoices to unlimited customers. You’ll also have access to additional features, including 13 reports, proposals, and invoices that don’t feature Invoice Ninja branding. This plan is limited to one user only. Pay for ten months, and you’ll receive two months free. You can also take this plan on a test drive with a free 14-day trial.
If you have multiple users, you can sign up for the Enterprise Plan, which starts at $12 per month. Like Ninja Pro, you can pay for ten months and receive two months free. You’ll also receive a 30-day guarantee. This plan supports up to 20 users and offers additional benefits, such as support for third-party attachments and branded client portal links.
Best for small businesses seeking an all-in-one invoicing and bookkeeping solution.
Freelancers and small business owners that want an invoicing software with bookkeeping options should look no further than FreshBooks. FreshBooks launched in 2003, but the company kept its software fresh with a revamp in 2017. The new version of FreshBooks offers lots of great accounting features, including double-entry accounting, journal entries, and bank reconciliation.Â If that’s more than you need, don’t worry — the old version is still available. FreshBooks Classic is true invoicing software with a few bookkeeping features. This software is a great choice for businesses that need basic bookkeeping and accounting functions but is not suitable for businesses that have more complex accounting needs.
With FreshBooks, you can send unlimited invoices and estimates to your customers. You’ll also be able to complete other tasks critical to your business, including time management, expense management, and project management tools. Depending on the plan you select, you may also be able to use features, such as bank reconciliation, reports, journal entries, and proposals. Both versions of the software are very easy to use, customer service is excellent, and FreshBooks has received mostly positive reviews from its users.
It’s obvious why over 10 million customers have chosen FreshBooks as an invoicing solution, but what’s the catch? Businesses with multiple users won’t find what they need here, as each plan only supports one user. If you have multiple businesses, another software will be a better fit, as FreshBooks doesn’t offer support for more than one business. While there are numerous integrations, FreshBooks only has two payment gateways.
FreshBooks stands out from its competitors because of its accounting features that you won’t find with other invoicing software. Other benefits of this all-in-one software include:
Unlimited invoices and estimates
Support for 14 languages
Excellent customer support
Strong mobile apps
Two customizable templates
Up to 11 reports
Over 80 integrations
Recurring invoices and payment reminders
Unlike many of the other software we’ve recommended, FreshBooks does not offer a free plan. However, there are three pricing tiers available to fit your needs best. The Lite Plan is best for freelancers or microbusinesses with five or fewer customers who don’t need double-entry accounting. This plan’s price is $15 per month. The Plus Plan costs $25 per month and allows you to bill up to 50 customers. As a Plus customer, you’ll get even more features, including unlimited proposals, automated payment reminders, and double-entry accounting reports. The Premium Plan will set you back $50 per month but allows you to bill up to 500 customers. Additional team members can be added as users for $10 per person, and payment processing is also available for an additional fee.
If you need a more customized solution, you can inquire about the Select Plan. This plan is for businesses that need to bill more than 500 customers. This plan — which is custom priced based on the needs of your business — also gives you access to a personal account manager, custom training, and other features.
Best for businesses that want a simple, no-fuss solution for managing bills and invoices.
Software that does it all and comes packed with features is great for some businesses. But what if you’d prefer a hassle-free way to simplify bills and invoices? If this sounds familiar, Bill.com may be the right solution for your business. Since 2006, Bill.com has streamlined the process of paying your bills and invoicing your customers. With this software, you can take control of your accounts payable using tools, such as reviewing and approving bills from any device, sending domestic and international payments to vendors and suppliers, and storing invoices, checks, and receipts.
But that’s not all that Bill.com offers. You can also manage your accounts receivables through this software. With Bill.com, getting paid is faster and easier with features, including automated invoices, automated reminders, contact management, and direct payments with ACH, credit card, or PayPal. Bill.com syncs with your accounting software, simplifying the process of reconciling your bank accounts and keeping your books balanced. There are also some features you won’t find with most other invoicing software, such as a customizable chart of accounts.
This software is best for medium- to large-sized businesses that want a more streamlined way to send invoices and pay bills. Small businesses may also benefit if they have a large number of payments and/or invoices. While this software can be a bit pricey, it’s a fraction of the cost of hiring an employee to handle these tasks. However, keep in mind that if you only want invoicing software and have your accounts payable under control, there are more affordable invoicing software options out there.
If billing and invoicing are slowing down your business, take advantage of all that Bill.com has to offer, including:
Unlimited document storage
Unlimited users (for an additional cost)
Strong security features
Up to 30 reports
Recurring invoices and payment reminders
There are four pricing plans available through Bill.com. The Essentials plan is the cheapest at $39 per user per month. With this plan, you can choose to manage payables orÂ receivables but not both. The Team plan costs $49 per user per month. This option also only includes payablesÂ orÂ receivables. The difference is that this plan allows you to sync the software with Xero, QuickBooks Pro, QuickBooks Premier, and QuickBooks Online. The third plan allows you to manage both receivablesÂ andÂ payables at the cost of $69 per user per month. This plan includes additional features, such as invoice and payment automation. Finally, you can get a custom quote for the Enterprise plan. It comes with all the features included in the other plans with the addition of advanced features, such as more integrations and API access.
Best for product-based small businesses that want an easy way to send invoices on the go.
Square has become known for its payment processing services, but in 2014, the company added Square Invoices to the Square Dashboard. When you sign up for a Square account, you automatically have access to Square Invoices as well as other tools for your small business. One of the best things about Square Invoices is that it’s completely free to send invoices to your customers.
Square Invoices is very easy to use and has a well-organized interface. There is just one template for invoices, but it can be customized by changing the colors and adding your logo. Square Invoices is the perfect software for busy entrepreneurs, making it easy to send invoices right from your smartphone or another connected device. In addition to mobile invoicing, Square Invoices has other tools to help you operate and grow your business, such as estimates, contact management, employee management, advanced inventory features, and sales tracking. You can even create contracts and easily attach them to your invoices.
Square Invoices is best for small- and medium-sized product-based businesses. Because of a lack of project management features and advanced invoicing capabilities, it’s not a good fit for service-based or project-based businesses.
Square is more than just a payment processor. Its invoicing feature and other tools are also beneficial to many businesses. Why should you choose Square? Consider the following benefits:
Unlimited invoices and estimates
Excellent mobile apps
An easy three-step process to send custom invoices
Recurring invoices and payment reminders
14 reports plus custom reports
Good customer support
Over 100 integrations
To use Square Invoices, you must sign up for a Square account. The good news is that your Square account is free. Sending invoices to your customers is also free. However, if you want to take advantage of some of Square’s other features — such as payment processing, payroll, or advanced employee management — there are additional fees.
Best for small businesses that want to manage time, projects, and invoices in one place.
Harvest launched in 2006 with a focus on time tracking. Since it’s launch, the software has evolved to provide additional tools for small businesses. Though its invoicing features are limited when compared to its competitors, Harvest’s time tracking features, basic invoicing, and project management tools are ideal for service-based and project-based businesses.
You won’t find advanced invoicing features with Harvest, but there’s enough to get the job done. In addition to being able to create and send invoices, you can also create and send estimates, track time, set up recurring invoices, create reminders, and manage your employees. Harvest also offers basic expense tracking as well as project management options that allow you to assign projects, set budgets, and track time and expenses.
There are a few drawbacks to be aware of before you sign up. Harvest isn’t a good fit for product-based businesses or any business that needs advanced invoicing features. If you need more advanced accounting features or don’t have much use for the project management tools offered through Harvest, consider shopping around for another software option.
Why is Harvest on this list? In addition to being a great choice for project-based and service-based businesses, here are more reasons why you should consider using this software:
Unlimited estimates (paid plan only)
Over 90 integrations
Good customer support
Strong security features
Harvest offers two plans. The first is the Free Plan, which doesn’t cost a dime. This plan allows one user to manage up to two projects and gives access to all of the other great features. If you need to add more users or projects, you can sign up for Harvest Pro, which costs $12 per user per month. With this plan, you can manage unlimited projects as well as take advantage of Harvest’s other features. Harvest offers several discounts for Pro members, including 10% off when you pay annually and 15% off for nonprofits. You can also give Pro a try with a 30-day free trial.
Best for creating and sending invoices through mobile devices.
Most business owners aren’t just sitting behind a desktop computer anymore. Today’s busy entrepreneurs are relying more and more on mobile devices to keep in contact with vendors and clients, collaborate with team members, and even send invoices. If you’re one of the people that prefers using your smartphone to conduct business, Invoice2go can help simplify sending invoices and getting paid by your customers.
Invoice2go features strong Android and iPhone apps that make it easier than ever to create customized professional invoices on the go. Setting up and using the software is simple, allowing you to send your first invoice in just minutes. Invoice2go offers additional features as well, such as expense tracking, invoice templates, estimates, time tracking, and purchase order management. You can send invoices in a variety of ways, including SMS and mobile apps. Cloud-based desktop software is also available if you prefer to go that route.
On the downside, though, Invoice2go — as the name implies — focuses primarily on invoicing. If you need more advanced bookkeeping and accounting features, another option will better suit your needs. If you don’t primarily use your mobile device for business purposes, Invoice2go likely won’t be a good fit for your business. Another downside is the limitations placed on the less-expensive subscription plans, which we’ll discuss in detail in just a moment.
Considering Invoice2go as your invoicing software? There are many reasons why you should choose this option, including:
Strong mobile apps
Good customer service
Easy to use
Good customer service
There are several plans to choose from if you select Invoice2go as your invoicing solution. The Standard Plan allows you to send up to 200 invoices and 200 estimates per month. One user can use the software, and up to 25 clients can be added. The Standard Plan costs $9.99 per month. For $19.99 per month, you can sign up for the Advanced Plan, which allows you to send up to 400 invoices and 400 estimates per month. Two users are included in this plan, and you can add up to 100 clients. This plan also gives you access to appointments. The Unlimited Plan, at the cost of $33.99 per month, lives up to its name by allowing you to send unlimited invoices and estimates and store an unlimited number of clients. This plan gives access to five users and includes recurring invoices and payment receipts. All plans are billed annually. A 14-day free trial is available, and Invoice2go offers a 30-day money-back guarantee.
