Should You Use a Personal Credit Card for Business?

Personal Credit Card for Business - Finance Hire

There are many reasons why you may want to use a personal credit card for your business expenses. The biggest reason is convenience. You can use one card for both business and personal expenses, making tracking both types of spending easy.

It also can be a great way to accumulate rewards points and other perks that may not be available on a business card; however, some risks are involved. Depending on your business policies, there may be several reasons you shouldn’t.

In addition, it’s an inefficient accounting practice to run your business expenses through a personal card, making it hard to track business expenses, especially when tax season comes.

So should you use your personal credit card for business? Here’s everything you need to know.

Using a Personal Credit Card for Business

It’s easy to see why many small businesses prefer personal credit cards over business ones: they offer more favorable terms and rewards than traditional business cards.

For example, most major credit card issuers offer lower APRs (annual percentage rates) on their cards than on their business cards. And some don’t charge an annual fee at all (although there are exceptions). In addition, many personal cards come with generous rewards programs that can help offset the cost of travel and other expenses typical for small businesses.

However, filing small business taxes can be a nightmare if you manually track business versus personal expenses. Unless you have clear separation, you could end up in a head of trouble with the IRS.

In many companies, employees can use their personal cards for business expenses, then file for reimbursement afterward. This shouldn’t be a problem if the user is authorized and there’s a simple expense reimbursement process.

Pros and Cons of Using Personal Credit Card for Business

Many small businesses use a personal credit cards for business expenses. The perks are clear: You can earn rewards and avoid costly merchant fees. But using your personal card for business has downsides, too.

For example, the interest rate on your personal credit card will likely be higher than the rate you’d get with a small-business loan or line of credit — even if you have great credit.

In addition, you’ll probably have to pay annual fees on most cards designed for businesses. And while many cards offer valuable rewards programs and other perks, they may not cover everything you need them to cover as a business owner.

Reasons Why You Might Use a Personal Card

There are a few reasons why you might use a personal credit card instead of a company credit card.

Convenience

There are many reasons why you might use a personal credit card. The most common reason is convenience. You may find it is more convenient to use your personal credit card for business expenses than the company’s credit card.

For example, if you travel for work, you may be able to use your own rewards card on flights, hotels, and rental cars. If you have an employee expense account at work, it may be easier to use your card than to submit receipts for reimbursement later.

Benefits

Rewards are a big draw for many people, especially if they’re loyal customers of the issuing bank. Many personal cards come with rewards programs to earn points or cash back on purchases at specific merchants or categories of merchants.

For example, if you always buy groceries at Walmart and fill up your gas tank at Exxon Mobil stations, you may benefit from signing up for cards that offer rewards points on those purchases.

Many credit cards offer cash back, miles, or points that can be redeemed for travel or merchandise. The most popular rewards categories include grocery stores, gas stations, and restaurants. The rewards you earn on your card can vary depending on the issuer’s reward program.

Necessity

You may not have a corporate credit card or line of credit, either because you have been unable to apply and qualify for one or simply didn’t know how to.

The Risks of Using a Personal Credit Card for Business

While many people use their credit cards for business expenses, there are several reasons why it might not be the best idea. 

Personal cards are unsecured by collateral, which means they don’t offer any protection against loss if you fall behind on payments or fail to pay off the balance in full each month.

This is a risk because it means that if you don’t pay off your balance in full every month, interest will continue to accrue on your account and make it harder for you to get out from under your debt.

Negative Impacts on Personal Finances

Using a personal credit card can have negative impacts on your personal finances.

Using your personal credit card responsibly will help maintain or improve your credit score over time, but only if you pay off the balance every month and avoid carrying a balance from month to month (which would hurt your score).

If you don’t pay off your balances immediately after making purchases, this could negatively impact your score, especially if you do it often enough.

In addition, interest rates on personal credit cards can be very high — as much as 25 percent or more in some cases — so even if you pay off your balance each month, you could end up paying hundreds of dollars in interest charges over time.

That can put a big dent in your cash flow if you don’t have enough money to cover the purchases in advance.

Finally, when using a personal credit card, it’s easy to forget that you’re spending money. It’s just a swipe of plastic; the money is gone before you know it. Studies show that people spend more when using a credit card than when paying with cash or debit cards.

Uncomfortable Dynamic With Employees

It’s easy to see why a business might want to their employees to use their personal credit cards for business. After all, they’re convenient and easy to administer.

Employees can use them for travel and entertainment expenses or reimbursements or even make purchases on behalf of the company.

But there are some severe drawbacks to using personal credit cards for business expenses. The first is privacy concerns. Personal credit cards don’t come with the same protections that business credit cards do, so there’s a risk of identity theft when someone gets hold of your personal information through an online purchase or by sharing a receipt with another colleague who may have access to your email address or social media profile page.

Another risk is that if you use a personal credit card for business expenses, your employees could be confused about who owns what. It’s hard enough for employees to understand how their salaries work or what benefits are available through their employer. Adding another layer of complexity could make them make mistakes or feel like they aren’t being treated fairly by their employer.

Tracking Business Expenses Is Harder

If you use your personal credit card for business expenses, it can be hard to keep track of all the charges. This is especially true if you don’t think about this ahead and set up a separate account or card just for business purposes.

If you don’t have a system in place, your personal credit card statements may look like a jumbled mess of personal and business expenses. You might have trouble figuring out which charges are legitimate business expenses and which ones were simply personal expenses paid with the wrong card.

In some cases, you may even find that some business-related charges haven’t been reimbursed, leading to confusion about what was paid for what purpose.

A better solution is to get an additional card specifically for business use so that there’s no confusion about which payments are related to which activities.

Preparing Your Taxes Is More Difficult

If you use your personal credit card regularly for business purchases and then try to claim them as deductions on your taxes, it will make tax preparation more difficult — especially if you don’t keep good records. 

Businesses are entitled to deduct certain expenses from their taxable income. Using your personal credit card for business expenses may not qualify for these tax deductions. For example, if your company buys office supplies and pays with your personal credit card, you aren’t likely to be able to write off those purchases on your taxes.

However, if the company pays with a corporate card and files an expense report with the bank, you could receive a reimbursement check and then use that money to cover those expenses.

Your Legal Protections Are Weaker

 One of the most important things to consider when considering using your personal credit card for business is that your legal protections are weaker. If you run a small business, you may feel more comfortable using a credit card issued by your bank or credit union than one from a third party.

If something goes wrong with a third-party card — if there’s a dispute over charges,

 or if someone steals your identity and racks up charges on your account — it’s up to you to resolve the problem. With a card issued by your bank, you’ll have more protection, including the right to dispute any fraudulent charges and get them removed from your bill.

Obtaining Financing Is Harder

Businesses often struggle to get bank financing because banks want to see a good track record of successful business ventures before they lend money.

Banks also want to know that they’ll be able to collect on the debt in case things go south. If you’re using your personal credit card for business, it may be harder to obtain financing due to these concerns.

Advantages of Using a Business Credit Card

 Business credit cards are one of the best ways to build business credit. If you’re an entrepreneur looking to start a new business, or if you’ve already got a company up and running and want to expand your business credit line, a business credit card can help you do that.

A business credit card can be a great option if you’re looking for a way to earn rewards, manage expenses, and track spending. The main advantage of using a business credit card is that it allows you to separate personal and business spending.

If you want to make purchases on behalf of your company, it’s easier to do so by charging them on a single card rather than using multiple cards or cash.

These cards offer more benefits than personal credit cards, such as purchase protection and extended warranties. They also tend to offer better interest rates and higher rewards rates than personal cards.

Business credit cards are usually designed to help small businesses manage their finances and keep track of expenses. You may qualify for one of these cards if you’re a sole proprietor or partner in a small business.

Build Business Credit

The main reason business owners use these types of cards is because they help them build their personal credit history.

Businesses often need to borrow money for various reasons, such as purchasing inventory or equipment, and creditors want to see that the company has successfully paid off its debts in the past.

A good track record with a business credit card can help show potential lenders that your company is reliable and responsible in managing its finances.

IRS Audits

The most important advantage of using a business credit card is that it can help reduce your risk of an IRS audit. According to IRS rules, businesses must keep receipts for all purchases made on behalf of their companies, including travel expenses and office supplies purchased with company funds.

These receipts are used when filing taxes each year so that the IRS knows what expenses were paid for by the company and which ones were personal expenses paid for out-of-pocket by employees themselves.

If an employee uses a personal credit card instead, they may face trouble during an audit when asked about specific purchases made on behalf of their company. Using a business credit card helps you keep track of your expenses and income more efficiently.

When it comes time to do your taxes each year, it’s much easier to add up all the charges and subtract them from your income when they’re all in one place. This is especially helpful if you’re audited by the IRS. If they ask for receipts for specific items, they’ll be on your statement, so it’s easy to pull them up and print them out if necessary.

Improved Security

Business credit cards are safer than personal cards. Business credit card issuers are subject to stricter security requirements than personal credit cards.

The business card issuer must comply with the Payment Card Industry Data Security Standard (PCI DSS). The PCI DSS is a set of information security standards developed by major payment card companies.

Credit card companies have prioritized security and are constantly improving their systems to protect consumers’ information. That means you can feel confident that your customer’s personal information is secure when they pay with their credit cards.

Low Costs

One of the most significant advantages of using a business credit card is that it helps lower costs. Businesses can use these cards to pay for travel expenses, office supplies or other costs that would otherwise be paid by writing checks or using personal credit cards.

This prevents businesses from having to pay fees for each charge they make. It also helps them avoid incurring interest charges on those items if they have outstanding balances that aren’t paid off immediately.

You might also be able to take advantage of an introductory rate that’s only available for a limited time. This can help you save money on interest payments if you use the card responsibly.

Cash Back Incentives

Many cards offer cash back incentives when you use them for certain purchases. If you want to earn cash back on your purchases, check the terms and conditions of your card to see what kind of rewards it offers.

You may also qualify for additional rewards if you’re a frequent flyer or belong to specific organizations.

Partnered Promotions

Business cards may offer more rewards than personal cards, especially if they’re tied to loyalty programs like Delta SkyMiles or Hilton Honors.

Some business cards also work with other companies rewards programs so that you could earn points from multiple sources with one purchase. This can be particularly useful if you have a small business because discounts and services are often offered exclusively to small businesses through partners such as Visa and American Express.

Solve Your Business Credit Troubles Now

 Many small businesses use personal credit cards. This practice has advantages and disadvantages, and it’s essential to understand them before deciding.

The advantage is obvious – if you use a personal credit card and pay it off in full each month, you’ll get rewards points or cash back. You can also earn airline miles, free hotel nights, and other perks from your business travel.

This can add up to hundreds or even thousands of dollars each year for a small business owner who travels frequently.

But there are also some disadvantages to using a personal credit card for business expenses. For one thing, if you carry balances on your accounts, you may risk damaging your credit scores if your business stops paying its bills on time (or at all). 

In addition, if you’re not careful about tracking expenses, it’s easy to lose track of how much money you’ve spent on behalf of the company — which could lead to trouble with the IRS down the road if they discover that you’ve been using non-deductible personal expenses as tax write-offs.

Bookkeeping vs Accounting

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Bookkeeping and accounting are two terms that are often used interchangeably. However, there are some differences between the two.

Bookkeeping is about recording your transactions to allow you to keep track of them. It’s about making sure that you have an accurate record of how much money came in and went out.

Accounting is the process of recording data, summarizing it, analyzing it, and communicating it. Accounting includes bookkeeping but is much more than just keeping track of transactions. 

This article will explain the difference between bookkeeping and accounting in detail.

The Function of Bookkeeping

The function of bookkeeping is to keep track of a company’s financial transactions. Bookkeepers record transactions by entering data into a computerized system. They take receipts, invoices, and other documents, enter them into the system and charge each item to the appropriate client. 

They use software that allows for just about any type of transaction to be recorded and categorized, making it easy to find any given information later on. Bookkeepers use software programs like QuickBooks, Sage, Xero, or other accounting software programs to keep track of the day-to-day transactions in your business.

These programs allow them to record every transaction accurately to create reports for their clients quickly.

Bookkeeping is essential because it keeps track of all the money coming into and going out of an organization’s bank account. It allows businesses to see exactly where their money is going to determine if there are ways they can cut costs here and there without affecting their bottom line too much.

