FAQ #1: Keeping Accounting In-House Or Outsourcing the Accounting Function?
Often small business owners are troubled by the question of whether to do the accounting tasks themselves, hire in-house bookkeeping staff or outsource the accounting function to a CPA firm. The answer to that question is that it depends on various factors. What should be taken into consideration is:
- Size of the Business
- Number of Employees
- Type of Entity
Generally, if you employ 50 or fewer people, then outsourcing your bookkeeping, accounting, sales tax and payroll tasks is the best answer. Once your business grows to over 50 employees, it may be time to hire in-house accounting people. There again, the type of business should be considered.
I would suggest that the business owner focuses on marketing, business management, customer service and growing the business. The best use of the business owner’s time is not in bookkeeping functions or filing sales tax forms. I recommend that small business owners outsource the sales tax, payroll compliance, income taxes and tax planning to a firm that specializes in helping small business owners.
We tell our clients that they still have to write checks to pay their vendors and also invoice their customers, but we take care of the rest. Some of our clients have a lot of volume in invoicing or making payments and in that case it makes sense to hire a bookkeeper in-house to help with the function of invoicing clients and paying bills. By doing this, the business owner has completely freed up his time to do what is critical in the business. At the same time, the business owner has peace of mind knowing that things are getting done right and on time.
Book an appointment so that we can explain how our fixed monthly Small Business Accounting Package works and how it could help your business.
FAQ #2: What is the Benefit of having an Accountant?
I think of the accounting function as an integral part of a small business. About 75% of small businesses fail in the first two years. This is not a statistic that I want to hear being a small business owner myself. However, there are things that are essential that can help our businesses survive and thrive. In my opinion, accounting and marketing/sales are key functions in a small business – especially newer businesses.
I am a strong believer that we all have different areas of expertise and should seek the advise of the appropriate professional when possible. Many small business owners see accountants as an expense, maybe a cost center. But what I see with our clients is that many times we provide them a good return on their investment with us.
Small business accountants know exactly when and what to file and will save you time and money by making sure everything is done on time thus avoiding penalties from the IRS. Normally, another good reason to work with a professional accountant has to do with IRS audits. Generally speaking, small businesses who employ a qualified accountant to handle record keeping are audited far less frequently than those who don’t. We are proactive in advising clients on tax strategies to lower what they have to pay to IRS. Remember that the less time you spend minding the record keeping, the more time you can spend growing your business and developing new business relationships.
FAQ #3: Do I have a contractor or employee situation?
As a small business owner, there are many challenges to understanding all of the tax codes regarding payroll taxes and how to treat different workers in your company. Finding the right answer to the contractor versus employee question can mean a big difference in how you treat that individual for tax purposes.
Let’s look at the semantics of each type of worker to better understand how it can impact your small business.
Doctors, lawyers, dentists, veterinarians, contractors, writers, graphic designers, and accountants are among just a few of the many professionals who often work as independent contractors. That doesn’t mean that in every instance these individuals can always be considered “independent”. Much depends on how, where, and under what supervision they perform their tasks.
For instance, a physician can work in the employment of a hospital or physician practice and be an employee that receives benefits and pays federal taxes out of each paycheck, while another physician colleague may work per Diem on a contract basis. The general rule from the IRS to determine if the individual is an independent contractor involves whether or not the payor has the right to control or direct only the result of the work and not what will be done and how or when it will be completed. Those receiving pay as an independent contractor are subject to Self-Employment Tax. Remember that for 2010, if you are considered self-employed you can also reduce your net self-employment tax by deducting your health insurance costs on Form 1040.
If you control specific details of your worker’s job such as what will be done and how it will be completed, then you are going to be considered an employer/employee relationship by the IRS. That means that as the business owner, you will be responsible for withholding and paying Federal Income Tax, Social Security and Medicare taxes on behalf of that worker. The IRS takes payroll taxes very seriously. Not only are you paying taxes as the business owner, you are also a third party payor collecting and submitting taxes on behalf of your employees.
Additionally, employers are responsible for paying Federal Unemployment (FUTA) and State Unemployment (SUTA) taxes. FUTA and SUTA taxes are not paid by employees or withheld from their pay. Failure to pay these taxes will result in heavy penalties and fines which can quickly snowball into substantial amounts if you aren’t meticulous in your reporting.