Choosing The Best Invoicing Software For Your Business
Choosing the right invoicing software can be a hassle, but there are a few things to keep in mind to help narrow down your choices. Start with the options in this post and compare pricing, features, and other factors to find software that works for your business. Don’t be afraid to shop around and even test out a few options before making your final decision. When testing out software, look for options that offer free plans or free trials, so you can fully explore the software before making an investment. If the software you test lags, is difficult to use, or it doesn’t offer the features you need, move on to another option until you find your perfect match. Your ideal match should have the features you need and make sending your invoices a breeze.
The post These Top 7 Invoicing Tools Are Your Answer To Sending Small Business Invoices appeared first on Merchant Maverick.
When you start your own business, there’s a long checklist of things you have to do in the beginning stages. Business plan written? Check. Advertising to customers? Check. Inventory in stock? Check. Accounting method selected? Wait, stop right there.
Accounting is one of the most important aspects of your business. With good accounting, you’ll be able to track the revenue and expenses of your business. Accounting helps you assess how your business is doing, and it simplifies filing your income taxes each year. In other words, accounting for your business isn’t just an option — it’s a necessity.
But what if you don’t know the first thing about accounting? Luckily, you don’t have to have a degree in accounting hanging on your office wall to get the basics. Even new business owners that don’t have the money to hire a dedicated accountant or bookkeeper can keep up with the books using the latest accounting software.
But before you start shopping for software options, there’s one critical decision you need to make for your business: will you use cash-basis or accrual accounting?
Unsure of what these terms mean? Then you’re in the right place. In this article, we’re going to look at the two major methods of accounting. We’ll dive into the benefits and drawbacks of each, the factors to consider before making your selection, and even a few software recommendations based on the method that you’ve chosen. Read on to find out more about these two methods and which is the right choice for your business.
What Is Cash-Basis Accounting?
The first accounting method we’re going to discuss is cash-basis accounting, also known simply as cash accounting. With cash-basis accounting, transactions are recorded when revenue has been received and expenses have been paid. Cash-basis accounting does not use accounts payable or accounts receivable. Instead, these transactions are only recorded when the cash changes hands.
Let’s simplify this concept with an example. Suppose your business has received $5,000 in payments from customers, and you have $2,000 in unpaid invoices. You have already paid $1,000 in expenses for this month. However, you have a bill from your supplier that is $500 that you haven’t yet paid.
Using cash-basis accounting, you would record the transactions for all payments you’ve received ($5,000). You would also record all expenses that have already been paid ($1,000). The unpaid invoices ($2,000) and unpaid expenses ($500) would not be recorded until they were paid. This would show that we had a total profit of $4,000.
A little later in this article, we’ll use this same example to see how the numbers change when using the accrual method.
The Advantages Of Cash-Basis Accounting
When deciding which accounting method to use in your business, you’ll want to fully evaluate the advantages and disadvantages of each. There are several benefits to using cash-basis accounting, including:
Tax Advantages:Â One of the major benefits of using the cash-basis method is that you won’t have to pay taxes on revenue that hasn’t been received by the end of the year. Instead, you would pay taxes on the income the following year after payments have been received.
Simplicity:Â This method of accounting is fairly uncomplicated, which could benefit a small business owner with a lack of accounting experience.
Current Cash Flow: Cash-basis accounting gives you a more accurate picture of your current cash flow. This method allows you to see exactly how much cash you have on-hand at this point in time.
The Disadvantages Of Cash-Basis Accounting
Of course, we can’t talk about the benefits without looking at the drawbacks of cash-basis accounting. The disadvantages of using this accounting method in your business include:
Tracking Accounts Payable/Accounts Receivable:Â The cash-basis method doesn’t track accounts payable and accounts receiveable. While this does save time in recording transactions, it can also be easy to lose track of who you owe money to … and who owes money to you. If you use this accounting method, you have to have some type of system in place to ensure that you’re collecting the money that’s owed to you and paying what you owe in a timely manner.
Higher Risk Of Errors:Â While cash-basis accounting may be easier, there is a higher chance that errors will be made. The double-entry system used with accrual accounting makes it easier to catch and correct errors. Learn more about double-entry accounting and its benefits.
No Long-Term View: Cash-basis accounting gives you an accurate picture of your company’s finances in the here and now, but it doesn’t provide an accurate view of your financial health over the long term. Let’s say you have a lot of cash on hand now. While this looks good for your business, further analysis could show that all of your customers have paid, you have many unpaid expenses, and business has been slow. In other words, things look good now, but they may not stay that way.
IRS Restrictions:Â Not all businesses can use this method of accounting. According to the Internal Revenue Service, businesses with over $25 million in revenue over the last three years must use the accrual method of accounting.
What Is Accrual Accounting?
The other method to consider for your business is accrual accounting, which is the more commonly used accounting method among business owners and is generally more recommended by accountants. When your business uses the accrual method, transactions are recorded when they occur. When a job is completed for a customer, for example, the transaction is recorded whether or not the customer has paid. If your business receives a bill from a vendor, this expense is recorded even if you aren’t paying it immediately.
These transactions are posted as accounts payable and accounts receivable.
Accounts Payable: Accounts payable are expenses that your business owes but hasn’t yet paid.
Accounts Payable: Accounts receivable is revenue that you’ve earned but haven’t yet been paid.
Now, let’s go back to the example we used for cash-basis account to show how accrual accounting works. Your business has received $5,000 from customers this month. You have an additional $2,000 in unpaid customer invoices. Your paid expenses for the month are $1,000. You have unpaid expenses totaling $500.
Unlike cash-basis accounting, if you were using the accrual system, all of these transactions would be recorded right away. If you wanted to calculate your profit or loss for this time period, you would first add all of your earned revenue — whether you’ve received payment or not. Adding the $5,000 you’ve received with the $2,000 in accounts receivable would give you a total of $7,000.
From this number, you would subtract your expenses, whether or not they have been paid. You would subtract $1,000 in paid expenses and $500 in unpaid expenses from your total revenue of $7,000. This would reflect a profit of $5,500 — quite different from the $4,000 profit we calculated using the cash-basis method.
The Advantages Of Accrual Accounting
Why would you choose accrual as the accounting method for your business? There are a number of advantages:
Fewer Errors: The accrual method uses double-entry accounting. This means that every transaction is posted to at least two accounts, keeping your books balanced. While double-entry accounting is more time-consuming, it does make it easier to spot and correct accounting errors.
Long-Term Cash Flow: While cash accounting might be better for gauging your current cash, accrual accounting gives you a clearer picture of the long-term cash flow of your business. This is a tremendous asset for budgeting, planning, and decision-making.
Obtaining & Tracking Funding: Whether you’re seeking investors or a loan from a bank, the accrual method of accounting allows you to run statements that give a better picture of your company’s future, which could improve your chances of getting a loan. For investors and lenders, this shows if your company is a risk and could be a factor in determining if you’re getting funded. After you receive a loan, credit account, or other form of financing, using the accrual method will also make it easier to track these accounts.
The Disadvantages Of Accrual Accounting
Accrual accounting has several big advantages for your businesses, but there are also a few drawbacks to keep in mind:
More Complicated: Accrual accounting uses double-entry accounting, which we’ve already established has its benefits. However, this does make it more complicated and time-consuming than cash-basis accounting. Fortunately, though, there are plenty of good accounting software options available that eliminate the need for manual calculations, in most cases.
Tax Implications: When you use the accrual method, all earned income is recorded. Some of this income may not have been received yet, but it will still be reported on your tax return. For example, if you have $5,000 in unpaid invoices at the end of 2019, these earnings are recorded in your accounting software and reported on your taxes for 2019, even if you don’t actually receive the money until 2020.
Current Cash Flow: Accrual accounting gives you a great overview of your business finances over the long term. However, it doesn’t give you a good picture of your cash flow at this moment. For instance, your books may show that you have quite a bit of money, but some of this could be money that has been earned but not yet received. When using the accrual method, you must keep track of cash to know how much money you have on-hand in the present.
Which Accounting Method Is Right For My Business?
By this point, you should have an understanding of the two accounting methods. Even though we’ve gone over the pros and cons of each, you may still be on the fence when it comes to choosing the right method for your business. If you’re still feeling unsure, consider these factors and situations to help you make the best decision for your business.
Factors To Consider
When determining which method is right for your business, keep the following factors in mind:
If one of the goals of your business this year is to seek funding, investors and lenders generally want to see numbers that reflect the long-term financial health of your business. This is more accurately reflected when the accrual method is used. Furthermore, using the accrual method makes it easier to track what you owe to creditors and lenders.
If you extend credit to many customers and/or send invoices to customers, the accrual method will help you accurately track what you are owed as accounts receivables.
Filing Tax Returns
Choosing the cash-basis accounting method does have some tax advantages. For example, if you’re a small business with many unpaid invoices at the end of the year and you use the accrual method, having to pay taxes on this income that hasn’t been received could negatively affect your cash flow.
Size Of Your Business
If you own a small and simple business without too many customers, the cash-basis method could work for you. However, if you have a very large business with many customers and complex transactions, the accrual method is typically a better fit for your business.
Monitoring Cash Flow
If one of your most important goals is to monitor how much cash you have on-hand in the present, stick with cash-basis accounting. If you would rather have a long-term overview of the cash flow of your business, choose the accrual method.