For example, if your company has been spending too much on advertising, then maybe it’s time you started looking for cheaper alternatives like free online ads instead of expensive print ads that do almost nothing for your sales numbers.

After entering all of the transactions for a given period, bookkeepers post them to the general ledger. The public ledger is an electronic or paper system used by accountants and businesses to track all of their assets, liabilities, and equity at any given time. This provides businesses with a complete picture of their finances at any given time to make decisions about future expenditures.

The Function of Accounting

Accounting is a core management accounting function. The main goal of accounting is to provide financial information to decision-makers.

Managers use accounting information to decide how much money to invest in the business, when and where to borrow, and how much profit is generated from different products or services.

Accounting is also used to allocate assets and liabilities among owners and creditors. Accounting standards are designed to provide consistency in the way assets and liabilities are reported so that investors can compare companies’ performance over time.

Think of it this way; accounting is an essential part of controlling a business because it provides information about how well a company is doing financially and its financial position at any point in time. Because accounting reports are prepared on regular bases (usually monthly), they provide timely information that managers can use to make decisions quickly when they need it most.

Accounting involves more than just recording transactions — it also requires analysis, interpretation, and reporting those facts in ways that are useful for decision-making purposes. 

Bookkeeping records transactions with little research beyond whether or not they happened correctly according to predetermined criteria set forth by law or company policy (such as double-entry accounting systems).

Where Bookkeeping Ends, Accounting Begins

The lines between bookkeeping and accounting are often blurred. Bookkeeping is the recordkeeping function of a business, and accounting is the reporting part.

Bookkeeping typically involves recording transactions, summarizing them, and arranging them orderly. Bookkeepers may use software or even handwritten ledgers to keep track of the financial transactions of a business.

Accounting is a broader term that encompasses more than just bookkeeping. Accountants use information from all parts of the business to create financial statements that help companies make better decisions about spending and investing money.

Bookkeeping is necessary for every business, but it is only one part of the larger accounting picture. Bookkeeping is simply the process of recording transactions in a company’s financial records. Bookkeeping does not include analysis, which is where accounting comes in.

The Roles: Bookkeeper vs. Accountant

You may have heard these two terms used interchangeably, but there is a difference between bookkeeping and accounting. The role of both professionals is to keep track of the financial records of a business, but they differ in their level of expertise and the work they perform.

Bookkeeper

A bookkeeper tracks transactions and records them in a ledger or accounting software program. 

They also reconcile bank statements and record deposits and withdrawals from cash registers. Bookkeepers are typically responsible for maintaining financial records from day-to-day operations, such as tracking inventory, cash flow, and payroll expenses. 

Bookkeepers are usually not licensed professionals. They typically hold an associate degree or certificate in accounting from a community college or technical school. They may be certified through a professional organization like the American Institute of Professional Bookkeepers (AIPB).

A bookkeeper is responsible for the day-to-day accounting duties of a company. You will be working directly with the bookkeeping software and financial records in this role. The accountant role requires you to have more advanced knowledge of financial statements, taxes, and business practices.

Accountant

An accountant provides more in-depth financial analysis than a bookkeeper does. They evaluate an organization’s overall financial performance by examining its sales, profits or losses, assets, liabilities, and other aspects related to management decisions such as capital improvements or expansion plans.

An accountant often prepares tax returns for individuals or businesses, advises clients on taxes based on their income levels, prepares budgets for future planning purposes, and audits tax returns prepared by others.

Usually, an accountant is a licensed professional who has completed a four-year degree program in accounting and passed a state exam. Accountants are experts in tax preparation, auditing, and financial planning for businesses.

They may also advise clients on how to finance their businesses or grow their profits by investing in assets such as real estate or stocks.

An accountant performs many of the same tasks that a bookkeeper does. Still, they also provide advice on tax matters, which makes them more valuable than a simple bookkeeper who only records transactions and prepares financial statements. 

Bookkeeper Credentials

Bookkeepers are not required to have any specific education or certification to work in this field. 

However, some employers may prefer applicants with a degree from an accredited college or university or a diploma from an organization such as the American Association of Professional Bookkeepers (AAPB). 

The AAPB offers two levels of certification: Certified QuickBooks ProAdvisor (CQPA) and Certified QuickBooks Enterprise ProAdvisor (CQE). The CQPA requires at least two years of experience as a bookkeeper, while the CQE requires at least five years’ experience and passing an exam designed by Intuit.

Accountant Credentials

The primary difference between bookkeeping and accounting is that accountants must meet specific professional standards to become licensed.

To practice as an accountant in most states, you must obtain a bachelor’s degree from an accredited university with a major in accounting or a related field such as business administration or finance. 

It’s also necessary to pass two exams: one covering basic concepts and one covering more advanced topics. These exams are administered by the American Institute of Certified Public Accountants (AICPA). Once you pass these exams, you can apply for licensure in your state board of accountancy.

Bookkeeper or Accountant: Which Do You Need?

There are two types of professionals who can help you with your business finances: accountants and bookkeepers. Which one do you need?

The difference between bookkeeping and accounting is that bookkeepers keep track of the money coming in and going out, while accountants do more than this. Accountants are responsible for reporting the financial information to the IRS, investors, and other stakeholders.

Bookkeepers usually work on a smaller scale than accountants do. They may be self-employed or work for a small business or an individual. Generally, they keep track of receipts coming in and payments going out of a company or personal bank account. Their track information includes purchases made on credit cards, cash withdrawals, checks written and received, etc.

Accountants work in many different businesses, including large companies and government agencies. They may also work for individuals who have small businesses or need help keeping track of their finances.

Accountants help clients with tax preparation and tax planning and prepare budgets and forecasts for future years’ income. They may also perform audits on behalf of government agencies or other third parties like banks or insurance companies to ensure proper financial reporting has been done by those entities receiving funds from them.

Many small businesses and startups think that they should hire a bookkeeper if they can’t afford an accountant.

Most businesses need both.

You can’t have one without the other. A bookkeeper does not provide tax advice or strategic financial management advice that impacts your business’s long-term growth and profitability. An accountant does not collect payments from customers or write checks for vendors — those are all tasks a bookkeeper performs.

The Changing Landscapes of Bookkeeping and Accounting

The landscape of bookkeeping and accounting has changed drastically over the last few years. As technology becomes more advanced, it is essential to understand how these changes affect your business.

The changing landscape of bookkeeping and accounting makes it difficult to distinguish between them.

For example, accountants were responsible for preparing past financial statements and tax returns. Many accountants also provide bookkeeping services to their clients, complicating the difference between accounting and bookkeeping.

Merging of Bookkeeping and Accounting Functions

The distinction between bookkeeping and accounting used to be clear: Accountants performed audits while bookkeepers handled day-to-day recordkeeping tasks like processing invoices and payments and managing budgets.

However, as technology has advanced, many businesses outsource their accounting needs to third parties — including some bookkeepers who offer these services as part of their packages.

As a result, it’s becoming harder for consumers to tell whether they’re getting an accountant or a bookkeeper when they hire someone to handle their finances on their behalf.

Bookkeeping to Become Obsolete Slowly

The world is changing, and the way we do business with it. As a result, bookkeeping is quickly becoming obsolete.

Technology makes it easier than ever before to keep track of your finances. However, as technology advances, so does our need for more efficient systems.

Although there are still some industries that require manual bookkeeping, most businesses have found ways to automate their processes using software programs and cloud storage.

These programs allow you to track expenses, revenues, and other crucial financial information without hiring a bookkeeper.

We Are the Solution You Need

Bookkeeping and accounting are different but related functions. The principal difference between bookkeeping and accounting is that bookkeeper’s record transactions in a company’s books, while accountants are responsible for preparing financial statements.

Bookkeepers keep track of money coming into and going out of a business. They record information about bills paid and received, sales revenue and expenses, payroll transactions, and other details of the business’ finances. These records help accountants prepare financial statements for the company to manage its business operations.

Accounting involves more than just balancing ledgers and preparing financial statements. Accountants also prepare tax returns, assist with audits, set up accounting software systems, review budget reports, and perform other tasks necessary to control the financial side of a business.

Lucky for you, Finance Hire has a team ready to provide both services for you. We are even happy to schedule a call to ensure you have the right back-office structure and the right bookkeepers or accountants in the right seats.

What Is a 1099 Form?

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The 1099 form is a document that reports a person’s income to the IRS. It’s used for reporting certain types of payments, such as interest, dividends, and freelance paychecks. If you get paid more than $600 in total from any one company during the year, they’re required by law to send you a 1099 form at the end of the year — even if you’ve already filed your taxes.

You might have heard the term 1099 form before and wondered what does that mean? This article explains the basics of this type of tax document and how to fill it out.

What Is a 1099 Tax Form?

The 1099 form is one of the most basic forms to track your business income and expenses. It’s also one of the most confusing since there are so many different kinds of 1099 forms.

1099 is used to report income to the IRS that was paid to a person or entity. The IRS uses the information on these forms to help determine how much income tax you owe.

You’ll receive one or more 1099s each year, depending on how much money you made in a given tax year. The IRS requires that companies send out 1099s for any amounts over $600 for services rendered, including rent and interest payments, dividends, and stock sales.

In addition to reporting the total amount of money paid out, 1099 forms also include information about the source (employer or contractor), type of income, and whether it’s from wages or non-wage payments such as dividends or interest earned on investments.

If you’re a small business owner, chances are you’ll be dealing with Form 1099-NEC, so we’ll focus on that one.

What Is a 1099-NEC Form?

 A 1099-NEC form is a tax form used to report amounts paid to nonemployees, including independent contractors, freelancers, and other workers who are not covered by social safety net programs such as unemployment insurance. A 1099-NEC is also known as a “nonemployee compensation” form.

For example, if you hire an independent contractor or freelancer to work on your business, you’ll need to work with your accountant or CPA to file these forms annually.

The IRS requires that you report all non-employee compensation, including the payments made to these people. If you fail to do so, you may be penalized by the IRS.

The IRS uses it when they need to track payments made to nonemployees to tax those individuals accordingly. You’ll only get this form if you paid someone who was not an employee of your company at least $600 during the year.

Issuing a 1099-NEC ensures that everyone pays their fair share of taxes on income earned through employment or self-employment.

Independent Contractor Definition

An independent contractor is a worker who meets the IRS criteria for being self-employed, which means the worker is responsible for paying their taxes and has more control over how they perform the work.

Businesses often hire independent contractors to perform copywriting, consulting, accounting, and IT support. They’re not employees because they don’t receive many of the benefits of a traditional job, including health insurance, retirement benefits, and overtime pay.

Who Gets a 1099?

The 1099 Form is a tax form sent to independent contractors, freelancers, consultants, and other nonemployees. The Internal Revenue Service (IRS) requires businesses to issue 1099s to individuals who receive $600 or more in payments during a tax year. Companies are also required to report the gross amount of payments made to contractors on Form 1099-MISC.

If you’re a business owner and hired an independent contractor, and paid them more than $600 over the year, you’re responsible for issuing them a 1099-NEC.

If you worked as an independent contractor for multiple clients during the year, each client would send you Form 1099-MISC at year-end detailing how much they paid you. You must report this income on your tax return if it totals $600 or more.

Who Needs to Fill Out a 1099 Form?

The Internal Revenue Service requires you to file Form 1099s for independent contractors and other parties who provide services to your business.

 If you are a business owner and paid out more than $600 to an independent contractor, you need to fill out a 1099 form.

If you’re not sure whether or not you need to file a 1099 Form for your freelancers, look at the following list. If any of these descriptions apply to your situation, then you’ll need to fill out a 1099:

  • You paid someone more than $600 for services performed as an independent contractor.
  • You paid someone more than $600 for services performed as a subcontractor.
  • You paid someone more than $600 for performing services as an attorney or doctor who isn’t incorporated or registered as an LLC.

Why the $600 Cut-off Matters

In the United States, the Internal Revenue Service requires that anyone who pays a vendor over $600 in a year file a 1099-MISC form. This includes freelance writers, photographers, accountants, and other professionals who work as independent contractors.

The requirement is intended to protect both parties from tax evasion by making sure you report all of your income to the IRS. It’s also meant to prevent taxpayers from claiming deductions they don’t deserve.

