It can be daunting dealing with government paperwork when you run your own business. This is why so many small business owners hire an accountant when the first tax filing is due.
But they can also help you cope with more than just tax returns. They can help your company interact with the government in other ways.
You should hire an accountant for your small business when you need help with the collection, analysis and reporting of financial information. Accountants can interpret your financial data in order to help you make better business decisions when it comes to your company’s money.
A business owner should look at hiring an accountant before the process of data collection, and analysis becomes overwhelming. An experienced accountant will have skills in data management, accounting and regulatory compliance, and be able to generate the financial reports a company needs to plan for its future correctly.
Individuals are not required by law to keep financial books and records (businesses are), but not doing this can be a costly mistake from a financial and tax perspective.1 Your bank account and credit card statements may be wrong, and you may not discover this until it’s too late to make corrections. You may forget to pay a bill and hurt your credit score. You may have no clue about allocating income to saving and investing. Or you may overlook expenses that could provide some tax benefits. So keeping track of your personal finances makes sense.
When looking for financial advice, you may have trouble deciding between hiring an accountant or a financial planner. Depending on your circumstances, you could need one or the other—or both.
There may come the point when it makes sense to have additional help figuring out the best way to file your taxes, for example. Then you’ll need an accountant. You may also be faced with a time when you need someone to help you manage your money, plan your investments, or assist with a sizeable inheritance. Then you’d need a financial planner.
Successfully managing a small business involves managing your cash. Your accounting system is critical for knowing how much cash you have in the bank each evening and if you can meet your expected expenses.
Three general activities are required for setting up and maintaining an effective accounting and recordkeeping system.
In order to answer this question, assess your situation first: the type of business you’re in, its size and what stage of development it’s at. Ask yourself the following questions:
If so, and the invoices and receipts are adding up, maybe, for now, you need a bookkeeper. This could be a more cost-effective solution than hiring an accountant. A bookkeeper can recommend and implement a software accounting system for you, as well as:
Most people do not need an accountant. However, there are certainly some cases in which you’d want their expertise. Consider whether you:
Simply put, an accountant will help you with specific issues that most people do not have. They can review your tax situation and help you structure your finances. There are also situations where using an accountant can help you save money.
If you are extremely wealthy or own a business, you may consider getting an accountant to help you understand the laws surrounding your bookkeeping and taxes.
Owning a rental property is much like owning your own business, so hiring an accountant will help you with the books and the tax implications.
You may also wish to hire an accountant if you have a complicated tax situation. Most people will be able to do their taxes with tax preparation software. Still, if you own your own business or own several large investments, you may consider finding a certified public accountant (CPA) or tax specialist to do your taxes for you.
Also, if you experienced a big life change that affects your finances, such as adopting a child, buying property, or receiving a large amount of money, then getting an accountant can put your mind at ease. You may only need to visit the accountant once, or only speak to them once a year around tax time. Either way, it’s financially prudent to have an expert you can consult if you have questions.
Recording your income and expenses isn’t a difficult task (you don’t need an accounting background or to be “good with numbers”), but it does take time and effort. How you do it depends on your personal preference. You can hire an expert to do it all, do it yourself or combine the two, using an expert to help you from time to time.
When budgeting for an accountant, you will need to determine the type of accountant you want to hire, and this means choosing between an accountant or a CPA (Certified Public Accountant).
The 2017 median pay for an accountant, according to the Bureau of Labor Statistics, was $69,350. That does necessarily mean you’ll have to pay that much. You may not need an accountant full time, perhaps just one or two days a week. So you could cut down on costs by going part-time, or with an hourly rate.
Typically, an accountant will have a degree from a recognized institution; however, there are no government requirements that an accountant do so. Since this is your small business (and your money), you’ll want someone who has at least a few years experience and is no longer at the junior level. This person should be able to consult strategically with you about the best way to manage the business’s finances, the legal implications of your decisions and of course, help you with the company’s tax returns. You’ll also want someone who can do the bookkeeping too.
The 2017 average salary of a Certified Public Accountant, according to the Journal of Accountancy, was $119,000.
That’s quite a difference in pay than an accountant; however, a CPA will be much more qualified. Earning the certification requires a lot of hard work on the part of the applicant. An applicant must complete specific education and work requirements (which differ from state to state) and pass a complex four-part exam. After earning the designation, a CPA has to take continuing education courses every year; otherwise, he will lose it.