When To Use Cash-Basis Accounting
Cash-basis accounting is best for small businesses, sole proprietors, and freelancers that want a simple way to track income and expenses. This type of accounting is best for cash-based businesses, businesses that do not keep inventory, and smaller service companies.
If cash-basis accounting is what you choose for your business, there are plenty of great software options available. One important thing to note, however, is that some software programs may say they offer cash-basis accounting, but in reality, they just offer the ability to run reports as cash-basis. If you want a cloud-based option that allows you to track your finances using the cash-basis system, QuickBooks Online is one of the most popular choices among business owners and entrepreneurs. Want to take your accounting offline? QuickBooks Desktop is another solid option to consider.
Read our Review
When To Use Accrual Accounting
Most small businesses opt to use accrual accounting — and most accountants recommend accrual over cash accounting. Although it is more time-consuming and complex than cash-basis accounting, the good news is that there are plenty of software options that simplify the process. While you do have to learn and understand the program you choose and manually enter some data, today’s accounting software offers a variety of features, such as automatic bank reconciliation, receipt scanning, recurring invoices, and payment reminders.
As previously mentioned, there are some businesses that don’t need to use accrual accounting. Small service-based businesses, businesses that primarily operate on a cash-basis, businesses that don’t have inventory or extend credit to customers, freelancers, and independent contractors may find that cash-basis accounting best suits their needs.
Even if this sounds like you, as your business grows, you’ll want to consider the benefits of accrual accounting. Or maybe you’re already there. If so, your next step is to find the right software for your business. Some of the most popular options include Wave, Xero, Zoho Books, and QuickBooks Online.
The Bottom Line
When you’re an entrepreneur or business owner, one thing that should never be overlooked is accounting. Whether you plan to hire a bookkeeper or you’re simply going to take this task on yourself, it’s extremely important to choose the method that will work best for your business. If you’re still unsure of which is the right choice, you can always talk to an accountant to learn more about the pros and cons of each method. If you have made a decision, you can get started by checking out our software recommendations above or comparing some of the best software options on the market.
The post Cash VS Accrual Accounting: Which Is Better For Your Business? appeared first on Merchant Maverick.
Payroll is a daunting component of any business, and many small business owners admit frustration with managing their payroll documents. But payroll is necessary. Not only is it important that you pay your employees correctly, but making a mistake on payroll is messy, complicated, and could impact taxes. If you’re looking for a quick and easily digestible introduction to payroll, you’ve come to the right place. Let’s delve on in.
What Is Payroll?
If you have employees, you pay them a wage for their work; that’s just a basic fact of life. Payroll is defined as the regular payment of wages to employees, and it includes withholding the correct amount for taxes, insurance premiums, or retirement plan contributions. Payroll can be complicated and unwieldy with technical minutia, but managing payroll is a legal requirement, so don’t try to skimp on understanding the basics.
In essence, with all payrolls there are dual systems at work — there is the money allotted to employees as wages and there is money that is withheld for payroll taxes. As a small business owner, you are responsible for managing those withholdings. So, when payday rolls around, you give your employees a check that has the appropriate amount withheld for taxes, and when tax time arrives, you provide employees with statements of income (more on this below) and pay the government their share of the booty. That’s payroll, in a nutshell.
The Components Of Payroll
Payroll is broken down into several steps. As the small business owner, you are responsible for providing your employee the correct wages and for withholding state and federal taxes. Your records for payroll need to be clear and accurate, and whether you do these calculations by hand or use payroll software to run the numbers for you, it’s important to understand how payroll works. Anything dealing with money and taxes is fundamentally crucial to your business, and it’s important to your employees, too. A functional payroll sends a message of respect and stability to the people you employ.
Before you set up a payroll system, here are the payroll terms and the concepts you should be familiar with.
What does it mean when someone runs payroll? It can mean running the monthly wage reports for employees, including their withholdings. And it can mean organizing the financial documents related to wage and withholdings for the entire fiscal year, as well. Payroll can also simply mean the amount you pay to employees and the government every year.
Your employees work for you for a certain amount of money, and processing the money you owe them is payroll. In order to set up a payroll system for your business, you will need to acquire some information from your employees. Here’s everything you must have to set up your payroll system:
Your company’s legal name or DBA (Doing Business As)
Your Federal employer identification number (EIN)
State tax withholding ID number
State unemployment tax ID number (SUI)
Local tax ID numbers
Your state unemployment tax rate information
Details on the pay rate for each employee
Personal information for all employees, including
Social security number
Tax filing status
Information on deductions and contributions
Once you’ve gathered this information, you can set about calculating the appropriate withholdings and deductions in order to be compliant with the law.
Salary & Wages
Money, money, money, money! Look, wouldn’t it be amazing if each of your employees was independently wealthy and believed in your business enough to work for free? I mean, sure, as a small business you may temporarily use your friends, but if you have someone working for you day after day, then put that person on the payroll. It might feel easier to pay a handful of employees under the table, but it’s both illegal and hurtful to your bottom-line. Here are some salary and wage terms to understand:
Gross Pay/Gross Earnings
Gross pay is the amount of money your employee has earned before any deductions. This includes commission, bonuses, and other payments.
Net pay is the amount of money your employee has earned after deductions and taxes are withdrawn. This can also be called “take-home” pay.
This is the accumulative yearly wage for employees. That salary is then divided up and distributed on a set pay schedule. The payment schedule could be weekly, bi-weekly, or monthly. (A salaried employee has set earnings per month versus an hourly employee.)
This is the amount of money paid per hour to employees who are not receiving a set salary. Freelancers, contractors, and all hourly employees are paid per hour. In a payroll system, the hourly rate is set for employees and is calculated when payroll is run.
If an hourly employee works more than 40 hours a week, any additional hours you approve over that is considered paid overtime. An overtime wage is a set rate and is subject to tax deductions. Overtime calculations can become complicated depending on when payroll is run, so if you have quite a few employees who earn overtime, factor that into your payroll choices.
Someone working for your business on contract has a specific pay schedule related to that contract. As a 1099-employee, a contract is based for a specific amount of time and ends on an agreed-upon date. As an employer, you do not withhold taxes from a contract employee — he/she is responsible for their own withholdings.
This is an amount of money rewarded to an employee for good performance. While it may be a one-time payment in addition to a salary, all bonus money is subject to taxes.
A tip or gratuity is an added amount of money received by employees for a job well done. Some payroll systems allow employees to keep track of their tips, as those wages are taxable income. Having a system to account for tips is important to your business and maintaining compliance.
If you are a sales-based company, your employees might earn money off of each sale they make, and this is called a commission. Even if your employees are commission-only, the IRS still considers commissions as supplemental income and it should be taxed at the regular rate.
Earning time-off is an important part of being an employee. Time off can appear in various forms; family and medical leave, paid vacation time, sick leave, and personal time. Your small business needs time-off policies and a way to calculate those hours separately from paid work hours. Your payroll system will also include information about your business’s time-off policies and calculate adjustments to a paycheck for earned time off. An automated payroll system can calculate earned time off for your employees — making it easy to put available vacation hours on pay stubs.
Paid Time Off (PTO)
This is a set amount of hours per year your employee has to take a paid time away from work. Some companies provide a block of hours employees can use toward sick, vacation, or personal days. Under federal law, you are not required to provide paid time off to your employees, but happy and healthy employees are good for business, so offering PTO is often in the best interest of employers (and can be a huge deciding factor for an employee’s job decision).
Set up a policy for paid time off and communicate it clearly to employees. What happens to unused time at the end of the year? Are employees paid a regular or amended rate for paid time off? Once you’ve made these decisions about time off, then you can find a payroll system that automates the process for you.
While Paid Time Off (PTO) and vacation days can be used interchangeably, they are different. Vacation time by definition is time your employees can take and to be totally free from work duties without restrictions. Business policies regarding vacation will vary. Make some choices about your vacation policies: do employees need to declare vacation by a certain time? How many hours of vacation are employees given a year? How are vacation days tracked?
Humans get sick. Humans make little humans who are sometimes sick and can’t go to school or daycare. Illness is a fact of life and business owners need to prepare for the inevitable with a sick day policy. Bonus: encouraging your employees to stay home when they are ill protects your business from sickness spreading! Check with your state to see if there are state-mandated sick leave policies. Note:At the time of this article, 13 states/territories have paid leave laws: Washington, Oregon, California, Arizona, Michigan, Connecticut, Maine, Maryland, Massachusetts, New Jersey, Rhode Island, Vermont, and Washington DC.
In addition to sick leave and vacation leave, you may want to consider offering other leave options to employees. Personal leave is scheduled time for your employees to use for adulting purposes (doctor appointments, car check-ups, parent-teacher conferences, school meetings, emergency plumbing disasters, mental health). Also, developing a plan for family leave/maternity and paternity leave is a must. Brainstorm the ways an employee might need to be absent and have firm policies in place for those occasions.
Employees care about benefits. Second to salary, benefits matter when employees choose where they want to work. Sometimes small business owners think they can’t afford to offer benefits to employees, but they actually can’t afford to risk the loss of employees by not offering benefits. The value far outweighs the potential cost.
So what are benefits? These are the extras a small business provides for their employees — health care, dental care, life insurance, or a retirement plan. As a small business, depending on your size, you might be required to provide some of these benefits to full-time employees, so as always, check the laws in your state. Here are a few benefits that may be legally required:
Time off to vote or serve in the military
Pay state and federal unemployment taxes
Comply with FMLA (Family Medical Leave Act) laws
You are not legally required to provide a retirement plan for employees; however, should you provide a retirement incentive, there is marked improvement in employee retention and happiness. There are also tax credits and incentives for small business owners who provide retirement benefits. The options for retirement benefits are tiered and varied; for companies with a small number of employees, retirement options like a Simple IRA or a Simple 401K are easy to implement, and many payroll software systems can help with employer contributions and matching.