Skip Filing 1099s for Corporations

If an independent contractor is registered as a C corporation, you don’t need to file Form 1099. You can see whether a contractor is incorporated based on the information on their Form W-9. You can request one of these forms from any contractor when you hire them.

Don’t File 1099s for Employees

The IRS has strict rules for distinguishing between employees and nonemployees. They are always on the lookout for business owners who misclassify workers as independent contractors (typically to avoid paying social security and medicare taxes.)

That said, it is essential that you file a Form W-2 to report wages, tips, and other compensation you paid to an employee during the tax year.

It’s also important to note significant penalties for misclassifying employees as independent contractors. 

Don’t File 1099s for Contractors Hired Through Freelance Marketplaces

Freelance marketplaces like Fiverr and Upwork dont provide tax documents because they are technically payment settlement entities. Businesses do not need to offer 1099-NEC forms to workers they hire on these platforms.

Do Partnerships Get a 1099?

In general, if you pay less than $600 per year to an entity involved with your business, it’s not necessary for you to issue them a 1099 form. This includes payments made for services rendered or goods sold. However, there are exceptions to this rule, and it’s best to check with your accountant before deciding whether or not you need to fill out a 1099 Form for your partnerships.

How to File a 1099 Form

There are two copies of Form 1099: Copy A and Copy B.

Copy A of Form 1099 is used to report nonemployee compensation. This includes payments made to independent contractors and prices made to other payees who are not business employees. If you hire an independent contractor, you must report what you pay them on Copy A and submit it to the IRS.

The IRS requires you to file Copy B of Form 1099 for each person or company to whom you have paid nonemployee compensation during the year. You must send Copy B of Form 1099 to your payee by February 1 (for payments made in the previous calendar year).

If you fail to send Form 1099-MISC on time, you may owe a penalty even if the payee does not report your income or fails to file a tax return.

If you’re an independent contractor and receive a Form 1099, Copy B from a client, you do not need to send it to the IRS. You report the income listed in Copy B on your income tax return.

Gather the Required Information (W-9 Request)

You’ll need the contractor’s name and address and their Social Security number or taxpayer-identification number. You’ll also need:

  • The total amount you paid them during the tax year
  • Their taxpayer identification number

If you don’t have this information, you can use the IRS’s free e-file system for paperless filing with Form W-9S or Form W-9 so that the contractor can provide it to you electronically and avoid having to mail the form back to you by mail.

Once you have all of the required information, you can then use it to fill out Form 1099-NEC.

Submit Copy A to the IRS

Once you have filled out all the required information, Copy A of Form 1099-NEC must be submitted to the IRS by January 31, regardless of whether you file electronically or by mail.

You can download and print a version of Copy A from the IRS website.

Submit Copy B to the Independent Contractor

Once you fill out and submit copy A, you can send Copy B to all of your independent contractors no later than January 31.

You can download and print a version of Copy B from the IRS website and send it to your independent contractor. 

Check if You Need to Submit 1099 Forms With Your State

Depending on your business, you may also have to file 1099 forms with the state. It’s best to check with a CPA and ensure you’re compliant with your state’s 1099 filing requirements.

How to File 1099s Online

Copy A

You can e-file Copy A of Form 1099-NEC through the IRS Filing a Return Electronically (FIRE) system. This form must be produced with the help of compatible accounting software.

Copy B

You can email Copy B to your contractor, but first, you need their consent.

Consent should be obtained to prove the contractor can receive the form electronically. If you’re planning to email them a copy, you should contact them via email to obtain consent.

When Are 1099s Due? (2023 Deadlines)

Filing Copy A with the IRS is due February 15, 2023.

The deadline for sending Copy B of Form 1099 to your contractors is February 15, 2023.

What if You Don’t Receive the 1099 From a Business?

If you don’t receive a 1099 from a business, you should contact them directly to ask if they sent it. You can use the IRS’s Where To File 1099s tool to determine if a company has listed your Social Security number on their 1099 filing. If they haven’t done so, you may need to call them and ask for it.

What Happens if You Miss the 1099 Filing Deadline?

If you miss the deadline for submitting your 1099 forms, you may be surprised. The IRS is serious about catching taxpayers who fail to report income.

You will have to pay interest on the taxes you owe, but you could also face penalties for late filing and late payment.

You will have to pay the following IRS penalties for each late 1099 form:

  • $50 if you file within 30 days
  • $100 if you file more than 30 days late but before August 1
  • $260 if you file on or after August 1

The Four Basic Financial Statements

Example Income Statement

A financial statement is a report that summarizes transactions, such as sales or expenses, and shows the financial condition of a person or organization. It’s a simple way to get helpful information about your finances in one place.

Financial statements are generally organized into four basic financial statements. These include a balance sheet, an income statement, a cash flow statement, and a statement of retained earnings. 

 It’s essential to understand the information on your financial statements so that you can track how your investments are doing. Having a good understanding of what the numbers mean, and looking for trends over time, will help you make more informed decisions about your finances.

The Four Basic Financial Statements (And Why They Matter)

Financial statements are reports that show a company’s financial position over a specific accounting period. They show how much money is coming in and what money is going out of the business. All businesses use these four financial statements to measure their performance and the results of their operations. 

These documents help you understand your business better, but they also help creditors, investors, and other interested parties understand your business and make predictions of its earning potential. 

Each statement provides a different point of view, but they all work together to form one complete picture. 

Balance Sheet

The Balance Sheet is a snapshot of a company’s financial position at any given moment — it reports what a company owns (its assets), what it owes (its liabilities), and its net worth (assets minus liabilities). The Balance Sheet is also sometimes called the Statement of Financial Position.

It tells you how much money the company has on hand and how its financial situation compares to when it was last examined.

The balance sheet is the heart of a company’s financial statements because it tells you if it is in good shape or in danger of bankruptcy.

Key Features of the Balance Sheet

When looking at a balance sheet, you will see three key features: assets, liabilities, and equity. These three sections contain information about your company’s financial position on a given day. 

Items Included in the Balance Sheet

Assets

Assets: The balance sheet’s asset side shows various things that belong to your organization. Assets are grouped into current assets and noncurrent assets. Existing assets are resources that can be converted to cash within one year, such as cash on hand, accounts receivable (i.e., money owed by customers), inventory, and prepaid expenses (e.g., insurance). 

Noncurrent assets are resources with values lasting beyond one year and include long-term investments, fixed assets (e.g., machinery), intangible assets, and deferred charges.

Liabilities: Liabilities are the debts and obligations of a business, such as loans, accounts payable, and accrued expenses. Liabilities can be short-term or long-term.

Current liabilities are debts that must be paid within one year. Examples of current liabilities include accounts payable, interest payable, income tax payable, and short-term loans.

Long-term liabilities are debts that mature more than one year in the future. Long-term liabilities include bonds payable, mortgages payable, and long-term notes payable.

Equity: Shareholders’ equity is the net difference between assets and liabilities. After accounting for everything owed, the equity section sums up assets minus liabilities and shows what you own. Equity can be damaging if liabilities exceed assets, called a deficit.

Example of a Balance sheet

A balance sheet is typically divided into three sections, starting with assets on the left side, then continuing with liabilities, and ending with the net worth on the right side.

This sample balance sheet shows how the balance sheet is typically laid out, the items reported, and how it differs from other statements. 

Example Balance Sheet

Income Statement

The Income Statement measures the business’s profitability over time. It has two major parts: income and expenses. When added together, these components equal net income for the period. The Income Statement is also sometimes called the Profit & Loss statement.

This is the most popular financial statement because it shows whether a company made or lost money during a specific period, like a month or year. The Income Statement shows you what happened to your money over a period (typically a year). In contrast, the Balance Sheet is concerned only with where your money is at any given moment.

One of its purposes is to help investors gauge how well a company is performing by comparing expenses against revenue. If a company has more expenses than revenue, it loses money; if it has more income than expenses, it makes money.

Key Features of the Income Statement

The income statement is a document that summarizes the revenues and expenses of an organization over a given period. On it, you’ll find three key features: revenue, fees, and net income. These three features tell you how well your company is doing financially over a given period.

Items Included on the Income Statement

Revenue: The total income of a company refers to the total amount of money brought into the company. It represents all sales generated in a given period, such as one quarter or one year. Revenue includes all money a company receives from its customers, whether it’s cash, checks, or other forms of payment. 

Expenses: Expenses are the costs incurred while generating revenue. Expenses can be broken down into four main categories:

Cost of Goods Sold (COGS). After subtracting its direct costs such as materials, labor, and shipping, this is the profit a company makes.

Operating Expenses. This covers payroll, rent, utilities, and other things that aren’t directly related to production or sales. These are generally fixed costs that are relatively consistent from month to month.

When a company borrows money, there’s interest to pay on those loans. Since this is an expense, it gets added here. These costs depend on how much the company has borrowed and the interest rate.

Taxes. The government expects its share of profits from companies, and those taxes are recorded here.

Net Income: Net income is the money you have left after you’ve paid all your business expenses. It’s also called net profit or the bottom line — which is why it shows up last on the income statement.

Start with your gross revenue and subtract your business expenses to calculate net income. You’ll end up with either a positive or negative number. If you have a positive number, that’s how much money your business made during the period covered by the statement. A negative number indicates a loss.

Example of an Income Statement

This sample income statement shows the income statement is typically laid out, the items reported, and how it differs from other statements.

Example Income Statement

Cash Flow Statement

The cash flow statement looks at how cash moved during a particular period — usually over one year. It shows changes in cash from operating activities, investing activities, and financing activities. It offers an overview of how well a company generates money to fund its operations, pay its debt, and support its investments.

For investors, the statement of cash flows can be significant, as it shows how much actual cash moved in and out of the company during the reporting period. The information is intended to give investors and other stakeholders an idea of how well a company is using its money, and it’s also a good way for companies to stay accountable to their shareholders.

Key Features of the Cash Flow Statement

The statement of cash flows groups together cash-related activities under three main sections: operating activities, investment activities, and financing activities. These sections tell you the overall state of your company’s cash flow. 

Items Included in the Cash Flow Statement

Operating Activities: The operating activities section reports activities that involve your company’s core business operations. This includes revenue generated and expenses incurred in the day-to-day operations of your business. For example, a software company would consist of all billing for licenses sold to customers and payments made to employees and third-party contractors.

Investment Activities: After paying all the expenses incurred while running its business, a company has to generate additional revenue through investments to keep itself afloat. These activities include all investments made by the company in other companies (through stock purchases or loans) or its own business by purchasing property, equipment, etc.

Financing Activities: Financing activities are how funds enter the business and how they leave—in other words, how capital is raised and paid back. Investing activities are also transactions related to acquiring or disposing of assets—for example, if a company buys new equipment for the company, that transaction would appear in this section. Investing activities can also include making loans to other companies as well.

Example of a Cash Flow Statement

This sample cash flow statement shows the income statement is typically laid out, the items reported, and how it differs from other statements.

Example Statement of Cash Flows

Statement of Retained Earnings

The statement of retained earnings also referred to as the statement of owners’ equity, is a financial report that details what portion of a company’s profits have been kept over a given period. Retained earnings are the portion of earnings that a company keeps rather than paying out to shareholders. They are part of the equity section of a company’s balance sheet.

The statement of retained earnings is not as widely used as other financial statements, such as the income statement, balance sheet, and cash flow statement. It is usually combined with one or more of these statements into a single report.

Investors need to understand how much money the company is retaining instead of distributing, as this represents future investments that can be made into new projects and ventures. This amount also represents earnings that have not been paid out and are available for reinvestment or distribution.

Items Included in the Retained Earnings Statement

The statement of retained earnings usually appears on the balance sheet as part of the stockholder’s equity and is generally prepared after an income statement and before a balance sheet. This is done to compute the retained earnings at the end of a period reported on the balance sheet—a component of stockholders’ equity.

Example of a Retained Earnings Statement

This sample statement shows how the retained earnings statement is typically laid out, the items reported, and how it differs from other statements.

Example Statement of Retained Earnings

Bringing It All Together (Why You Should Review All Statements)

When you’re running a business, keeping track of finances is critical. You need to know where the money is coming from, where it’s going and what’s left over at the end of each period.