Effective January 1, 2011, taxpayers must deposit all depository taxes such as employment, tax, excise tax and corporate income tax, electronically using the Electronic Federal Tax Payment System (EFTPS). Each state has separate recording and payment systems so it’s important to check with your local and state revenue offices for details. And that’s just the beginning. Managing payroll tasks can be time consuming and confusing for many small business owners. Depending on the size of your staff and to alleviate worry and the risk of over or underpayment, it may be wise to invest in a payroll service to help manage your payroll and all of the changes that seem to come with the job.
To make a determination about how your business should treat an individual who performs work for your company, consider the following test from the IRS:
1) Does your business control or have the right to control what the worker does and how the worker does his or her job? If you control when, where or how the individual performs the work, then the worker is an employee.
2) Are the business aspects of the worker’s job controlled by the payer? For example, do you provide the tools, computer system or other means necessary for the individual to complete their work? If the employee works in your office, uses your computer systems or other tools to complete the tasks, then the IRS would consider that individual an employee.
3) Do you have written contracts or employee benefits for this individual? Does the employee receive vacation pay, retirement benefits, health insurance or other ‘benefits’ of working at your organization? If you answered ‘yes’ then the IRS would consider that individual an employee.
Once you answer these questions, review the results and see to what degree the responses fall in either the independent contractor or employee category. Not only are employers responsible for federal taxes and rules, but each state has its own rules pertaining to independent contractors and employees as well as payroll tax requirements. When in doubt, it is always best to consult a small business accountant or bookkeeper or a tax professional.
FAQ #4: What are the Key Accounting Reports for a Small Business?
Understanding how your business functions financially is often one of the most overlooked yet important functions of being in business. Beyond the necessity of cash flow and understanding where your money is going each month, is the critical matter of being able to adequately represent your business’ financial viability for creditors, vendors, bankers and even potential investors. Unfortunately, in some cases small business owners don’t realize how important it is to have current and accurate financials until they are ready to buy a house or need to get a loan to invest in their business. Years often pass where the owner’s personal equity is grossly under-reported making securing loans difficult if not impossible especially in today’s tighter lending market.
To establish what the business and in many cases, what the business owner(s) are worth there are a few basic steps in making the calculation. First, gather information on all personal assets including the home, jewelry, cars, vacation property, retirement, savings and any other personal belongings. Next total all liabilities the individual has including outstanding debts such as a mortgage, credit card debt, student loans, or any other financial obligations. Now take all assets and deduct liabilities. This number will be the individual’s total net worth.
The same calculations hold true when looking for a business’ net worth. Using the balance sheet, liabilities are subtracted from assets resulting in a net worth figure. For corporations, the calculation will need to include shareholders/stockholders on the equity portion of the balance sheet. Included in the stockholder section would also be line items for reserves, retained earnings, stockholder equity, and capital. However, we need to take into consideration the fact that your accounting books is not a valuation of your business.
Two other reports which are critical to understanding the business’ financial health include the income statement, which reports the company’s profit and/or loss and the statement of cash flow, which provides a reporting of the business’ ability to generate cash.
FAQ #5: Do I need to keep Separate Business and Personal Accounts?
One of the biggest mistakes small business owners make is commingling business and personal funds. They fail to set up separate business-only bank accounts. They may pay for business expenses out of a personal account, or vice-versa. When tax time rolls around, these entrepreneurs find themselves in a self-created mess trying to sort out personal from business expenses.
Additionally, if you’re unlucky enough to get audited, it makes things even tougher. It can be especially challenging if the business is structured as an S-corp because the money transferred to the business is deemed capital contributions, and the amounts transferred back to the taxpayer are sorted as being general distributions rather than repayment of a loan. This means the taxpayer can end up with a deemed “wage” even if the business did not make a profit and owe thousands in payroll taxes on the money transferred out of the company. If you’re one of the 20% of business owners who’s are still not operating out of business exclusive bank accounts, you’re making a mistake. Not only should you set up separate banking accounts for your business, but it’s also recommended that you obtain a credit card that you use exclusively for business-related purchases. Not only will it help you keep track of business expenses, but it will also help you build your business credit score.