Do you need to provide health insurance to your employees? Possibly! The current legal requirement is this: If your business is considered an Applicable Large Employer (ALE) with 50 or more full-time employees for more than six months out of the year, then you will need to provide your employees with health insurance as a legal requirement of the Affordable Care Act.
If not, then health care benefits are a choice! (But a good choice! And one that leads to happy employees, higher retention rates, and a thriving and healthy community.) Need to know more about health insurance, even if you are a small business with only one employee? We have you covered. Check out ourÂ Ultimate Guide to Small Business Health Insurance or our post on How Health Insurance Works for One Employee.
As a small business, you may offer life insurance to your employees. Group life insurance is an inexpensive and easy way to communicate to your employees that you value them. (Also, did you know that you can even singularly insure a really important employee? Like, if your business won’t function without a particular human being…insure that human! It’s called Key Person Insurance. Check it out.)
Fringe benefits mean any additional supplement to income that you may offer your employees. They include the benefits listed above, but also include many other types of assistance you may want to offer. Some companies provide access to a company car, rewards for healthy living, transportation vouchers, discounts for schooling, employee discounts on merchandise, technology grants, and paid career advancement conferences. Most fringe benefits are tax-free, but it’s important to check with a tax expert.
Tax Deductions & Withholdings
The most important thing, equal to paying your employees, is paying the government. Managing federal and state tax withholdings is a crucial component of payroll. It is your responsibility as the small business owner and employer to understand the tax law and the federal tax rates (you, or a software program, or a hired accountant). Your employees, when hired, will fill out and send the proper forms to the Internal Revenue Service (IRS), and that paperwork along with current tax rates will tell you how much to withhold for payroll taxes.
We know it’s a lot to take in, but before you start hyperventilating, we’ve broken down the tax withholding basics below.
Federal Income Tax Withholding
This is the amount of money withheld from an employee’s paycheck each month that goes to pay federal income taxes. The federal rate for income tax withholdings changes depending on your income level and your employee’s allowance preferences (as reflected on their W-4s).
State Income Tax Withholding
This is the amount of money withheld from an employee’s paycheck each month that goes to pay state income taxes. As an employer, you are required to calculate how much to take for state and all local taxes.
The social security tax is a federal income tax that affects all employees, no matter what. The tax rate for social security depends upon a formula that takes inflation into account. In 2019, the current rate is 12.4 percent which accounts for a 6.2 percent employee and 6.2 percent employer contribution. (Unless you make over $200,000 a year, then you gotta pony-up an extra .9 percent.) Combined with Medicare, this is what is referred to as Federal Insurance Contributions Act (FICA) Taxes. And FICA taxes are also called payroll taxes.
Along with social security, Medicare is considered a FICA Tax which is considered the cost to the government for employment. The current Medicare rate is at 1.45 percent for all employees, and there is no cap. You will collect this money as part of the paycheck withholdings and send it along to the IRS throughout the year.
Payroll Tax Forms
You cannot create a payroll system without having the right tax documents from each employee. (Cue Roz’s constant battle-cry for paperwork in Pixar’s Monster’s Inc.). Our current digital landscape allows for the ease of sending and receiving tax forms via the internet, so we can cut down on the “paper” part of all this paperwork.
Filing payroll? Here are the forms required by law that you/and or your employees must fill out:
W-2: Every employer is required to send this document to each employee and the IRS. This form is a statement of all wages earned and all taxes withheld during the previous year.
W-4: This form is filled out by employees and communicates how much tax they’d like withheld from their paychecks. You will need to know their withholding allowances in order to correctly run payroll and take out the right amount of money.
1099: This form is for people who worked under contract or freelancing for your business and do not earn a regular salary. This form is for tracking miscellaneous income, or extra income, a person may earn. Money sent to a 1099 employee does not have taxes withheld, which means the burden of paying taxes moves away from you as the temporary employer.
Schedule C: If you are an independent contractor or a sole proprietor of a business, you will need to fill out a Schedule C profit/loss report and file it with the IRS. A profit-loss statement is also called an income statement and its purpose is to help calculate your self-employment tax. Under the new tax laws, you will file a Schedule C form with your 1040 form.
1-9: This form is required to verify the identity and employment availability of your employees. When you hire someone and onboard them to your business, every single new hire needs to fill out this form. After your employee fills out the first part, you as the business owner need to fill out the second part. Since this is used to establish identity, your employees will need to send you formal identification: a current US passport, a green card or alien registration card, birth certificate, social security card, among others.
940: When you run payroll, you will pull out and withhold certain taxes to send to the federal government. One of those taxes is the Federal Unemployment Tax. That money is used to compensate workers who are unemployed and are qualified to receive assistance.Â You will need to fill out a 940 form every year to declare your payroll: how much your employees earned and how much money you pulled for your unemployment taxes.
941:Â This important payroll tax form tells the federal government how much you paid your employees and how much money you withheld to pay for income taxes, social security taxes, and Medicare taxes. You will file the form and then send the IRS the money you withheld from employees when you ran payroll.
944: If you are a big company running payroll, you will pay your payroll taxes every quarter, and this form doesn’t apply to you. However, if you are a very small business and your total withholdings for payroll taxes are less than $1000, then you can file a 944 form once a year.
The phrase processing payroll means several things. We’ve already discussed the biggest decisions regarding setting up payroll. To process payroll means all of these things:
Determining your employee’s wages and salaries
Determining an employee pay schedule
Calculating payroll taxes
Withholding payroll taxes from employee paychecks
Delivering paychecks with the proper withholdings
Submitting taxes to the government
Dispensing paperwork to employees via W-2 or 1099s.
Payroll is not a single step, but a collection of steps that lead to paid employees and a paid government — keeping the people you employ happy and the tax gods happy. Here are the factors to consider in order to set up and process payroll:
Who Is On Payroll?
You’ve hired an employee. Yay! Now, you need to pay that employee. Your payroll will include any W-2 and 1099 employees you pay regularly. But not everyone who works for your business will need to be processed through a payroll system, so who does get paid via payroll?
Whether or not someone is considered an employee has a lot to do with whether or not you control his/her workload, control his/her paycheck, and control your relationship. (If you have control over another human…you’re the boss!) If you can say yes to any or all of those questions, then that person is your employee and you have legal requirements related to paying that individual. If you’re super confused about whether or not you are someone’s boss, you can fill out an SS-8 form with the IRS and they’ll help you figure out the classification.
A contractor is not an employee. They are a freelancer helping your business for a set time or a set project, and are paid according to their contract. Contract employees are responsible for withholding their own taxes! When you run payroll for contractors, pay them their wage and your part is done. (Easy peasy.)
Now it’s time to make important choices about how often your employees will get paid. Twice a month? Once a month? Once a week? Here are the options, challenges, and benefits of each.
On a weekly payroll schedule, employees would receive a paycheck each week for a total of 52 pay runs per year. Some employees like being paid weekly; it can be good for monthly budgeting. However, running payroll every week can be a time-consuming practice for you or your accountant. Many payroll companies will charge you each time you run payroll, so a weekly payment schedule might seem nice, but it’s expensive and hard on the people in your accounting department (or if you don’t have an accountant: you).
A bi-weekly paycheck would arrive every two weeks, regardless of how that week fell on the calendar. Bi-weekly payroll doesn’t always even out since every month is not exactly four weeks. With bi-weekly payroll, there’s a total of 26 pay runs per year (which means that most months, employees will receive two paychecks per month, but twice a year they will receive an extra check). This means the paychecks may appear to come inconsistently and some people find this harder to rely on.
A semi-monthly paycheck arrives twice a month, usually on a set date (for example: the 1st and the 15th; or the 15th and the end of the month). Unlike bi-weekly payroll, semi-monthly payroll has a total of 24 pay runs, meaning employees will get paid twice a month no matter what. Semi-monthly is the best for employees who earn a salary but is cumbersome for calculating overtime.
On a monthly payroll schedule, employees receive a paycheck once a month. Some employees don’t like the once a month payments, but with only 12 pay runs a year, it is the easiest on the person running payroll. The end of the month corresponds with payments to the IRS, so it can be simple to withhold, collect, and report.
One of the components of payroll is giving each employee a pay stub. This is a formal piece of communication between you and your employee about how much they earned and how much you withheld. Each pay stub also includes all the year-to-date figures. The type of information required on a pay stub varies by state.
Payroll Payment Methods
When the time arrives to give your employees their paycheck, you have several methods to choose from. You may offer payment choices to your workers, or you can choose for them. Here the three most popular options you can use to distribute your payroll:
1. Payroll Checks
You can give your employees a paycheck. Manually filling out handwritten checks might take a long time every payroll period, but there are automated ways to print checks, too. (Some require a special printer, so be sure to talk to some payroll experts about your needs.) A check has several benefits: employees don’t need a bank account and there are low distribution costs.
2. Payroll Card
A payroll card is similar to giving employees a preloaded credit card — actually, that’s exactly what it is. Every pay cycle, you put money on a payroll card and employees can use the payroll card wherever debit/credit is taken, or pull the money out as cash. These payment cards are gaining in popularity. This is another method that doesn’t require a bank account.
3. Direct Deposit
If you don’t want to mess with checks and cards, direct deposit into an employee’s bank account can be the way to go. This is the most common way employers pay their workers, and it’s easy: if you have an automated online payroll system, linking a direct deposit creates a seamless payroll. However, it can be expensive to set up and not all employees may have a bank account.
How To Run Payroll
Alright, now the nitty-gritty part of this process. You know what kind of employees you have, they’ve filled out their paperwork, you’ve decided to pay them bi-weekly (or, you know, whatever), you’ve learned about rates of withholding and benefits, and you know how the employees want to receive their money. Bam! You’re on a roll! But now what? How do all those numbers and choices combine into a seamless process that won’t eat up major hours of your time?