You need to prepare four basic financial statements: balance sheets, income statements, cash flow statements, and shareholder equity statements. Some people refer to these as “books,” and you can use them to get a quick read on your firm’s financial health.

These financial statements are essential for several reasons. You’ll need accounting reports to comply with government regulations or file tax forms in many cases. Different agencies will require various statements, but they generally revolve around these four concepts.

In addition, the statements help you analyze how your company is performing over time and compare that performance with other companies in your industry. This information can help guide decisions on everything from next year’s budget to whether or not your company should pursue a merger or acquisition strategy.

Finally, if you want to borrow money or invest for any reason, lenders and investors will usually require some type of accounting report to evaluate a company’s financial health.

How Much Do Accountants Make

Male Accountant Calculating Finance Hire

Accountants work in various industries, including manufacturing, retail trade, government agencies, etc. They may be employed by corporations or nonprofit organizations or work independently as consultants offering services to businesses and individuals.

Accountants prepare accounting records for businesses or individuals, analyze financial statements and tax returns, monitor budgets and forecasts, and advise clients on improving their finances or meeting regulatory requirements.

There are so many different specializations and qualification levels within accounting, let alone external factors like the state you live in. We’re here to provide you with some clarity and hopefully help you find out how much an accountant makes in the U.S.

What It Costs to Hire an In-House Accountant

An accountant is an integral part of any business. They help you identify your financial strengths and weaknesses, and they can help you develop strategies to improve your bottom line. 

 The cost of hiring an in-house accountant can vary widely based on several factors. For example, you’ll pay more for someone with particular expertise in a specific area, such as tax law or auditing. And it’s common for companies to pay bonuses to accountants who meet their goals or exceed expectations.

According to the Bureau of Labor Statistics (BLS), the average annual salary for accountants is $77,250 per year. However, salaries vary widely depending on education, experience, and location. A certified public accountant (CPA) earns more than a non-CPA and will have additional responsibilities such as advising clients on financial matters.

This figure only reflects the average across all industries and companies — your salary will depend on where you live and which accounting firms are available in your area. You’ll also need to factor in several other expenses when considering whether to hire an in-house accountant.

For example, you’ll pay more for someone with particular expertise in a specific area, such as tax law or auditing. And it’s common for companies to pay bonuses to accountants who meet their goals or exceed expectations.

Finally, when it comes to how much accountants make, you’ll need to consider how much time they’ll spend working with your business. If they have to spend hours on the phone or in meetings with clients, those hours could eat into their billable hours and increase costs for your business.

Hiring an in-house accountant is a big decision, and it’s not the right fit for every business. It can be helpful to start by weighing the pros and cons of hiring a dedicated bookkeeper.

Pros of Hiring a Full-Time In-House Accountant

  • Save time and money by outsourcing bookkeeping and accounting tasks to someone.
  • Avoid paying high fees for outsourcing accounting duties.
  • Reduce stress by having one person handle all financial matters for your business.
  • Gain access to valuable information about your business that you may not be able to find on your own or through outside resources

Cons of Hiring a Full-Time In-House Accountant

  • Hiring someone with the right experience and qualifications may also be challenging due to the high demand for qualified accountants.
  • Hiring an employee is expensive, especially if you do not have the cash flow to cover their salary. 
  • Another downside of hiring a full-time accountant is the lack of flexibility.
  • Some companies, especially startups, need someone who can occasionally work on short notice.

State by State Breakdown

Accountants is one of the most in-demand professions in the United States, with over 135,000 openings for accountants projected each year. The Bureau of Labor Statistics also reports that the average salary for accountants will be $77,250 in 2022.

The table below breaks down how much it costs to hire an in-house accountant across the United States. The figures below are based on average hourly rates reported by ZipRecruiter.

Remember that these are averages, and your specific situation may vary. For example, an experienced professional with a high level of expertise may command a higher salary than someone with less experience or a more specialized skill set.

StateAnnual SalaryHourly Wage
Washington$60,451$29.06
Maryland$59,427$28.57
Nebraska$58,213$27.99
New York$57,903$27.84
Virginia$57,449$27.62
Colorado$56,545$27.19
South Carolina$56,388$27.11
New Hampshire$56,000$26.92
Delaware$55,623$26.74
California$54,189$26.05
Oklahoma$54,104$26.01
Massachusetts$53,966$25.95
Michigan$52,983$25.47
Vermont$52,791$25.38
Hawaii$52,208$25.10
Wyoming$51,818$24.91
Missouri$51,483$24.75
Idaho$50,913$24.48
Connecticut$50,732$24.39
West Virginia$50,324$24.19
Maine$50,293$24.18
Rhode Island$50,034$24.05
Alaska$49,758$23.92
Pennsylvania$49,472$23.78
Nevada$49,367$23.73
North Dakota$49,337$23.72
Texas$49,304$23.70
New Jersey$49,291$23.70
Montana$49,167$23.64
Arizona$48,662$23.40
Indiana$48,350$23.25
Minnesota$48,078$23.11
North Carolina$48,052$23.10
Tennessee$48,023$23.09
South Dakota$47,896$23.03
Wisconsin$47,791$22.98
Ohio$47,675$22.92
Oregon$47,150$22.67
Utah$47,074$22.63
Georgia$46,943$22.57
Louisiana$46,626$22.42
Kansas$46,435$22.32
Iowa$45,930$22.08
Alabama$45,845$22.04
New Mexico$37,409$21.83
Kentucky$44,442$21.37
Florida$44,244$21.27
Arkansas$43,663$20.99
Mississipi$43,501$20.91
Illinois$43,425$20.88

According to ZipRecruiter, the state of Washington has the highest average annual salary at $60,451 per year, while Maryland comes in second with $59,427 per year, and Nebraska rounds out the top three with$58,213 per year.

Here is a quick breakdown of the top ten states in terms of average annual accounting salaries in the United States:

Washington – $60,451

Maryland – $59,427

Nebraska – $58,213

New York – $57,903

Virginia – $57,449

Colorado – $56,545

South Carolina – $56,388

New Hampshire – $56,000

Delaware – $55,623

California – $54,189

The bottom ten states are in terms of average annual salary for accountants:

Louisiana – $46,626

Kansas – $46,435

Iowa – $45,930

Alabama – $45,845

New Mexico – $37,409

Kentucky -$44,442

Florida – $44,244

Arkansas – $43,663

Mississipi – $43,501

Illinois – $43,425

Is Hiring an In-House Accountant Right for You?

If you’re a small business owner, you’ve probably wondered at some point whether hiring an in-house accountant is the right move. After all, it’s not cheap to have someone on your payroll. But when it comes down to it, there are many advantages to having your in-house accountant. Here are some things to consider:

You’ll save money. If you hire a full-time accountant to handle your books, they will likely charge less than the fees charged by an outsourced firm. Plus, you won’t have to pay for extra travel time or expenses incurred when they need to collect information from multiple locations.

You’ll have more control over your business. You’ll be able to focus on running your business instead of worrying about how much money it makes or loses each month. Plus, if something goes wrong with your accounting system — such as being hacked — it can be easier to fix issues internally than if they were handled by another company or individual outside of your organization.

You’ll get more skill and experience. If you’re running a small business, the chances are that you have other responsibilities besides bookkeeping and taxes. If your accountant can handle these tasks and other administrative duties like payroll and benefits management, then hiring one makes sense. But if you need someone who’s skilled in business analysis and forecasting or has expertise in specific areas like tax planning or compliance requirements for particular industries (such as health care or construction), hiring someone with those qualifications might be worthwhile.

You’ll have someone who knows your business. An in-house accountant knows everything about your business — from how much money you make each month to which customers are profitable and which ones aren’t — because they work directly with you daily. They know what questions to ask when something goes wrong and can help resolve issues immediately.

Hiring an in-house accountant can be a smart move, but it’s not right for every business. One of the biggest obstacles to hiring an in-house accountant is finding the right person for your company. If you want to experience someone, you’ll pay more than if you hire a recent accounting graduate (though they may be cheaper). If you want someone who knows your industry well, it takes time to find them and train them on your operations and systems.

If you can’t afford this investment of time or money, then hiring an accounting firm or online accounting service makes sense — especially if your business is brand new or small. However, if your company has been around for several years and has grown significantly over those years (or expects to), then hiring an in-house accountant could be beneficial in the long run.

What It Costs to Contract With a Traditional Accounting Firm

 The cost of hiring an accounting firm depends on various factors, including the size of your business and the type of accounting services you need.

Most small businesses hire an accountant to prepare their tax returns and help them keep track of their finances. 

Accounting firms charge more for more complex tasks, such as business valuation, management advisory services, and forensic accounting investigations.

The cost of a professional audit depends on many factors:

  • What type of audit do you need?
  • How much work needs to be done by outside professionals
  • How much work needs to be done by in-house staff 

The pricing structure for traditional accounting firms can be pretty complicated. However, there are some basic principles that you should follow when determining the cost of working with a formal accounting firm.

The most critical factor in determining how much it costs to contract with a traditional accounting firm is how they charge their clients. There are two major fee structures that accountants use:

Time-based billing: With time-based billing, accountants charge clients by the hour or by the project. The more complex your business is, the higher your bill will be — which means that if your business is more straightforward, you’ll pay less than someone whose business requires more time and effort to keep track of.

Fixed fees: Fixed fees are based on the number of services provided rather than how long it takes to provide them. Fixed costs usually include an hourly rate plus additional charges for specific services like tax preparation or bookkeeping.

The following are some standard fees that accounting firms may charge:

Accounting fees: This covers professional services rendered by accountants and bookkeepers to keep your books and records up-to-date and accurate. These fees usually run between $75-$350 per hour, according to AccountingCoach.com. Some accountants are willing to work hourly, while others charge flat fees for specific tasks such as filing taxes or preparing financial statements.

Is a Traditional Accounting Firm Right for You?

Accounting firms can be expensive, but they are worth the cost. You’ll need to determine how much you’re willing to spend on accounting services before you start looking for a firm. The following factors will help you determine your budget:

How much money are you making now? If you’re starting and don’t have much revenue, working with an inexpensive firm might make sense. But once your business starts making money, you might want to invest in a more experienced accountant who can help guide you through the rest of your journey.

How complicated is your business? Small businesses with simple needs will pay less than those with complex conditions such as international operations or multiple locations across several states. If your business requires specialized expertise, expect to pay more for certain services (like payroll or tax preparation).

What kind of support do you need? Accounting firms offer different service levels depending on how much time they spend working on your books each month (or quarter). An hourly fee means that they’ll charge by the hour for every task they perform (e.g., reviewing invoices)

Accounting firms are highly trained professionals whose valuable skills, but they may not be the right fit for every business owner. Here are some things to consider when deciding whether a traditional accounting firm is right for your business:

Pros of Working With A Traditional Accounting Firm

What makes these firms different from other accounting firms? Here are some things you should know before deciding whether you need a traditional accounting firm:

They offer a full range of services. Traditional accounting firms can help you with bookkeeping, tax planning, business valuation, and estate planning. If you want someone who will be there for your future needs, this is the kind of firm that will help you get there. They’re experts in their field. They have years of experience working with small businesses like yours, so they know what issues may arise and how best to deal with them.

They have a network of resources at their disposal. The bigger the firm, the more available resources, including other accountants who specialize in different areas (such as tax planning or employee benefits). This means that when you need help with something, someone else within the firm is already dealing with it.

Cons of Working With A Traditional Accounting Firm

Here are some things to consider before deciding whether or not a traditional accounting firm is right for your business:

Accounting firm services are expensive. A full-service accounting firm will charge anywhere from $150 to $300 per hour for most services, and that doesn’t include the cost of their software subscriptions and licenses. Those costs can skyrocket if your company has proliferated or needs specialized tax planning and preparation.

Accounting firms can be slow to respond to requests from clients. Accounting firms are typically staffed with several employees who take care of dozens or even hundreds of clients. When you call with questions, you may find yourself waiting on hold for long periods or dealing with an inexperienced staff member who doesn’t know how to answer your questions correctly.

Accounting firms aren’t always prepared to handle emergencies. If there’s a problem with your taxes or finances that needs immediate attention, it’s unlikely that someone at an accounting firm will be able to help you right away —

In addition, A small firm can offer more personalized service than a large one, but it might not have the resources to handle larger projects or deal with complicated tax issues. A large firm might be able to handle complex accounting issues quickly and efficiently, but it may lack the personal touch that a small firm can provide.