If your business is very small, like a sole proprietorship, then chances are you don’t need a CPA. A Certified Public Accountant is allowed to perform certain duties that regular accountants are not permitted to do (by law), so you may need to consider one down the road when your business grows. A CPA can be particularly helpful if dealing with the ATO
When you set up your business, one of your first decisions is to determine who should handle these accounting activities. The three choices are to do it yourself, assign someone on your team to do it or to outsource to a bookkeeper or accountant. Often with a start-up, you are the only employee, and there are limited funds available, so initially, the founder frequently does all the bookkeeping.
As soon as you have sufficient discretionary funds, you can consider outsourcing the task. The key is to decide if bookkeeping is the best use of your time.
You started your business because you are good at selling, developing apps, manufacturing a product, consulting, or whatever other activities produce sales. Is it more valuable to spend your time producing sales or doing bookkeeping? Unless you are in the financial services sector, it is unlikely accounting is your strength.
If you decide to outsource, there are two types of financial professionals to consider: a certified public accountant (CPA) and a bookkeeper. Each has vastly different skills and rates, and you will want to retain both, but for different tasks.
You don’t necessarily need to hire a CPA as a full- or even part-time employee to benefit from his or her knowledge of the ins and outs of business finance, as many offer their services to small businesses as consultants. Here are four times you should hire a CPA:
When you’re launching a business and money is tight, the idea of paying hundreds of dollars for a few hours with a CPA may seem extravagant. However, like many other start-up costs, it’s an investment (and it’s a deductible expense).
A CPA can help you set up your business correctly so you can avoid mistakes that could cost you much more to fix. Here are some of the decisions a CPA can assist you with as you get your business up and running. You might not need help with all of these decisions, but if you do, it’s useful to know who can give you professional advice.
CPAs can recommend the best business structure for your specific business. The legal structure you use to set up your business – sole proprietorship, partnership, LLC, corporation or co-op – affects your taxes, liability and reporting requirements. It can also be difficult to change later on and may require you to reapply for licenses, get a new EIN, notify your bank and insurance company, among other things.
They will help you determine whether cash or accrual accounting is the best fit for your business. When you’re setting up your accounting software, one of the first decisions you’re asked to make is which type of accounting you use. Generally, new businesses use cash accounting, as it’s simpler, but there are instances when the ATO requires accrual accounting, such as if you sell goods to consumers and maintain an inventory. The difference is that with the accrual method, you record income and expenses when they’re billed rather than when you receive the money. In a blog entry from QuickBooks, Carrie Smith writes, “The upside to using the accrual method is that it gives small business owners a more realistic idea of income and expense during a certain period.”
CPAs can prepare tax documents, file tax returns and provide tax planning advice to help you strategize how you can minimize your tax liability for next year. Also, as mentioned above, CPAs can represent you if the ATO has questions about your return or you’re audited, which is an important consideration.
Business taxes are very different from personal taxes; even if you’ve always done your taxes yourself, you might want to hire a CPA, especially if your tax situation is complex. For instance, if you have employees, or if you sell products to customers in multiple states or countries, having a CPA handle your taxes can save you time and ensure they’re done correctly.
Here are other ways CPAs can assist you with your taxes:
If your business started as a hobby, but you’re not yet turning a profit and want to know how the ATO will classify your business and which deductions you can take.
When exceptional circumstances occur, and you need expert accounting advice and assistance.
As you run your business, there may be specific instances when you need a CPA’s expertise. For example, if you receive a letter from the ATO notifying you that you’re being audited, or even if it merely requests additional information about your return, you should hire your CPA to represent you.
CPAs have experience dealing with the ATO and can help you respond appropriately, supply the information it needs, and resolve the issue as painlessly as possible. Mark Kohler, CPA and tax lawyer at TaxSlayer, notes in a CNBC article that even though a letter requesting information from the ATO may seem simple enough, “if you mishandle it, it can turn into a big deal quickly.”
Here’s are some additional examples of situations that may prompt you to hire a CPA:
When you’re facing significant structural or operational changes to your business, such as if you’re considering buying a business, merging with another company, planning to sell or close your business, or deciding to take on a new business partner or dissolve a business partnership, you should consult a CPA about the tax implications for your business and for yourself as the business owner.
If you’re purchasing a business, a CPA can help you analyze the business’s financial records, verify its assets and assist with due diligence. Or, if you’re selling your business, a CPA can give you an idea of what the fair market value of your business is and prepare your financial reports and statements.
When you have a serious buyer, they expect you to have perfect accounting records, plus an accurate valuation – and you may lose potential buyers and receive a lower price if you don’t meet these expectations.
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