Here are the options you have as an employer for calculating and processing payroll.
Manually Calculate Payroll
Manual payroll might be your only choice, financially or otherwise, and that’s okay. If you have only a handful of employees, it could be more cost-effective to do those calculations by hand. If you have a salaried employee, you’ll take their salary, divide it up among the pay periods, and withhold the necessary taxes. For hourly employees, you will examine their time cards and make the calculations based on their hours and rate of pay.
Manually running payroll is cost-effective for your small business and could be a good choice if you feel comfortable and confident working with numbers, and you only have a handful of employees.
For example, you have an employee named Jim. Jim’s a salaried guy making $50K a year, with no overtime. Jim gets paid every two weeks, so his salary of $50K is divided up across 24 payments. 50,000/24 = $2083.33 is his GROSS pay every two weeks. You will still need to withhold payroll taxes though. You can use the IRS’s tax withholding percentages to help you calculate this.
According to the IRS, for a bi-weekly gross pay of $2,083.33, federal withholdings are $267.00, social security withholdings are $129.17, and medicare is $30.21, which means you’d give your employee a NET amount of $1717.37 on their bi-weekly paycheck.
How did I calculate that? Well, I did spend some time with a calculator and the federal rates we discussed above. Then I checked my numbers against a payroll software program. Was I right? Yup! Did the software calculate it faster and give me more confidence? Well, also, yup. So, if manual calculation doesn’t get you feeling all fun and loose, there’s a software for that.
Business software has come a long way in recent years, and payroll software is no exception. There are tons of online, easy-to-use payroll solutions. The benefits of payroll software include built-in time tracking and payroll calculations, expert help from customer support teams, peace of mind, and saved time.
Merchant Maverick has already reviewed a few payroll software providers, including Gusto and Paychex. These comprehensive payroll reviews cover pricing, features, customer support, user feedback, security, and more so you can make an informed decision about the right payroll software for your business.
The last option is to hire an accountant or a payroll outsourcing company to manage your payroll from start to finish. While a payroll program can do the calculations and manage your tax tables, as the small business owner you might still be the singular responsible person for managing payroll. By outsourcing the entire process, you can rest assured that professionals are handling the numbers, and it doesn’t have to be a monthly or bi-weekly chunk of time.
How To Choose Payroll Software
So, you’ve decided that as much as you enjoyed your high school math classes, you want to trust in computer calculations, and you want to check out available payroll software. There are many options at your fingertips. All those options can also make finding the right payroll software a bit overwhelming. Do you need bells and whistles? How much can you anticipate to pay? What if you make a mistake?
Ask yourself the following questions before you start to look at programs:
How many workers do I need to run payroll for?
Do I have mostly salaried employees or contract employees?
Do I provide a benefits package?
Do I have a payroll manager who is comfortable with the legal requirements of payroll?
How much am I willing to pay to outsource the work?
Payroll Software Features
Each software program that helps you with payroll comes equipped with different features. Only you will be able to know what features are needed most for your company. To start, here is a list of all the basic features a good payroll software should have:
Payroll Processing Abilities: Maybe this should go without saying, but your software needs to calculate and process your payroll, whatever that looks like. Look for integration with timekeeping software, ease of use, etc.
Tax Calculations: Since this is the trickiest part of payroll, it’s important to have software that you trust to manage and perform automated calculations. There’s less human error and the system will help you file those taxes, too.
Direct Deposit: Automate everything and make sure when you run payroll that your software has the capabilities to work directly with banks.
Time & Attendance Tracking: Some payroll software can also be used for timesheets and keeping track of employee hours. If you have many hourly employees, this might be a nice integration tool so you don’t have to import hours from a different program.
Payroll Training & Support
When shopping around for a payroll system that works for you, make sure that it comes with real-person training and help. Should you get stuck, you’ll want to make sure there is someone who understands compliance issues available to help you. If your business doesn’t have an accountant, then purchasing software that comes with human support should be a high priority. Payroll can be complicated, daunting, overwhelming, and there are many opportunities for human error.
But there are also many online support and training opportunities if you want to learn it on your own or pay an employee to become payroll certified.
Cost Of Payroll Software
As with the costs of all things, the monthly number differs depending on need. There are some payroll systems that start as low as $10 a month and no additional fees per employee; however, some programs charge a fee per employee (in the $4-5 range). And some payroll software companies can charge up to $200 a month. With that much of a variance between programs, it’s important to set a budget and decide what features are the most important for your business as you move forward.
Getting Started With Payroll
Paying your employees is not an optional part of running a small business. You need to find a payroll system and a method of running payroll that adds quality to your business, not chaos. Compliance, necessary HR onboarding, and running payroll during tax season are all components of a small business that might make you want to go take a long nap and turn your brain off if you have a tendency to want to sleep for years when life gets overwhelming (…or is that just me?), but in today’s digital world payroll is easier than ever.
Research and understand what you need, know your business, and take the leap into organizing your systems with seamless payroll. The IRS and your employees will thank you.
The post Everything You Need To Know About Small Business Payroll appeared first on Merchant Maverick.
Before you launch your business, you have to check a few items off your to-do list. Perhaps you have to purchase inventory, find a commercial building to lease, and explore different types of business software. Maybe you operate a home-based business so your list isnât as extensive. No matter what type of business you plan to open, though, thereâs one thing all business owners must do: select a business structure.
Thereâs no getting around choosing your business structure. The way your business is set up determines both how youâll file your taxes and how much youâll pay. Your business structure may provide you with personal liability protection against the debts and obligations of the business. It will also determine specific requirements for your business, from registering with your state to ongoing requirements (like holding meetings and recording meeting minutes).
If your business has just one owner, one business structure to consider is the sole proprietorship. But before you make that critical decision, itâs important to understand what a sole proprietorship is, registration and paperwork requirements associated with this structure, and the benefits and drawbacks of being a sole proprietor.
While the business structure you choose should ultimately be whatâs best for your business, we hope to make the decision process a little easier by breaking down exactly what to expect as a sole proprietor. Keep reading to find out more.
Sole Proprietorship Definition
Merriam-Webster defines a sole proprietorship as âa business owned and controlled by one person who is solely liable for its obligations.â
Letâs break down this definition. A sole proprietorship is a business that belongs to and is run by only one person. If your business has multiple owners, youâll be unable to operate as a sole proprietorship.
In aÂ sole proprietorship, the owner alone is liable for the obligations of the business. A sole proprietorship is not a separate legal entity. This means that the ownerÂ — you — is responsible for the debts, obligations, and liabilities of the business. Your personal assets may be seized to fulfill debts, and lawsuits can be brought against you personally.
Many people choose this structure because a sole proprietorship is the quickest, easiest, and most inexpensive way to start and operate a new business. A sole proprietor is not required to register with the state. Simply engaging in business activities legally establishes a sole proprietorship. However, the sole proprietor is still required to apply for the appropriate business licenses and permits needed to legally operate in their state.
Sole proprietors can operate under their own legal names or can create a fictitious trade name when doing business. Using a trade name does not establish a separate legal entity, and the business owner will still be held responsible for the liabilities of the business.
Sole proprietors do not have to file separate tax returns for their businesses. Instead, these business owners report business profits, losses, and expenses on a Schedule C form. Self-employment tax for the sole proprietor is reported on a Schedule SE. The Schedule C and Schedule SE are both filed with the business ownerâs Form 1040. Weâll dive deeper into the benefits and drawbacks a little later in this article.
Next, weâll compare sole proprietorships to other business structures so you can better determine which works best for you.
How Is A Sole Proprietorship Different From A Partnership?
The biggest difference between a sole proprietorship and a partnership is the number of owners of the business. A sole proprietorship has a single owner. A partnership has two or more owners.
Comparing a sole proprietorship with a limited partnership (LP) and limited liability partnership (LLP) reveals a few additional differences. With these types of partnerships, limited partners are protected from personal liability. These partnerships are also more expensive and more complicated to form because they require registering with the state.
Other than the number of owners, a sole proprietorship and a general partnership (GP) are very similar. Neither has to be registered with the state to exist. The profits and losses for a sole proprietorship and general partnership are also filed on personal tax returns.
How Is A Sole Proprietorship Different From A Corporation?
A sole proprietorship is very different from a corporation. A corporation is the most expensive business entity to form, whereas a sole proprietorship is very inexpensive. Corporations must be registered with the state. There are also multiple ongoing requirements corporations must meet, such as holding meetings and having a board of directors. Sole proprietors do not have to register and there are no ongoing requirements.
Corporations may have multiple owners, whereas a sole proprietorship has just one owner. Corporations can also raise capital through the sale of stock — something a sole proprietor can not do.
Corporations also offer the best personal liability protection for its owners. As previously discussed, sole proprietors are held personally responsible for the liabilities of the business.
Another big difference between sole proprietorships and corporations is how each business structure is taxed. Sole proprietors are able to report business profits and losses on their personal tax returns. Corporations are taxed differently — a corporation is the only business structure that must pay separate income taxes. If dividends are paid to shareholders, shareholders must report this on their personal tax returns, resulting in double taxation for the corporation.
How Is A Sole Proprietorship Different From An LLC?
A limited liability company, or LLC, combines benefits of different business entities. An LLC must register with the state, and there are some fees associated with starting an LLC. This is in contrast with sole proprietorships, which are not required to register and are the least expensive to start.
Another difference between the two is that LLCs have liability protections in place to protect the personal assets of the owners. Sole proprietors do not receive these same protections. LLCs may also have multiple owners, whereas a sole proprietorship is limited to a single owner.
There may also be differences in how the LLC is taxed. Owners of an LLC can choose how they are taxed. In some cases, they may opt to be taxed as a sole proprietorship. In other cases, however, owners may choose to be taxed as a partnership or corporation.