What It Costs to Work With an Online Accounting Service Provider

Online accounting services are increasingly becoming more affordable and accessible to small businesses, which is excellent news for business owners looking for a better way to manage their finances.

When you work with an online accounting service, you keep your costs down because there’s no need to pay benefits or payroll taxes, and they’re able to handle your books remotely, so there’s no overhead associated with their office space.

Online accountants can handle everything from general bookkeeping to tax preparation and everything in between.

The best online accountants, like Finance Hire also offer a free initial consultation where they’ll talk through your needs as a business and help you decide which service is perfect for you. That’s something that traditional in-house hiring processes just can’t do.

Is an Online Accounting Service Right for You?

One of the most significant advantages of working with an online accounting service provider is that they can often offer more affordable services than traditional accountants. There are fewer overhead costs and administrative fees when you work with a company that has no office space or other physical assets. 

There are still some fees associated with using an online accounting service provider. For example, some companies charge a monthly fee for their services, while others charge based on the type or size of your business. Additionally, some providers may charge additional fees for certain services such as bookkeeping or payroll management.

Here are some things to consider when deciding if an online accounting service is suitable for you:

  • You don’t have time or expertise to manage your bookkeeping.
  • You don’t have the resources to do it yourself.
  • You want someone else to do it all for you and the convenience of having everything done automatically.
  • You want someone who can help answer questions and advise how to run your business better.

There are several advantages to using an online accounting service:

Online Accounting Services are convenient. Online accounting services are convenient because they don’t require additional hardware or software beyond standard internet access. You can access your accounts anywhere with an internet connection and a web browser.

Online Accounting Services Offer 24/7 Access. One of the most significant advantages of using an online accounting service is that it is available 24 hours a day, seven days a week. You can access your financial data at any time and from anywhere. You no longer have to wait until the end of the day or week to see how your business did during that period.

Online Accounting Services Are Affordable. Another advantage of using an online accounting service is that they are usually much less expensive than traditional accounting firms. This is because there are no storefronts or office space to maintain, which reduces overhead costs considerably. Most online accounting services charge by the hour or by the project rather than charging for every transaction processed by your business, which means you don’t have to worry about paying for transactions that don’t affect your bottom line.

 If you are a small business owner with limited accounting knowledge, an online accounting service may be the answer for you. The best online accounting services offer a wide range of features to help you manage and grow your business.

16 Big Tax Deductions for Small Businesses

Tax Deductions 1040 Finance Hire

Tax deductions for small businesses are an essential part of any business owner’s income tax planning. As a small business owner, you’re eligible for some deductions that you would not be able to take if you were an employee.

You may also qualify for other deductions that aren’t available to self-employed people or independent contractors. Knowing which deductions you are eligible for and how to claim them on your taxes.

There are steps you can take to reduce your tax burden, and by taking advantage of these deductions and credits, you’ll be able to keep more money in your pocket. If you are a small business owner, you can benefit from using these 16 significant tax deductions for small businesses. 

What Exactly Is a Tax Deduction?

Tax deductions are reductions in your taxable income. Deductions reduce the amount of money that you owe in taxes, so they can help you save money on your tax bill.

The IRS defines a tax deduction as an expense that reduces your taxable income. The keywords are “reduces” and “taxable income.” Tax deductions don’t reduce your total costs; instead, they allow you to deduct part of those expenses from your gross (total) income.

For example, if your business earns $100,000 in revenue and has $50,000 in expenses, it will be taxed on $50,000 of income. If you have $5,000 worth of business-related expenses, you can deduct those expenses from your $50,000 taxable income to arrive at your final figure — $45,000. What you make and what you owe is your “taxable income.”

Deductions come in many forms: business expenses, charitable donations, mortgage interest payments, and more. Tax deductions are an essential consideration for small businesses because they can lower your tax bill significantly.

How Does Tax Deduction Save You Money?

A tax deduction is an adjustment made to your taxable income. If you have an expense that doesn’t fall under one of the other allowable deductions (medical expenses, alimony, etc.), it may fall under a business tax deduction.

Deductions reduce your taxable income by specific amounts based on certain criteria set by the IRS. For example, if you’re self-employed or have a lot of medical expenses, then those expenses can count as deductions for your taxes. All deductions reduce your taxable income, meaning less money will be taken out from your paycheck for taxes each year. 

For example, if you make $50,000 per year and have some business expenses that add up to $3,000, those expenses will be subtracted from your total income (or deductible). Instead of paying taxes on $50,000 in earnings, you would only pay taxes on $47,000 in payments! That’s why it’s important to claim every possible deduction when filing taxes as a small business owner: they could save you thousands of dollars every time you file your taxes.

The tax deductions available to small businesses can be a valuable tool for lowering your tax bill. These deductions can also help you use less of your profits to pay taxes, leaving more money in your pocket.

Staying On Top of Your Deductions

If you own a small business, you likely have many expenses to deduct from your income. However, with all the deductions available, it can be challenging to know what is legitimate and what isn’t.

That’s where bookkeeping comes in.

To stay on top of deductions, you need to keep good records. If you’re a small business owner, keep copies of your receipts and invoices. As a small business owner, you’ll also save paperwork related to your business vehicle and assets. Be sure to also keep letters from vendors.

One way to stay on top of your deductions is by using accounting software like QuickBooks. These programs allow you to keep all of your financial information in one place and automatically calculate the deductions you’re eligible for based on data from previous years. If you want everything done for you, you can hire an online bookkeeping service or accounting firm to keep all the records. 

You may already know the many tax deductions if you own a small business. But it’s essential to be mindful of these deductions — and to make sure you’re keeping track of them — because they can help save you money when it comes time to file your taxes.

Understanding Bookkeeping

When you’re starting a small business, it can be easy to overlook the tax implications of your new venture. But understanding the basics of bookkeeping is one of the most important things you can do for your business.

There’s a lot to keep track of: invoices, receipts, bills and payments, salaries and expenses — not to mention the daily details of running a business. If you don’t keep good records, it’s easy to overlook critical deductions that could save you thousands in taxes each year.

If you want to claim tax deductions on your small business income, you’ll need to keep good records throughout the year. It’s also important to know what tax deductions are available to small businesses and which ones benefit entrepreneurs running their ventures.

If you’re ready to learn more about accounting, here are 16 tax deductions specifically for small businesses.

Advertising and Promotion

Advertising and promotion costs are 100% deductible. This includes the cost of advertising your business, designing a website, and more. This also includes things like:

  • Hiring someone to design your company logo
  • Shipping cards to clients
  • Sponsoring a networking event
  • Creating and launching a new website
  • Costs associated with printing business cards
  • Running a social media marketing campaign

However, you can’t deduct the cost of entertaining customers or employees at sporting events or concerts.

Business Meals

You can deduct 50% of your food and entertainment costs, but only if it’s directly related to your business and as long as they’re with clients or employees and aren’t excessive. If you buy a meal for a client or customer, the IRS requires that you have “more than a general expectation of getting income or some specific benefit at some future time.” In addition to this:

  • The meal expense must be necessary to carry out your business goals
  • The meal cannot be extravagant in any way
  • The business owner must also be present during the dinner.

It’s also good to know that you can deduct up to 100% of the cost of providing meals to employees, such as burgers and drinks, if your team is working late.

Meals that you provide at office parties are also 100% deductible. 

This is among the most popular small business tax deductions because it’s easy to claim. Keep track of all the costs and what you spend on meals, and you can keep some extra cash later down the line. 

Business Insurance

Business insurance is a considerable expense for small businesses. Fortunately, it’s also one of the most tax-deductible items on your list.

Business insurance can include general liability, property, casualty, workers’ compensation, etc. If you own your business, you’re responsible for paying premiums and deducting them from your taxes. But if you’re self-employed and work as an independent contractor, you’re not allowed to deduct the cost of insuring yourself.

The amount that can be deducted varies depending on your insurance policy and how much coverage it provides. The IRS allows you to remove a percentage of your premium payments for most business insurance policies — including fire, theft, burglary, and liability coverage — up to certain limits per year.

Business insurance deductibles may also include:

  • Liability coverage
  • Property coverage for your buildings, furniture, and equipment
  • Vision and dental insurance for employees
  • Workers compensation coverage
  • Life insurance for employees
  • Auto insurance for business vehicles

Bank Fees

Having separate bank accounts and credit cards specifically for your business is always a good idea if you are a business owner. If you use your bank account to conduct business, you can deduct your payment fees. 

These include monthly maintenance fees, ATM fees, wire fees, and overdraft fees. You can also deduct any expenses your bank charges for closing an account.

It’s important to know that you cannot deduct fees related to your banking accounts or credit cards as these are regarded as personal expenses.

Business Use of Your Car

Business use of your car can be a tricky deduction, but it can also save you money. If you need a business vehicle, the IRS allows you to deduct the cost of mileage, gas, maintenance, repairs, and depreciation of your car. The IRS also allows you to remove any tolls and parking fees.

The IRS allows the following deductions:

The standard mileage allowance allows small business owners to deduct 58.5 cents per mile for business miles driven in 2022, up from 56 cents in 2021. The IRS has specific rules about when to claim this deduction. To calculate your deductible expenses, multiply the miles driven for your business during the year by the rate set by the IRS.

Gasoline and oil costs. You can deduct what you paid for gas and oil during the year, but only if they’re used to generate revenue for your business.

Insurance premiums. You can deduct the cost of liability insurance, collision coverage, and comprehensive coverage (if your vehicle is used for business).

Repairs and maintenance costs. You can deduct expenses related to maintaining or repairing your vehicle (such as tires or oil changes) as long as they don’t improve its appearance or performance beyond other cars in its class. This includes any labor charges related to those repairs or maintenance work.

To deduct actual expenses related to your car’s business use, it’s essential to keep track of all vehicle operating costs, including mileage, gas, oil changes, and repairs. You can save a detailed log of your business miles by using an app that tracks your mileage, or you can construct a mileage log using appointment bookings and the like.

Note that the cost of driving between home and work is not deductible and is considered personal commuting expenses.

Contract Labor

If you hire contract labor to perform services for your business, you may be able to deduct these costs as a business expense. Contractors include independent contractors who provide plumbing, landscaping, and accounting; they also include temporary employees who work full-time for a specific period. 

It’s important to note that the IRS has strict rules about what constitutes an employee versus an independent contractor, so speak with a tax professional if you have questions about this category.

The contract must be in writing and signed by both parties, and the labor must be performed at the direction of the person who signs the contract. A written agreement between you and your employee describes their services and duties as required to substantiate employee status.

Also, remember that if you pay a contractor more than $600 for work completed, you’re required by the IRS to send them a Form 1099-NEC the following year.

Education

Education costs are fully deductible when they add some value to your business. If you’re taking classes to improve your skills in your current business, then those education expenses may be tax-deductible. If they relate directly to your job, you can deduct the cost of tuition, books, and other required materials, such as travel expenses.

Education and job training programs can be deducted if they meet the following criteria:

  • The education is designed to make you more valuable in the marketplace.
  • Books tailored to your industry
  • Workshops to increase your expertise and skills
  • Transportation expenses to and from classes

You can deduct the cost of books and supplies required to take the course, but not any other expenses, such as travel expenses. 

Home Office Expenses

You can take a home office deduction if you use part of your home exclusively for business purposes. If that’s the case, you can deduct the amount of your rent or mortgage interest and property taxes and utilities and maintenance costs related to that area.

Some employers provide their employees with a workplace, but if yours doesn’t, then you can’t claim this deduction.

You have to meet specific criteria to qualify for this deduction, however. For example, you must use the space regularly and exclusively for business purposes, and it must be your principal place of business or an entire office used by employees.

Interest

If you use your own money to finance a business, like through a loan or credit card charges, this interest can be deducted from your taxes. The IRS allows interest paid on loans used for any business purpose, including supplies, equipment, or other operating expenses, to be deducted as an expense. 

If you use money from a loan or credit card to cover your business expenses, you can deduct the interest paid as long as you meet the following requirements:

  • You are legally liable for the debt
  • You and the lender have a genuine relationship

Legal and Professional Fees

If you have an attorney or accountant helping you with your taxes or other matters, these expenses are deductible against your gross income. Legal and professional fees are deductible when they’re related to your business. 

For example, you can deduct the cost of professional advice like tax planning, estate planning, and other legal services. If you’re a limited liability company (LLC) or corporation, you can also deduct the cost of accounting services required for your business.

You can’t deduct the cost of personal legal bills or expenses that aren’t related to your business. For example, if you get sued for negligence by a client in your profession as a carpenter, that lawsuit is personal and not deductible.

Moving Expenses

Moving expenses are a standard tax deduction for small businesses. If you moved to a new location for business reasons, the IRS might reimburse you for your moving expenses. Moving expenses include:

  • The cost of packing and shipping your belongings.
  • The cost of travel and lodging to your new location.
  • The cost of connecting or disconnecting utilities at your old residence.
  • The cost of renting a truck or other large vehicle needed to transport your belongings.

Keep track of all receipts and travel documentation for this deduction.

Rent Expense

If you rent a business location or equipment for your business, you can deduct the rental payments as a business expense. This includes rent, mortgage interest, and property taxes. 

You’ll need to show proof of the cost and how it relates to your business — for example, by keeping a log of time spent in the space each day and showing how much time was spent working.

Salaries and Benefits

Salaries are likely the most significant expense for your business, so it’s no surprise that they’re tax-deductible. The amount you pay your employees is deductible as long as you have a reasonable salary for the work performed.

The IRS allows businesses to deduct reasonable salaries for themselves and other employees. The company can also remove any benefits it provides its employees, such as health insurance and retirement contributions. 

These types of deductions are often overlooked by small business owners who focus on other aspects of their business, but they can add up fast and make a big difference when doing your taxes.

Telephone and Internet Expenses

If you use your phone or internet connection to conduct business, these expenses are tax-deductible. For example, if you have an office and use an internet connection to send emails to clients, this expense is deductible. You can also deduct costs associated with your smartphone if used for business purposes such as making or receiving calls or sending emails. 

However, if you use your cell phone primarily for business calls, then in most cases, you can also claim a deduction for that portion of the bill — be sure to track how much time is spent on business calls versus personal ones.

The same goes for a landline at home or elsewhere: You can deduct the cost as an ordinary and necessary expense for that part of the bill related to work-related calls.

Internet access is another area where it gets complicated quickly because there’s no blanket rule about what percentage of usage is considered work-related. If you have a cable or DSL line and use it mainly for personal browsing but also do business online from time to time, then you may qualify for this deduction if most of your usage is related to work activities.

Travel Expenses

A trip to qualify as business travel has to be necessary and away from your tax home. This means that you or your employees travel away from the entire city or area where you conduct business, regardless of where you live.

It would help if you traveled away from your tax home for more than a day to qualify for this tax-deductible. 

If you qualify, you can deduct all travel costs — airfare, taxis, train tickets, and car rentals — if they’re related to your business. You can even remove your meals while traveling and lodging expenses (including Airbnb) if you have to stay overnight on business.

Deductible, IRS approved business travel expenses also include:

  • Travel costs to your destination and back
  • Using your car while at a business location
  • Any parking or toll fees
  • Any other methods of transportation like taxis and Uber
  • Any meals and lodging costs
  • Other necessary expenses related to your business travel

You must keep records of all your expenses, details of your trips, and the business reasons for the journey.

Personal Tax Deductions for Business Owners

You’re not just paying taxes on your income as a business owner. You may also be able to deduct expenses related to your business from your tax return, as long as they are considered ordinary and necessary for your business to run.

The 16 tax deductions mentioned above can be claimed on Schedule C, but there are also other tax breaks that small business owners may qualify for and claim on their returns. 

Child and dependent care expenses

If you have dependents who require child care services, you may be able to deduct those costs as business expenses. The IRS allows this deduction if you pay for the care of children under the age of 13 or disabled dependents who can’t take care of themselves outside the home because they’re physically or mentally unable to do so.

You can also deduct these expenses if you have a spouse or other qualifying person who is physically or mentally unable to take care of themselves outside the home.

Depending on your income, the amount you can deduct is worth between 20% and 35% of your allowable expenses. Allowable expenses are limited to $4,000 for one dependent and $8,000 if you paid for the care of two or more dependents. 

Retirement Contributions

 If you’re a business owner, you may have the option to make contributions to a retirement plan. These contributions are tax-deductible, but they may not be deductible if your business is organized as a sole proprietorship or single-member LLC taxed as a sole proprietorship.

If your business is organized as an S corporation or partnership, these plans are usually deductible from your income taxes. If you’re self-employed, you may be able to deduct some of your retirement plan contributions. The money must be deposited into an IRA or a qualified retirement plan to qualify for this deduction.

Health Care Expenses

 If you’re a small business owner, you may be able to deduct some of the expenses related to your health care. You can remove the following healthcare expenses:

Health Insurance Premiums. You can deduct the health insurance premiums you pay for yourself, your spouse, and your dependents on your income tax return. It would help if you delivered the dividends yourself and not through an employer or other employee benefit plan to qualify as a deduction.

Out-of-Pocket Medical Expenses. Eligible expenses include prescription drugs, co-pays, and co-insurance fees for doctor’s visits, ambulance services, hospital stays, nursing home care, etc.

The Bottom Line – Saving Money

As a small business owner, you may be eligible for various tax deductions. Not all small business owners are familiar with miscellaneous tax deductions. If you’re starting or running a small business, it’s essential to understand the basics of these deductions and how they can benefit your business. You can keep some extra money in your pocket come tax season.

How Much Do Bookkeepers Make

Bookkeeper Accountant Hired Through Finance Hire

Bookkeeping is an essential part of running a business. Without records and data, it’s hard to understand how your business is doing financially.

Bookkeeping is very diverse, and professional bookkeepers maintain the financial records of businesses and companies using advanced accounting and financial software. This includes handling payroll, preparing bank deposits, verifying receipts, preparing invoices, and more. 

The nature of the job enables qualified individuals to work from home or part of an in-house time. This guide will help you understand which option is right for your business and how much it will cost you.

What It Costs to Hire an In-House Bookkeeper

To hire a full-time in-house bookkeeper at the national average hourly rate would cost approximately $45,560 per year in salary plus benefits, according to the Bureau of Labor Statistics (BLS). If you typically pay overtime and your bookkeeper works more than 40 hours per week, the actual cost of hiring her can be substantially higher. However, the average Bookkeeper salary range in the United States, typically falls between $39,887 and $50,984, according to salary.com

When you’re looking for a bookkeeping service, you’ll find that pricing can vary wildly. The cost of hiring an in-house bookkeeper depends on how much work you want them to be doing and what kind of services they’ll be providing. Some bookkeepers will charge by the hour, but it’s more common to see some sort of retainer or a flat fee. 

For example, a small business can pay a monthly fee to have their books kept up to date, or they can pay an annual fee for a comprehensive set of services. A large business may have its own in-house accounting team and may also choose to use one or more outside bookkeepers at different points throughout the year to help keep things organized and running smoothly.

There are also many different kinds of bookkeepers out there who each offer their own specific services. For example, a controller is more senior than an entry-level bookkeeper and will spend more time reviewing financial reports and doing analyses. An accounting manager will usually be able to work directly with clients without having to consult with the company’s higher-ups for approval on certain things. 

Hiring an in-house bookkeeper is a big decision, and it’s definitely not the right fit for every business. It can be helpful to start by weighing the pros and cons of hiring a dedicated bookkeeper.

Pros of Hiring a Full-Time In-House Bookkeeper

  • Your bookkeeping will be done by someone who is 100% devoted to your business.
  • You have access to a bookkeeper whenever you need one.
  • Your bookkeeper is constantly working on your books, resulting in more accuracy and up-to-date information than you could likely get if you tried to do it yourself.

Cons of Hiring a Full-Time In-House Bookkeeper

  • You have to pay your bookkeeper even if they don’t have enough work to do all day.
  • You must provide benefits for your bookkeeper, which can be costly depending on what you offer.

State by State Breakdown

In addition to work experience and level of education, education level, and location plays a key factor in bookkeeper salaries, and this varies from state to state. 

The table below breaks down how much it costs to hire an in-house bookkeeper across the country. The figures below are based on average hourly rates reported by ZipRecruiter.

Keep in mind that these are averages and your specific situation may vary. For example, an experienced professional with a high level of expertise may command a higher salary than someone with less experience or a more specialized skill set.

StateAnnual SalaryHourly Wage
Washington$53,008$25.48
New York$50,228$24.15
New Hampshire$48,607$23.37
California$47,380$22.78
Massachusetts$46,260$22.24
Vermont$45,854$22.05
Wyoming$44,922$21.60
Hawaii$44,818$21.55
Idaho$44,554$21.42
Maine$43,921$21.12
West Virginia$43,650$20.99
Connecticut$43,615$20.97
Texas$43,182$20.76
Rhode Island$42,966$20.66
Pennsylvania$42,912$20.63
Alaska$42,693$20.53
Montana$42,587$20.47
Maryland$42,579$20.47
New Jersey$42,576$20.47
North Dakota$42,359$20.36
Nevada$42,357$20.36
Arizona$42,149$20.26
Nebraska$41,904$20.15
Indiana$41,878$20.13
Minnesota$41,426$19.92
Tennessee$41,396$19.90
Virginia$41,354$19.88
Wisconsin$41,235$19.82
South Dakota$41,121$19.77
Ohio$41,095$19.76
Georgia$40,659$19.55
Utah$40,551$19.50
Oregon$40,489$19.47
Lousiana$40,176$19.32
South Carolina$39,989$19.23
Kansas$39,889$19.18
Colorado$39,841$19.15
Delaware$39,791$19.13
Alabama$39,709$19.09
Iowa$39,538$19.01
New Mexico$39,179$18.84
Oklahoma$38,946$18.72
Florida$38,321$18.42
Kentucky$38,087$18.31
Arkansas$37,409$17.99
Michigan$37,388$17.97
Mississippi$37,369$17.97
Illinois$37,206$17.89
Missouri$36,603$17.60
North Carolina$34,076$16.38

According to ZipRecruiter, Washington is the state with the highest average bookkeeper salary in the United States. Bookkeepers in Washington earn an average annual salary of $53,008 or an hourly rate of $25,48.

New York has the second-highest average bookkeeper salary in the United States, with an average annual salary of $50,288 or an hourly rate of $24.15. New Hampshire comes in third, with an average annual salary of $48,607 or an hourly rate of $23.37.

Here is a quick breakdown of the top ten states in terms of average annual bookkeeper salaries in the United States:

  1. Washington – $53,008
  2. New York – $50,288
  3. New Hampshire – $48,607
  4. California – $47,380
  5. Massachusetts – $46,260
  6. Vermont – $45,854
  7. Wyoming – $44,922
  8. Hawaii – $44,818
  9. Idaho – $44,554
  10. Maine – $43,921

The bottom ten states are in terms of average annual salary for bookkeepers:

  1. New Mexico – $39,179
  2. Oklahoma – $38,946
  3. Florida – $38,321
  4. Kentucky – $38,087
  5. Arkansas – $37,409
  6. Michigan – $37,388
  7. Mississippi – $37,369
  8. Illinois – $37,206
  9. Missouri – $36,603
  10. North Carolina – $34,076

Is Hiring an In-House Bookkeeper Right for You?

You need to know a few things before you hire an in-house bookkeeper. 

First, it’s important to weigh the pros and cons of hiring a full-time employee. Hiring an in-house bookkeeper includes having someone available regularly, the added security of knowing your books are being handled by someone reliable, and the ease of working with one person instead of multiple people at an agency or accounting firm. 

The downside is that hiring a full-time employee can be expensive if you aren’t fully utilizing their time and skills. You’ll also have to manage them and find ways to keep them motivated and productive.

It’s also important to consider your company’s stage and what it might need from its financial services provider. A small business may not have enough work to justify hiring an in-house bookkeeper. In contrast, a larger business might not want the additional overhead of having an extra employee on its payroll. 

You should also consider whether or not you have enough money to hire someone full-time and whether or not you have enough work for them to do.