What Types Of Businesses Are Sole Proprietorships?
A sole proprietorship is best for businesses with one owner that wants full control of the business without complicated requirements or additional expenses. Self-employed business owners, home-based businesses, independent contractors, and even some franchise owners may choose this business structure.
Any business can be a sole proprietorship provided there is just one owner and the owner is aware of the benefits and risks of this business structure. Smaller businesses are better suited for sole proprietorships. Companies that plan to grow much larger and want to take out business loans or raise large amounts of capital in the future would benefit from another business structure, such as a corporation or LLC. Some common small businesses that are sole proprietorships include:
Home Healthcare Businesses
Freelance Writers, Editors, Or Designers
Computer Repair Technicians
Regardless of what type of business you operate, the business structure you select should be based on the long-term needs and goals of your business.
Benefits Of Sole Proprietorships
After breaking down the definition of a sole proprietorship, you should have at least some idea of why business owners would choose this structure. However, letâs take a closer look at the full list of benefits of operating your business as a sole proprietor.
Less Expensive: Sole proprietorships are the easiest and least expensive forms of business structures. This is ideal for business owners that aim to keep their startup costs as low as possible.
No Registration Required: Sole proprietors simply need to participate in business activities to exist. No state registration is required. However, any applicable permits and licenses will need to obtained to legally operate in your state.
No Ongoing Requirements:Â Sole proprietors are not required to hold meetings, record meeting minutes, or have a board of directors.
Full Control Of The Business: As a sole proprietor, you will be the sole owner of your business. There are no additional owners or shareholders to consider. You get to make all business decisions and you receive all of the profits.
Easier Tax Returns: Sole proprietors can file their business profits, losses, and expenses on their personal tax returns with just two additional forms.
Drawbacks Of Sole Proprietorships
While being a sole proprietor definitely comes with its benefits, there are also drawbacks to consider when youâre weighing out your decision. Those drawbacks include:
No Liability Protection: As a sole proprietor, you will be held responsible for the debts, obligations, and liabilities of your business. If you default on a loan, lenders can come after your personal assets, such as your bank account, vehicle, or real estate. If your business goes bankrupt, your personal finances could be affected. Finally, lawsuits can be filed against you personally, which would also put your assets at risk.
Financing Challenges: As a sole proprietor, getting business financing can be a challenge. Most lenders — from traditional lenders like banks to online alternative lenders — only provide financing to registered entities. Sole proprietors also canât sell stock in the business as a way to raise capital. As a sole proprietor, you may have to get more creative with your financing, such as launching a crowdfunding campaign or taking out a personal loan for business.
For many aspiring business owners, operating a sole proprietorship is the right path to entrepreneurship. However, what works for some doesnât always work for others. After weighing out the pros and cons of a sole proprietorship, consider consulting with an accountant and/or attorney to help determine if a sole proprietorship will meet the needs and goals of your business.
Ready to learn more? Download our free beginner’s guides for business. You can also learn more about the different types of business structures to help you further pinpoint which option is best for you.
The post What Is A Sole Proprietorship? appeared first on Merchant Maverick.
Everyone wants their small business to succeed, which means everyone needs a small business accountant. Yes, even if you use accounting software and do your own bookkeeping, a professional accountant is indispensable.
But how do you even find an accountant? And once you do, how do you know if they’re any good?
In this post, we’ll provide five easy steps for finding an accountant for your business. We’ll teach you where to look and how to tell a good accountant from a bad accountant. We’ll also give you the top tips and tricks for choosing the perfect accountant.
How To Find An Accountant For Your Business
Step #1: Pinpoint Why You Need An Accountant
Step #2: Choose the Right Type of Accountant For Your Business
Step #3: Know Where To Look
Step #4: Learn What To Look For
Step #5: Ask The Right Questions
Know When & Why You Need An Accountant
The first step is knowing when to hire an accountant. Spoiler alert: the answer is now.
Sure tech-savvy business owners can use accounting software to manage their own bookkeeping, but when it comes to actualÂ accounting, you’ll want the many advantages of having an expert onboard.Â As a small business owner, you should do everything you can to set yourself up for financial success; the best way to do that is to hire an accountant.
Accountants do so much more than just help you file your taxes. An accountantÂ can give sound business adviceÂ when you’re setting up your business,Â analyzing your cash flow,Â trying to improve efficiency,Â facing an audit, and much more. Read our full postÂ When Should You Hire An Accountant For Your Business to learn every instance when an accountant can help.
When beginning the process of hiring an accountant, it’s important to pinpoint why you want help and exactly what you want your accountant to do for you. Common tasks accountants can perform include:
Basic bookkeeping tasks
Verifying your bookkeeper’s work
Setting up your business
Offering business advice
Analyzing your business’s finances and assets
Cash flow management and projections
Providing tax advice
Filing tax returns
Maximizing your tax deductions
It’s important to know which tasks you want your accountant to perform before starting your search as services vary from accountantÂ to accountant.
For example, if you just want tax advice and help filingÂ your tax returns, you may want an enrolled agent (EA) instead of a full-on accountant. If you want business advice and tax advice, a certified public accountant (CPA) with expertise in your business industry may be a better way to go.
Take a careful look at your finances and your business’s current situation and create a list of problem areas where you would like help from a professional. Do you need help managing your cash flow? Are you worried you aren’t taking all of the deductions you’re eligible for? Are you simply overwhelmed by finances and need a helping hand with the day to day work? Pinpoint these concerns and write them down in a list. Later, when you interview prospective accountants, you can return to your list and determine if their services would be a good solution to address your business’s needs.
Why Picking The Right Accountant For Your Business Matters
As a business owner, you pick tools all the time that help your business — accounting software, a new ecommerce site, a file organizer for your office — you name it. One, if notÂ the, most important tool you can pick is a good accountant. A good accountant will help you successfully manage your finances so that your business can be successful and grow.
But there isn’t a one size fits all accountant. The second step in finding the perfect accountant for your small business is knowing whichÂ type of accountant you need. There are three main types of accounting professionals: bookkeepers, accountants, and CPAs.
Bookkeepers handle the day-to-day finances and bookkeeping tasks of a business. Tasks can include invoicing, reconciling accounts, managing accounts payable and receivable, creating reports, entering data, and running payroll.
Accountants offer business and tax advice and handle the big picture finances of a business. Tasks can include bookkeeping, business advice and planning, tax advice, tax filing, cash flow management, creating reports, and analyzing business financials.
Certified Public Accountant (CPA)
A CPA, or certified public accountant, is and accountant who has passed a certification exam. Often considered more knowledgeable and trustworthy because of the education and work it takes to get and maintain their licensing. Tasks can include everything an accountant can do, plus the ability to create audit reports and represent your business legally before the IRS.
If you are overwhelmed by daily financial takes and looking to save time, a bookkeeper might be the best way to go as they are often cheaper than accountants. However, that doesn’t mean you should hire just a bookkeeper and call it good. You still need an accountant. An accountant will provide insightful business and tax advice that a bookkeeper can’t.
So the real question becomes, does your business need an accountant or a CPA?
All CPAs are accountants, but not all accountants are CPAs. Here’s how accountants and CPAs differ and what advantages each can offer your business:
Certified Public Accountant (CPA)
Must have a Bachelor’s and have successfully passed the CPA certification exam
Generally has a bachelor’s degree, preferably in accounting
Offers advice and insight about the big picture finances of a business, and can often offer deeper knowledge of tax codes
Offers advice and insight about the big picture finances of a business
Can create audit reports and review reports
Can only create compilation reports
Can legally represent a client
Cannot legally represent a client
Often an experienced CPA will charge more than a traditional accountant, but because of their rigorous education and certification, many business owners view CPAs as more qualified and trustworthy. Plus, a CPA can legally represent your business before the IRS in case of a tax audit. If these are qualities your business requires, you can narrow your search down to CPAs specifically.
Another thing to be aware of is that accountants can specialize in certain areas.
An accountant who analyzes books for fraud, inaccuracies, and discrepancies. Often tasked with figuring out if an employee is stealing from the business.
An accountant who helps businesses understand how certain decisions affect their finances. Tasks include planning, budgeting, business strategy, and risk management.
An accountant who focuses on current costs and how they can be improved. Tasks include cost analysis and budgeting.
An accountant hired on a project-by-project basis to manage and oversee a specific business project. Tasks include management, approving expenses, project invoicing, job costing, and maintaining budgets.
Knowing whichÂ type of accountant you need and what you need them to do will help guide your search.
Where To Find An Accountant
Step three: where can you find an accountant?
Well, there’s always the good ol’ Internet, but let’s face it — there are just some things you shouldn’t Google and an accountant is one of them. The best way to find an accountant is by getting a referral.
Ask your friends and family if they know of any good local accountants. See what accountant your fellow business owners use. Ask your local Chamber of Commerce or other local small business organizations and clubs if they have any recommendations. One tip from the accounting software provider Patriot Software is that oftentimes if you are a member of your local Chamber of Commerce, you’ll have access to accountants who partner with the organization and provide discounts for their services.
A personal referral is one of the best ways to find a trustworthy accountant, but if this doesn’t work, there are some trusted sources you can use to find and vet a potential accountant including:
The American Institute of Certified Public Accountants (AICPA)
The IRS Directory
If you use existing accounting software, you can often find referrals to certified accountants through your accounting software company. The nice part about this is that the accountants will already be familiar with the software you use.
Factors To Consider When Choosing An Accountant
The fourth and most important step to finding the perfect accountant is knowing what to look for. Here are some of the key factors to consider.
Pay attention to the prospective accountant’s credentials. Are they a certified public accountant? Do they have any additional credentials such as a CMA (certified management accountant) or CFE (certified fraud examiner)? Are they licensed to practice in your state? Find an accountant whose credentials you value and trust.