What It Costs to Contract With a Traditional Bookkeeping Firm

When you hire an in-house bookkeeper, your expenses will be limited to the salary of that one person. A full-time bookkeeper will cost between  $39,887 and $50,984 a year. You’ll need to factor in additional expenses such as worker’s compensation insurance and benefits, which can add up to 20% to 30% of total salary costs. 

Another option for small businesses is outsourcing your bookkeeping to a traditional bookkeeping firm. The benefit of this approach is that you get access to a wide range of bookkeepers and accountants who have different areas of expertise and can help with bookkeeping, from basic data entry to more advanced financial reporting.

Finding a traditional bookkeeping firm won’t be an issue, as they are located all over the US. They are often a small group of specialists that serve local geography.

If you decide to contract out your bookkeeping services instead, the annual costs can vary significantly depending on the scope of the work and the amount of time required to complete the job. Some firms charge a flat monthly rate for their services; others may bill by the hour or based on the number of transactions processed.

A traditional bookkeeping firm may also require a set-up fee, especially if you’re transferring from an in-house system, and may charge a monthly maintenance fee.

When you hire a traditional bookkeeping firm, the normal process is that they’ll offer you a quote upfront, giving you an estimate of how long it will take them to do your books. If your bookkeeping requirements are much more complex than initially estimated, they may also charge extra fees, and your costs might sike considerably.

Is a Traditional Accounting Firm Right for You?

If you’re a small business owner, you’ve no doubt noticed how easy it is for your accounting to get out of hand. You may be wondering whether it makes sense to hire an in-house bookkeeper or contract with an external bookkeeping firm. In our experience, we’ve found that the latter is by far the better option. 

If you want your bookkeeping needs to be taken care of without any hands-on management, then outsourcing is the way to go.  In the case that you have simple books with few transactions that don’t require any specialized expertise, it may be most cost-effective to contract with a traditional bookkeeping firm that can give you a few hours each month at an affordable price.

Even if you do have specialized needs, the right outsourcing firm has access to individuals with your industry expertise.

Contracting with the leading remote accounting firm also saves you money. You typically save about 40 percent of their payroll costs by hiring an in-house bookkeeper or accountant. You don’t pay for benefits, vacation time, or sick days.

On the surface, contracting with a new-age accounting firm has many advantages. You can hire an expert in the field, and you can work together to decide on a flat fee that will cover all your needs. 

What It Costs to Work With an Online Bookkeeping Service Provider

Hiring an in-house bookkeeper seems like the most cost-effective way to keep track of your finances. But there are several hidden costs that you may not have considered that make an online bookkeeping service a much more attractive alternative.

Online bookkeeping services are a great way to save money on your business’s bookkeeping and accounting needs. When you work with an online bookkeeper, you keep your costs down because there’s no need to pay benefits or payroll taxes, and they’re able to handle your books remotely, so there’s no overhead associated with their office space.

Online bookkeepers can handle everything from general bookkeeping to tax preparation and everything in between.

The best online bookkeepers, like Finance Hire also offer a free initial consultation where they’ll talk through your needs as a business and help you decide which service is perfect for you. That’s something that traditional in-house hiring processes just can’t do.

Is an Online Bookkeeping Service Right for You?

If you’re considering hiring a bookkeeper, you might be wondering if an outsourced accounting firm is right for your business. An online accounting service can help your business in many ways. It means you won’t have to pay a salary and benefits to an in-house accountant. Instead, you’ll be spending a get the benefits of a full-time bookkeeper at a fraction of the cost.

This means that when times are good, and you don’t need as much attention from them, you don’t have to worry about paying for their downtime. It also means that when times are busy, and you need more help, they are ready to keep up with your company’s growth, without the need of hiring more and more bookkeepers.

In addition to saving money on payroll, an online bookkeeping service will save you time. You won’t have to train anyone or answer questions—you just hand over your paperwork, and they take care of everything else. You can focus on what matters: running your company.

Best Chart of Accounts Structure

Chart of Accounts Finance Hire

The chart of accounts structure is the skeleton of your accounting system. It’s the way you organize your finances and categorize transactions, and it’s a key component of your accounting software.

While not every business has the same chart of accounts, some best practices can help your accounting processes run more smoothly. 

If you haven’t set up your chart of accounts yet, or if you’re looking to streamline an existing one, here are some guidelines to follow.

What Is the Chart of Accounts, and Why Is It Important?

A chart of accounts lists all the reports that make up your business’s financial records. It groups them into categories, like assets and liabilities, to see what you own (assets) and what you owe (liabilities). It also lists your income and expenses in separate categories to help you track how much money your business is making or losing.

Your chart of accounts helps keep your accounting books in order by tracking specific transactions, such as payroll, expenses, inventory costs, and other transactions.

These accounts are then used to prepare your business’s financial statements. You can use accounting software to automatically generate a chart of funds based on your business type.

Accountants commonly use the chart of accounts to prepare financial statements. These financial statements are then used by various stakeholders, such as investors and creditors, to analyze a company’s finances and make business decisions about whether or not to invest or extend credit to it.

The chart of accounts is important because it is the foundation for all your other financial reports. It drives what shows up on your income statement, balance sheet, and cash flow statement. You’ll want to ensure that you have all the accounts that apply to your business set up in the correct order.

How should you use the Chart of Accounts?

  • To categorize every transaction in your business.
  • As a tool for analyzing past performance and planning future strategies
  • To identify where you are making money and where you are losing money

Use Chart of Accounts Best Practices

A well-designed chart of accounts allows management to make decisions based on accurate reports. Inaccurate or poorly categorized statements can lead to reporting issues and may indicate that management needs to change its bookkeeping procedures.

A “numeric” structure is a “numeric” structure, meaning each account has a unique number assigned to it. These are often three to five digits long, with different categories posted with varying ranges of numbers. Anyone looking through the general ledger can find every transaction for a specific account.

A good chart of accounts has a numbering system that allows new account numbers to be added easily between existing ones without renouncing all subsequent account numbers. This makes it easy to add unique or detailed account numbers without disrupting existing reporting processes. 

Which type is right for your small business depends on your industry and business model, but there are some common patterns you can use to set up your chart of accounts. A typical accounting system uses the following:

1000’s: Current asset accounts, including all cash accounts (savings/checking accounts) and accounts receivable, prepaid, and fixed assets.

2000’s: Liabilities including anything in accounts payable, accrued expenses, notes payable, and other liability accounts.

3000’s: Owner’s equity accounts, including common stock and preferred stock and any funding-related capital.

4000’s: Income statement accounts that cover sales and revenue.

5000’s: Cost of revenue accounts, including support, hosting expenses, and third-party transaction fees.

6000’s: Accounts for operating expenses from salaries, rent, etc.

7000’s: Other income from interest, rent gains on the sale of assets, and gains from foreign exchange transactions.

8000’s: Other expenses from income taxes and interest.

A number like 1000 could represent an asset account. Subaccounts under 1000 might start with 1001 (a checking account), 1002 (a savings account), or 1003 (a second savings account). You can create subaccounts under 1001-01 for a checking account for business expenses or 1002-02 for your savings account where you save money for taxes.

Align Your Chart of Accounts With How You Want to View the Business

Every business is different, and your chart of accounts must reflect how you want to view your business. If you’re unsure what the best structure for your chart of accounts is, consider how you want to see your business. You’ll probably have one income account if you wish to view your business by location. If you’re interested in seeing expenses by department, you might have one expense account.

It’s also a good idea to consider how many different reports you’ll be running. Having just a few categories might be acceptable if you only need a few standard reports like a balance sheet and an income statement. On the other hand, if you need more complex information or if the nature of your business requires a systematic analysis of different segments, then breaking up your chart of accounts into more subcategories will be helpful.

It’s essential to align your chart of accounts with how you want to view the business. When you know what metrics are critical to your business, you’ll better understand how to categorize expenses in your accounting system. This will give you better data and improved reporting.

If you’re not sure where to start, here’s an example chart of accounts for a small company:

1000 Cash Assets

1100 Accounts Receivable Assets

1200 Inventory Assets

1400 Investment Accounts

1500 Fixed Asset/Depreciation

2000 Accounts Payable

2100 Credit Card

2300 Sales Tax Payable

2400 Accrued Expenses

2500 Current Portion of Long-Term Liability Liabilities

2700 Long-Term Liabilities Liabilities

Follow GAAP but Focus on the Business

You know that it is essential to follow the Generally Accepted Accounting Principles (GAAP) when creating your chart of accounts. But it’s also true that your chart of account structure has to be tailored to your business.

The GAAP-approved guidelines provide a framework for structuring a chart of accounts, but they shouldn’t be used as a checklist.

Your goal should be to create a structure that makes sense for your company and that you can use over the long term. Review your list regularly, make sure it is designed for long-term use, and don’t spend too much time tweaking an account that isn’t critical to your business’s goals.

Scalability and Flexibility Are Key

When you’re setting up your chart of accounts, it’s best to plan. You want to build something that will grow with you, so you want to make sure your structure is scalable and flexible. This will help you keep your records organized as you grow and expand.

You’ll also need to decide how detailed your chart of accounts will be. Some companies opt for a simple structure with fewer accounts, while others may have a highly complex system with hundreds of accounts.

The size and complexity of your business will help determine the best strategy for you.

Logical Account Numbering

Accounting is all about organization, so having a systematic way of numbering your accounts. One easy method to use is to give your accounts numbers based on the account type and its order in the Chart of Accounts.

For example, suppose you have three different types of revenue accounts (e.g., sales, service fees, and other revenue). You could number them 100, 200, and 300, respectively—and you’d number the individual accounts within these categories accordingly. So your sales accounts might be 101, 102, and 103; your service fee accounts 201 and 202; and so on.

Having your accounts ordered this way makes it easier to find things in reports because they’ll be grouped visually—for example, when you’re looking at an income statement.

Standardization Will Save the Day

One of the most important benefits of setting up your chart of accounts correctly is that it will be easier to pull accurate reports later. If you have a standard numbering system, you can sort your accounts by number and quickly find what you’re looking for.

This is especially helpful if you have multiple people working on your books since they’ll all know which account to look in when they need information. It makes things easier for everyone, and it’ll save you time and money down the road when you don’t have to hire someone who knows how to fix messed-up charts of accounts.

When you standardize your chart of accounts, you’re making your accounting and bookkeeping processes more straightforward, accurate, and stressful.

Your information will be more organized, which means everyone can access it. If a person leaves your organization, another is trained to step in seamlessly. If you switch software platforms, the transition will go much more smoothly.

Make Department Tagging a Top Priority

For most companies, having a helpful chart of accounts structure depends on being able to tag each transaction with the appropriate department. Many organizations have adopted a “tagging” system for transactions, which allows them to create reports that would otherwise be impossible or very difficult to make.

Unfortunately, this tagging is done manually and by different people in different ways for many companies – resulting in inconsistent reporting. Ensure you have a strategic and consistent approach for tagging.

To ensure that you’re getting the full benefit from your chart of accounts structure and your reporting capabilities, it’s best to prioritize department tagging. It might be helpful to start by creating a list of all the departments in your organization and then brainstorming how each type of transaction could be tagged based on its primary purpose.

Nail Down Cost of Revenue vs. Operating Expense

The first step in creating a chart of accounts is to nail down your cost of goods sold (COGS) or cost of revenue and separate it from operating expenses.

COGS includes all costs you incur to deliver your goods or services, including labor, materials, shipping, and overhead.

Operating expenses are everything else that’s not COGS. This includes rent, office supplies, marketing costs, accounting fees, travel, payroll for non-production employees, and professional development for non-production employees.

The more information you can track in your COGS account, the better. For example, if you make products and sell them to customers, you should follow the billable hours of your production team and the cost of materials used per product. You can also track shipping and overhead as line items in the COGS account.

Once you have your COGS sorted out, it’s time to start building out the rest of your chart of accounts. The best way to do this is to think about how you plan on using financial reports as part of your business management process.

A Clean General Ledger Helps Business Scale

There are many ways to organize your chart of accounts. The most important thing to remember is that the chart of accounts is a tool for you to use, so you should set it up in a way that helps you understand your business’s financial performance.

One thing to consider is whether to include account numbers and how long they should be. Account numbers are used in accounting software and can save time searching for specific accounts. They also help ensure the correct account is selected when entering transactions because the name alone might not be enough to tell the difference between similar accounts.

One of the best ways to successfully use a chart of accounts is to follow certain best practices established by similar businesses. These practices include:

  • Funds should be in alphabetical order.
  • Assets should be listed first, followed by liabilities and then equity.
  • Accounts used more often should be assigned lower account numbers than those used less often.
  • The use of subaccounts is encouraged.
  • Account numbers should be able to accommodate future growth by including extra digits at the end of the number.
  • Each new account added should have a unique account number; do not skip numbers when adding funds to an existing group.

A well-designed chart of accounts allows management to make decisions based on accurate reports. Inaccurate or poorly categorized statements can lead to reporting issues and may indicate that management needs to change its bookkeeping procedures.

How to Manage SAAS Revenue Recognition for Your Startup

Programmer Coding SaaS Revenue Finance Hire

Growing a SAAS business is exciting — especially when you see all the cash rolling in. Knowing how to account for this revenue can be tricky.

Do you account for these invoices and funds as they are received, or do you allow a buffer period? While these questions might seem straightforward at first glance, a couple of other factors can affect revenue recognition.

You must understand when your company recognizes revenue. If your account for the money from your contracts as revenue inappropriately, you’ll risk having an inaccurate understanding of your company’s actual profits.

If you’re in the software-as-a-service (SaaS), you’ll want to understand how to manage SaaS revenue recognition properly. You might already know that revenue recognition is tricky, challenging, and complicated. 

However, the complexity of the topic doesn’t mean it shouldn’t be done correctly. This post will cover everything you need to know to manage your SaaS revenue recognition for your startup.

What Is Revenue Recognition?

Revenue recognition is the process of accounting for revenue in the period it’s earned. It is essentially when revenue is recognized and brought into the company’s income statement.

From a more technical standpoint, it involves evaluating which transactions should be recorded as sales and when they should be recorded.

Revenue recognition can be complicated for SaaS businesses because they usually provide software as a service instead of a single product. They also offer subscription services that are typically paid regularly. Because of this, it’s difficult to determine when revenue has been earned and can be recognized.

Proper revenue recognition is essential because it has a significant impact on how much money you’re bringing in, how well you’re doing compared to past months/years, and what kind of information investors can see about your startup. For this reason, revenue recognition is essential for understanding how well a business is doing financially.

To help you understand how revenue recognition can be tricky, consider this. You have a customer who agrees to pay you for a service subscription of $1,000 each month for a yearly contract worth $12,000. Should you recognize the $12,000 right away? The answer is no.

Your revenue can only be accounted for once the service has been delivered in totality and when the obligations have been met. In this case, only $1,000 in revenue can be recorded each month until the contract expires.

This is where the problem lies with revenue recognition for SaaS companies and stems from the fact that it’s not always an easy process.

Companies often have to judge complex contracts and decide when and how to record revenue. This leads to companies using different methods for revenue recognition, which creates an inconsistency in their reporting.

Monthly Recurring Revenue (MRR) & Annual Recurring Revenue (ARR)

You’ll often hear two terms when talking about SAAS revenue recognition: Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR). These are both essential metrics for understanding your business and its growth.

Monthly recurring revenue is your customers’ subscription revenue each month. It does not include one-time fees or usage-based fees.

Annual recurring revenue is the same as monthly revenue, but it is calculated every year instead of every month.

When you multiply your monthly recurring revenue by 12, you get your annual recurring revenue.

Bookings

Bookings are the total dollar value of a new contract or renewal. They include any money that you have contracted for in the future.

For example, if you sign up a new customer for $500 per month and commit to one year of service, it’s not just $500 this month that you can count on as revenue. You can count on $6,000 for this customer over the next 12 months (more if they renew at the end).

The reason that bookings are so essential is that they help you predict your company’s future revenue. Revenue (also called ARR) is excellent because it gives you an idea of what money is flowing into your business.

However, bookings are like a crystal ball into the future and provide you with insight into what is likely to happen later based on what has happened so far.

Bookings can forecast future revenue and show investors how much money your company has “booked.”

This can be useful when pitching potential investors since it shows them how much money your company has effectively contracted for with its customers over a set period. This also gives them an idea of how much revenue they can expect from your company in the future.

Billings

Billings is the revenue that your company brings in during a particular period. This can be tracked on a monthly, quarterly, or annual basis. Billings can also be defined as the revenue recognized in a given period that has not yet been paid for. 

Many SaaS companies refer to billings as the new revenue they book during a given period. While revenue is the money you’ve earned through selling products or services, billings is the money you’re bringing in through the sales team.

For example, if you sign a customer to a six-month contract worth $1,200, you’ll receive $200 per month. Your revenue is $200 per month for six months for $1,200. However, your billings are $1,200 since that’s the amount of money you bring in from the sales team.

Revenue

Revenue is the total amount of money a company receives from its customers in exchange for the sales of goods or services. Revenue is often referred to as the “top line” because it sits at the top of the income statement. The term contrasts the cost of goods sold (COGS), operating expenses, and other expenses that make up the bottom line on an income statement.

The three main types of revenue are recurring revenue, project revenue, and transactional revenue.

Recurring revenue comes from a consistent source, often from subscription-based products or services; project revenue is based on the delivery of a one-time service, and transactional revenue is typically fee-based for each transaction. 

The difference between revenue and billings is straightforward — it’s just the timing of when you recognize them on your financial statements. Revenue is recognized immediately when earned, while billings are recognized immediately when billed (but before actually being paid).

It’s important to note that revenue recognition doesn’t mean cash received. For example, if you record $100,000 in revenue for a month but haven’t yet received any money from your customer for that work, it’s still recognized as revenue. In this case, you’d have an accounts receivable balance until the customer paid.

It’s also important to know that revenue is not the same as profit. Profit is the amount of leftover money after you deduct all the cost of goods and expenses from your income.

Key Guidelines for SAAS Revenue Recognition

Startups typically have a lot of things to worry about when it comes to revenue recognition.

Fortunately, the Financial Accounting Standards Board (FASB) has provided some key guidelines for SAAS revenue recognition that can help ensure your business appropriately recognizes revenue by Generally Accepted Accounting Principles (GAAP). They are based on these five steps:

Step 1: Identify the contract terms. 

Step 2: Identify the entity’s performance obligations in the contract. 

Step 3: Determine the transaction price. 

Step 4: Allocate the transaction price to the performance obligations in the contract. 

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. 

Key Concepts and Metrics in Revenue Recognition

Now that you’ve got a handle on the basics of revenue recognition, let’s look at some key concepts related to revenue recognition.

Deferred Revenue

Deferred revenue is the money a company has charged its customers for products or services but has not yet delivered.

Deferred revenue is also called unearned or advance income because it occurs when a company receives payment for goods and services that have yet to be delivered.

These goods or services will be delivered in the future, at which point the deferred revenue will then become earned revenue. Deferred revenue is considered a liability on a company’s balance sheet until the obligation is fulfilled, which becomes earned revenue.

For example, if you have a subscription-based business model and charge your customers upfront, you will have both earned and unearned revenue on your balance sheet. Any prepaid subscriptions that you have not delivered yet are considered deferred revenue.

Deferred revenue, or deferred income, is a payment from a customer that has been received by the company but not yet earned. Every time you receive money from a customer, and it’s not yet earned, you need to record it as an asset called “deferred revenue” on your balance sheet. Deferred revenue is considered a liability because it’s an obligation to provide services to your customer in the future.

You’re a software company, and you sell 12-month subscription licenses for $120 per year per user. Your customers pay you upfront before they even use your software. Since they paid you in advance before using your software, this revenue is considered unearned until the services have been provided.

When you receive the money from your customers, you’ll recognize this on your balance sheet as deferred revenue since it represents payments for future services that have not yet been performed.

As soon as your customers start using your software, at the end of each month or quarter, depending on how often you bill them, you’ll recognize some of that deferred revenue as earned revenue by recording sales on your income statement and reducing deferred revenue through journal entries. You’ll continue to do this each month or quarter until all deferred revenue is recognized as sales.

Unbilled Revenue

Unbilled revenue is the value of a signed contract or service yet to be performed. It is also known as deferred revenue, and it is listed on the balance sheet. The income from products or services sold on credit has not yet been billed to a customer.

For example, if a company accepts payment for an annual subscription of $10,000, unbilled revenue will be recorded under liability in the balance sheet.

However, if the company provides the service each month throughout the year ($1,000), $1,000 will be moved to income (after adjusting the liability). The remaining amount in unbilled revenue will still be available to increase revenue when the next month’s services are provided.

The most common way for software companies to generate unbilled revenue is when customers prepay for the service. For example, if a customer signs up for a year of service for $1,200, the company gets paid $1,200 upfront. However, the company can’t recognize that total amount of money as revenue on the income statement because it hasn’t earned it yet — it has to recognize it as revenue over time.

What Is Accrual Accounting?

There are two basic types of accounting methods: accrual and cash-based. Cash-based accounting records transactions when the money changes hands, whereas accrual accounting records transactions when the deal is agreed upon.

For example, if a SaaS startup bills a customer in December, but your customer doesn’t pay until January, a cash-based accounting system would record the transaction in January, but an accrual system would have recorded it in December.

Accrual accounting makes more sense for long-term projects or businesses paid in advance (such as subscription services). If a company signs up 1,000 customers to a subscription service and receives all of the payments, they need to be able to track how much money they’re earning overtime to pay their bills and gauge their growth.

How to Recognize the Three Types of SaaS Revenue

Businesses can generally earn three types of SaaS revenue, i.e., license or user fees, support, and projects. Each of these revenues has specific contract types and obligations, so your business needs to recognize them. 

License or User Fees

License or user fees are what you charge your customers for using your software. Companies that use this system charge per user or seat, and license fees are the most straightforward when it comes to accounting, as they receive payment upfront for the use of their software as a service.

Often these companies will provide tiered pricing schemes based on different service levels, with additional fees tacked on if users exceed storage or bandwidth limits. And some set usage caps at all.

These are usually charged monthly (or annually) per user. If you offer different editions (e.g., Professional vs. Enterprise vs. Ultimate), these will be priced differently. 

The main advantage of this revenue model is that it’s scalable. You get paid every month for as long as your customers use your software, and if more users sign up to use your service, your revenue will increase.

Support

In addition to software licenses, many SaaS companies offer customers support services or technical support at a cost. 

One-time fees can be charged for services like onboarding, training, and additional features that aren’t included in your customers’ subscription plan but are necessary for them to use your service effectively.

Projects

Projects are one-off charges for custom programming or other non-subscription work within an existing contract. For example, if you have a customer who wants to add new functionality to your product and agree to build it for them, you’ll probably bill them separately for that work rather than just adding it to their next renewal cycle.

Aligning COGS With Revenue Recognition for SAAS Companies

Proper revenue recognition is a critical component of a company’s financial statements. It enables investors, management, and the board of directors to make informed decisions about the future direction of the business. 

SaaS companies have to synchronize all costs of goods sold with the recognition of revenue to get a clear picture of the company’s earnings and spending.

Key Challenges of SAAS Revenue Recognition

Revenue recognition is a critical part of your startup’s financial health. With the increasing popularity of SAAS (software as a service) and other subscription-based business models, it can be a significant challenge to manage revenue recognition accurately.

The challenges of managing revenue recognition for your startup include:

Correctly calculating the sale value: It’s essential to correctly calculate the sale value to make sure you’re charging the right amount for your software. This includes ensuring you aren’t undercharging for your product or overstating its capabilities.

Timing of revenue recognition: When you sell a new version of your software, there may be delays between when you start selling it and when you recognize that revenue because there may be different stages in your product’s development cycle where it could take longer than expected to get from one location to another.

The Easiest Way to Ensure Your SaaS Revenue Is Recognized Correctly 

As a SaaS company, you’re probably all too familiar with revenue recognition, as it’s one of the trickiest concepts in accounting and a major topic of discussion. The rules for revenue recognition have changed dramatically in recent years, thanks to new guidance from the Financial Accounting Standards Board (FASB).

The easiest way to ensure your SaaS revenue is recognized correctly is to work with an experienced accounting team. It’s best to work with an experienced accounting firm that has experience managing software revenue recognition.