In addition to credentials, an accountant’s experience speaks volumes. Learn where they went to school, how long they’ve been in business, and what area they specialize in. Do they have experience with your specific type of business and industry? This expertise will be key in choosing an accountant who will help you grow.
Every accountant specializes in different areas and offers a variety of services from basic bookkeeping to taxes to audits to business planning and more. Learn exactly which services and tasks a prospective accountant will perform and make sure their work lines up with your business’s wants and needs.
Ask yourself if location matters. In the past, a local accountant was the only way to go. Now, with the rise of the internet, you could opt for a remote accountant. Ask yourself how important face-to-face interaction with your accountant is so you can find theÂ right fit for your business.
As with anything, the cost can make or break your decision. Take a careful look at your budget (or take this time to create a small business budget if you don’t already have one) and see how much you can afford to spend on an accountant. When interviewing prospective accountants, ask them about their fees and pricing structure. You want to get a good deal, but more importantly, you want to get a good accountant, so don’t sacrifice quality for cost.
When choosing an accountant, analyze the prospective accountant’s reputation. Ask for referrals and speak to current clients. Do a little LinkedIn stalking and see how the prospective accountant interacts with their clients. Are they nice? Do they seem excited about their work? Are the customer reviews positive? These are all good signs.
As a business owner, you’re going to be working closely with your accountant so personality matters. Make sure a prospective accountant is someone you can talk with, work well with, and get along with. Figure out if they are fiscally conservative or aggressive. You want an accountant who pushes your business to grow, but you don’t want someone who is on the completely opposite end of the spectrum from you and makes you feel uncomfortable about your finances.
These factors will help you evaluate how well an accountant will fit your business and its needs.
Characteristics Of A Good Accountant
In addition to the key factors for evaluating an accountant, you also want to look for the qualities that make a good accountant.Â A good accountant should be:
Above all else, a good accountant should be trustworthy. Not only will you be turning to them for wisdom and advice,Â but they will also have access to sensitive information about you and your business. You want someone who you can trust and communicate with easily. You should feel confident in their ability to keep your information protected and private.
When looking for an accountant, you’ll want to focus on hiring a good communicator that will keep you posted on the status of accounts, taxes, and business reports. Since accountants often have to explain confusing accounting concepts, you’ll also want someone who is a good teacher and skips the accounting jargon so you can easily understand your business’s finances.
An accountant should value your time and perform the services you ask of them in a timely manner. A good indicator of this is if they show up on time for your consultation/interview with them. You can also ask existing clients about the accountant’s track record.
Detail Oriented & Organized
When it comes to accounting, it’s all in the details. Accountants have to be incredibly organized and detail-oriented to handle bookkeeping tasks and successfully analyze every aspect of your business’s finances.
A good accountant should be friendly and have a personality that you get along well with. You’ll be spending a lot of time with your accountant, so you want someone that is a good fit for your business.
Your accountant should be committed to their job as well as to your business. You want someone who is dedicated to his or her work and who is invested in the success of your business.
Knowledgeable & Wise
As accountants are a source of business advice, you want an accountant who is knowledgeable and wise. CPAs are often the most knowledgeable when it comes to accounting and taxes as they have to meet education requirements every year and stay up to date on the latest tax laws. You also want someone who is knowledgeable about your specific type of business and industry so they can offer sound advice to help your business succeed.
When you meet with a prospective accountant, try to get a feel for how well they display these key characteristics and be sure to talk to existing clients about their experiences with the prospective accountant.
Key Questions To Ask Before Hiring An Accountant
The fifth and most crucial step to finding an accountant is actually meeting with them face to face. You’ll want to set up a consultation to get a feeling of who the accountant is, what services they offer, and if they’re a good fit for your business. Accountants want you to work with them, so most offer free consultations.
Treat the consultation like an interview. Just as you’d perform a job interview to see if a potential employee is going to work for your business, interview a prospective accountant to see if he or she can fill the role you need for your business.
Here are fifteen key questions to ask before hiring an accountant:
What experience and credentials do you have?
Ask the accountant what experience, credentials, and licensing they have. Are they a CPA? Do they have any extra credentials like a CMA? And do these certifications match up with the needs of your business?
How long have you been an accountant?
Often, you’ll want a seasoned accountant who has a lot of experience with accounting and your business’s industry.
What made you decide to become anÂ accountant?
This question allows you to get a feel for the accountant’s priorities and personality. Did they go into accounting because they love their work and want to help businesses or did they want a good paycheck? The answer to this can speak volumes about a person and be a good indicator of how well you’ll get along with them.
What types of clients and size of business do you work with?
You want an accountant who has experience working with your business size and type. For example, if you’re a freelancer, you don’t want an accountant who has never had to file Schedule Cs. The more experience an accountant has with businesses similar to yours, the better they’ll be able to help you succeed.
Do you have experience working with the IRS?
If having a CPA who can represent you before the IRS is important to your business, you’ll want an accountant who has previous experience with audits.
What services can you provide my business?
This question is key. Different accountants mayÂ perform different services and tasks. Before hiring an accountant, you’ll want to be 100% clear about what they can do for you. If their services match up with your list of business needs, great! If not, you’ll want to move on to the next prospect.
Which accounting programs are you familiar with?
This could be a make it or break it situation for your business. Not every accountant will work with every accounting program. Some require you use QuickBooks, some only work with Xero. Others may be more willing to work with your existing software. If you’re incredibly attached to your accounting software, you’ll need to find an accountant who works with it.
How much do you charge for your services, and how do you bill yourÂ clients?
This is probably one of the first questions that come to mind. It’s important to have a clear understanding of exactly how much an accountant charges and how they bill their clients. Some charge per hour, some charge fixed fees for tasks, and others use monthly retainers. Make sure you know exactly how much to pay ahead of time, but also remember that cost isn’t everything. The accountant’s experience and valuable services they can provide your business are just as (if not more) important than the cost.
Will you be doing all of the work or do you delegate or outsource tasks?
Oftentimes, accountants will delegate certain tasks internally to other members of their firm or even outsource certain tasks. Ask who you will be working with most often and what privacy policies they have in place for their outsourcing. As always, never do anything you don’t feel comfortable with, so if you want an accountant who will be doing all of the work themselves, that’s totally okay. There are plenty out there who do.
Will you work directly with my bookkeeper?
If you already have a bookkeeper, ask if your accountant is willing to work with them. Oftentimes accountants will have specific instructions for bookkeepers about how certain transactions should be recorded, and the two should work closely together to ensure your books are balanced and accurate.
When are you available to your clients and how would we communicate with you?
Make sure you know how and when you can reach the accountant if you need them. Choose an accountant whose availability and response times match your wants and needs as a business owner.
Accountants have access to sensitive information about you and your business, like your social security number. Ask what security procedures they have in place and how they protect your privacy. Verify that they will not share your information with third-parties.
How can you help me grow my small business?
This question can give you an idea of what the accountant can do for your business and how they can help your business succeed.
Do you have any references I can contact?
Contacting current clients and asking about their experience with a prospective accountant is one of the best ways to gauge the accountant’s reputation and work.
Is there anything else I need to know about working with you?
This question allows your accountant to mention anything you may have forgotten and gives them a chance to explain why you should work with them.
Do you have any questions for me about my business?
If they say “no,” it’s a red flag. You want an accountant who is interested and invested in your business. This question gives them a chance to demonstrate that care.
Tips For Finding The Perfect Accountant
Here are some of our tops tips and trick to help you in your search for the perfect small business accountant.
1. Ask For Referrals
Networking isn’t just about gaining potential clients but also accessing more resources. Put those networking skills to good use and ask friends, family, and other businesses for accountant referrals. This is often the quickest way of finding an accountant you can trust.
2. Cheaper Isn’t Always Better
We all like to save money, but sometimes cheaper isn’t always better. For example, an accountant just starting out might charge less to file your tax return, but an experienced accountant who charges more could get the tax return done in half the time. When choosing an accountant, don’t just look at the numbers. Look at quality as well.
3. Do Your Research
Choosing an accountant is one business decision you don’t want to rush. Don’t be afraid to take your time, meet a prospective accountant face to face, and ask questions. Check out the accountant’s reputation on LinkedIn and Yelp to see what customers have to say. View how they interact on their social media accounts. Do as much research as you can so you can feel confident in your decision.
4. TreatÂ It Like An Interview
Choosing an accountant can seem daunting, so treat it like something you already know. Hiring an accountant is just like hiring an employee. You’re interviewing them to see if they’d be a good fit for your business. If you like them, great! If not, there are plenty of accountants in the sea.
5. Negotiate Your Fees
It’s always worth a shot. Test the waters and see how movable your accountant’s fees and pricing structure are. Try negotiating for lower fees or ask the accountant’s advice on how you can keep the fees low. Maybe they won’t change the rates, but they might tell you certain bookkeeping tasks you can perform to make their job faster (since most accountants charge by the hour, this can help save you some money).
Bottom Line: Trust Your Gut
When choosing an accountant, it all comes down to trusting your intuition. Trust your gut, listen to your instincts, follow your heart, and so on (don’t make us sing a Disney song about it). Seriously though, if you have a bad feeling about someone, or even if your personalities just don’t mash up, move on and look for an accountant you can trust and work well with.
The Hunt Is On
It’s as simple as that!
Step 1: Know what you need your accountant to do for you.
Step 2: Know whichÂ typeÂ of accountant you need.
Step 3: Know where to look for an accountant.
Step 4: Know what to look for in a good accountant.
Step 5: Know what questions to ask a potential accountant.
Follow our tips and tricks to help you find the perfect accountant and read our comprehensive accounting reviews to find the perfect accounting software to work with them.
The post How To Find The Perfect Accountant For Your Small Business appeared first on Merchant Maverick.
Running a business can be quite a juggling act. Between finding the right business software to getting the funding you need to buying business insurance to managing the actual day to day processes of your business, some things get put on the back burner.
Accounting and bookkeeping are often the first places business owners fall behind, but this is the last area where you want to drop the ball. Managing your finances is the key to a successful business. But when can you manage your books on your own and when should you hire an accountant?
In this post, we’ll cover when you should hire an accountant and how much it’s going to cost you.
When Should I Do My Own Accounting?
We all love a good DIY, but let’s face it, we don’t want your business to become a Pinterest DIY fail. Sometimes, you just need a professional. But is accounting one of those times? Can you do yourÂ own business accounting?
To answer this question, let’s first talk about the difference between bookkeeping and accounting.
Although the phrases are often used interchangeably, bookkeeping and accounting are not the same things. Bookkeeping consists of daily business financeÂ processes, like data entry, bank reconciliation, entering sales and expenses, creating reports, etc. Accounting analyzes those reports and data and turns that information into actionable insight about your business’s big-picture finances.
Here are some of the other differences between bookkeeping and accounting:
Handles the day-to-day financials of a business
Offers advice and insight about the big picture finances of a business
Compiles reports and business data
Analyzes reports and business data in order to offer actionable advice
Often has real-world experience, and sometimes a certification, instead of a degree
Generally has a bachelor’s degree, preferably in accounting
Can assist with payroll and sales taxes, but does not file tax returns
Files business and personal tax returns
Has knowledge of the business’s finances only
Has knowledge of the business’s finances and client’s personal finances
A business owner can do their own bookkeeping, but actualÂ accounting should be done by a professional.
If business owners have the time and want to be hands-on with their finances, they can handle bookkeeping tasks like:
Accounting software makes it feasible for business owners to perform these tasks with relative ease and manage their books successfully. However, we always recommend that business owners turn to accountants for business and tax advice.
Even as someone who is very familiar with dozens of accounting programs, if I started a business, the first thing I would do is hire an accountant. Yes, I could handle my own bookkeeping and day-to-day finances, but the advice of accountants is indispensable for running a successful business and creating and achieving long-term financial goals. Accountants can verify your bookkeeping, give business advice, analyze areas where your business can grow, offer tax advice, maximize your tax deductions, and much more.
Additionally, just because you can do your own bookkeeping, doesn’t mean you should. If financial tasks are eating up your time and taking away from the success of your business, hire a bookkeeper or delegate some of the tasks to a trusted employee. This will free up your time so you can get back to growing and running a successful business.
Oftentimes, businesses have both a bookkeeperÂ andÂ an accountant. Bookkeepers are more affordable, so they are a better option for daily finance tasks, whereas a better use of your money and your accountant’s time is big picture finances and business planning.
Remember: If you hire an in-house bookkeeper, make sure that you divide accounting tasks. No matter how trustworthy an employee is, you should never have one person in charge of all the books as this is the easiest way for fraud to occur. Delegate accounting jobs and put strong internal programs in place to prevent fraud, or consider outsourcing your bookkeeping instead.
When Should I Hire An Accountant?
As a business owner, you can handle your own bookkeeping, but when should you hire an accountant? What are the signs your business needs an accountant? And if you already have an accountant, when are the times you should turn to them for help?
Here are fifteen cases when you should hire an accountant for your small business:
1) When Starting A Business
The early stages of business are incredibly important. Put your best foot forward and set your business on the path to success by hiring an accountant as soon as you start a business. An accountant can help you:
Choose the right type of business entity (like a sole proprietor, partnership, LLC, etc.)
Set up your business EIN and any state licenses or requirements
Choose the right accounting software for managing your business
Create a business plan
Create a tax plan and explain which deductions you need to record through the year
And more importantly, they’ll be able to advise you on how to run a financially successful business.
2) When Incorporating Your Business
If you are starting out and want to become an LLC or if you want to make the jump to incorporating your business, an accountant will guide you through that process.
3) When You Need Business Advice
We said it once and we’ll say it again, one of the biggest benefits of hiring an accountant is the business expertise and knowledge you gain access to. Turn to your accountant when you need business advice. Is your cash flow lower than you’d like? Are you losing money on COGs and can’t figure out why? Having trouble obtaining certain data about your business? An accountant can help.
4) When Filing Taxes
One of the biggest parts of an accountant’s job is preparing and filing taxes. An accountant will help you with your personal and business tax returns. They’ll know which forms you need to fill out, which deductions you qualify for, and how to appease the IRS so you can sleep easy come tax season.
5) When Planning For The Future
If you need advice on how to grow your business and prepare for the future, an accountant can offer guidance and help you create a business plan.
6) When You Need Help Managing Cash Flow
Cash flow is the lifeblood of your business. Without enough cash flow, you won’t be able to pay your bills or employees; too much positive cash flow and you aren’t investing your extra money wisely. An accountant can help analyze cash flow trends, give cash flow predictions, and offer suggestions to improve your financial situation.
7) When You Need Advanced Business Analysis & Reporting
Accountants are experts in business analysis. Not sure exactly where your money is going? Want to know where you can cut back and save money? Accountants know all of this and more. They can help create reports and give financial insight and analytics, so you can take that information and use it to improve your business.
8) When You Want To Save Time On Financial Tasks
As we mentioned earlier, if you are spending to much time on managing your finances, hiring an accountant can free up your schedule so you can focus on running your business. (If you need help with daily tasks, we recommend choosing a bookkeeper over an accountant to save money on services. Read ourÂ full post CPA VS Accountant: Which Is Right For You? to learn more.)
9) When Buying Or Selling A Business
If you are considering buying a business/franchise or expanding your current business, talk to an accountant first. They’ll be able to assess if the purchase is a wise financial move. Additionally, if you need to sell your business, an accountant will walk you through the process.
10) When Buying Or Selling Property (And Other Assets)
Along the same vein, talk to your accountant before buying or selling business assets like property, equipment, office furniture, etc. Because accountants know your business finances, they’ll be able to tell you if the purchase is a wise investment.
For example, they’ll tell you if you have the cash flow to buy all new computers for the office or if you should wait until next month when the cash flow trends predict more sales.Â Accountants will also help you manage your assets, track depreciation, and properly write off the tax deductions you’re eligible for. When selling propertyÂ or other assets, accountants will know how to records this on your taxes properly.
11) When Applying For A Loan
Believe it or not, having an accountant can help improve your chances of getting a loan. Lenders want to see that you are fiscally responsible and some lenders, like Fundbox, require that you’ve been using an accounting solution for a certain amount of time in order to be eligible for the loan. Accountants can also offer insight into how the loan will affect your business finances.
12) When Facing A Tax Audit
No one wants to be audited by the IRS, but in business, you have to prepare for the worse and hope for the best. And if the worse does happen, you want an accountant — a CPA to be exact — on your side. A CPA, or certified public accountant, can legally represent you and your business before the IRS in the case of an audit. Read our post on CPAs VS Accountants to learn which is best for your business.
13) When You Suspect Someone Is Stealing From You
This is another worst-case scenario, but if you suspect someone is cooking the books and stealing money from your business, you’ll need to hire a forensic accountant to investigate the fraud.
14) When Going Public
If you have a public corporation or want to go forward with an IPO (initial public offering), you’ll need an accountant. Public corporations are required to have audit reports to show to investors. Only a CPA can prepare these reports for you.
15) Whenever You Feel Out Of Your Depth
Bottom line: If you aren’t sure about some aspect of your business or its finances, ask an accountant. Accountants are invaluable resources that can help you whenever you feel out of your depth or like you don’t know what you’re doing.
Benefits OfÂ Hiring An Accountant
Hiring an accountant will allow you to sit back and relax. You can trust that your finances are in good hands and get back to running your business with the advice and time you need to grow successfully.
Here are some of the biggest benefits of hiring an accountant:
Save time on bookkeeping
Reporting and analytics
Managing cash flow
Peace of mind
Another important benefit of accountants (CPAs in particular), is that a certified public accountant can legally represent you and your business if needed. This peace of mind is priceless.
How Much Does Hiring An Accountant Cost?
It may seem contradictory that to manage your money, you have to spend your money on hiring an accountant, but the cost is more than worth it. Which probably leaves you asking, how much is this going to cost me anyway?
There is no set answer for how much an accountant costs. The price is going to vary significantly depending on:
The complexity of your accounting
The services you require
Whether you hire a bookkeeper, accountant, or CPA
The accountant’s experience
Most accountants charge by the hour and will give you an estimate of how much the services you require will cost. The best way to figure out how much an accountant will cost is by deciding what you need your accountant to do and then searching for the right fit. Get quotes from multiple accountants and CPAs, ask if they do free consultations, and gather information and referrals from other business owners.
Also, remember that cheaper isn’t always better. A more experienced CPA may charge more than an accountant who’s just getting started, but your business may prefer the expertise of a CPA. Or, maybe one accountant charges a lower monthly fee but another, more expensive accountant is faster — the time saved could be money saved as well.
The real question isn’t how much an accountant will cost, but, can you afford notÂ to have an accountant? That’s a rhetorical question. This is no time to be a Scrooge. The benefits of hiring a professional accountant far outweigh the cost. And, if you choose to forgo an accountant, your business and its finances may suffer. Plus, you’d have to do your own taxes, and let’s be honest, who wants that?
It’s true! Behind every good business is a great accountant. Accountants offer financial wisdom and business insight, They make sure your books are balanced and that you get the most out of your tax returns. They walk you through business plans, cash flow management, and can even represent you before the IRS in case of an audit.
Accountants give you the tools to help your business succeed and are an important asset to have. Now that you know when to hire an accountant read our full post CPA VS Accountant: Which Is Right For You? to help you find the perfect accounting professional for your business. Then hop on over to our post How To Find The Perfect Accountant For Your Business to take the next step.
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