With your business all set up and ready to run, it is crucial for you to know that your work to nurture the business in the right way hasn’t come to an end. It is now time to look into the bookkeeping part of your company along with the tax recordkeeping.
To begin with, bookkeeping is one of the basic things that runs the firm’s accounting system properly. Recordkeeping in small businesses is essential as these records are used when the company has to file their taxes or show information during an audit of the company. And a bookkeeper is the one who is responsible for recording and arranging the various accounting transactions.
This means that being a business owner, you would have to set up an accounting system for your business or hire someone to do it for you. In this article, we are going to get into bookkeeping and all the aspects of it. Keep reading to understand all about bookkeeping and why you need a bookkeeper for your business.
So, let us start from the beginning, starting from what bookkeeping is all about. From the introduction, you know that bookkeeping is the process of recording and arranging the financial transactions of a business. Basically, the bookkeeper manages all the accounts in the company, makes payments, sends invoices, prepares the financial statements for the company and records all the transactions that take place during the year.
In fact, bookkeeping and accounting are slightly the same, but bookkeeping is more of a base for the accounting process. To understand both, you would have to learn about each separately. This article would help you out in understanding bookkeeping in details, while you can learn all about Accounting here!
Moving ahead, if you are thinking of hiring a bookkeeper, then you need to know that more than 1.8 million Americans work as bookkeepers in the industry where each person earn around $39,000 per year. From this, it can clearly be seen that bookkeeping is an essential part of any company’s accounting system, and a business founder might not be able to fulfill all these duties on their own.
So, why exactly is bookkeeping important?
Bookkeeping is highly crucial for any company that hopes to have a long life in the industry and for long-term success. Fundamentally, to work out the accounts part of your company properly, bookkeeping acts as the most accurate picture of all the ins and outs of your company.
This means that you would need to have the details on all the debts that you owe along with the amount of cash you have in hand. And not only would this help in the accounting aspects and for filing your taxes, but it would also help you in making better plans and decisions for the future of your business.
Proper bookkeeping helps in protecting your company in case of any dispute. Let us take an instance where you are having some trouble with a vendor or the IRS has come for an audit of your company. In this case, if you have all your financials set properly and kept in records, you will be able to get out of the situation without any trouble. On the other hand, if you do not have any clean financial records, you can fall under the risk of paying penalties/settlements to the vendor and tax penalties to the IRS for financial errors that you could have avoided otherwise.
Bookkeeping will also save you a lot of time. From managing the invoices to payroll taxes, an effective bookkeeping service smoothens all the processes for the financial tasks in your business. In short, with this process, you would not have to manually sit down and waste time later on tracking every dollar that came in and out of your business.
What is the process of Bookkeeping in a Business?
Now that you know all about bookkeeping and why it is important for your small business, let us get into the details further. There are four simple steps for recordkeeping in small businesses:
- Set up & manage accounts
- Record every financial transaction
- Balance & close the books
- Prepare financial statements
With all this clear, let us dive deep into all the processes and facts that you need to know about bookkeeping, beginning with record keeping.
Recordkeeping means that you need to keep the records of all the transactions for tax purposes. And good tax recordkeeping is a very important thing. This is because the IRS needs you to keep specific tax records for certain periods. Moreover, by performing good tax recordkeeping, you would not have to panic when the tax time comes around.
In fact, you would be able to use the record keeping to easily record your tax deductions that you might not have otherwise if the records weren’t kept. Also, in case of an audit, bigger problems can come your way. In short, with recordkeeping, you overcome a lot of troubles and are prepared for the many things that comes your way.
But before we can get deeper into this, you need to understand the basic accounts of bookkeeping and tax recordkeeping system – Assets, Income & Expenses. Let us start with assets, liabilities and equity.
Assets, Liabilities & Equity
Let us understand all that comes under assets, liabilities and equity.
To explain each of the three terms:
- Assets: Assets are the things that the company owns like the accounts receivables, cash and inventory. After that, you can see the accounts for the inventory and fixed assets like buildings, land, plant, and equipment. All these are also called tangible assets, which means that you can touch them. On the other hand, firms also have intangible assets like trademarks, patents, and even computer software.
- Liabilities: The liabilities in the company are things that the company owes like the accounts payable to suppliers, mortgages, business, bank loans, and any other debt that the company has. The balance sheet that holds the liability details hold both long-term and current liabilities.
- Current Liabilities (Accruals) – What the business owes in the short term.
- Long-Term Liabilities – These are typically long term loans, such as mortgages or bank loans over one year.
- Equity: Equity (company securities) is the ownership that the shareholders have in the company. The statement for this includes who owns how many securities, how much it costs, along with how much investment they have made in the company, if any.
Balancing the Books
Now that you are clear with the three terms, it is time to balance the books. This means that you would have to track all the items (transaction details included) and carefully record them in the right place. A formula that is used to balance the book is the accounting equation which is:
Assets = Liabilities + Equity
As per the equation, everything that the business owns (assets) is balanced against the claims against the business (which is the liabilities and equity).
The income statement is another part of the tax recordkeeping for small businesses which includes the revenue, cost and expenses. To explain each:
- Revenue is the income that the company gets for selling its services and products.
- Costs is the money that the company spends to manufacture or purchase services or goods that would be used to sell your products or services to the customers. It is also called the cost of goods sold.
- Purchases recordkeeping tracks all the goods that have been purchased by the company.
- Expenses account recordkeeping holds all the money that is spent for operations. It is mostly about the things that are not necessarily related to the product or service sold.
How long to keep records?
Now that you know what recordkeeping is needed in a business, you also need to know that these documents have to be kept for a specific period of time. As per the Internal Revenue Tax Code, you should keep the records always and not discard your records, as it might be needed for the administration of any part of the tax code in the future.
To be clear, if you have employees, it is important to keep the record keeping for more than 4 years. In case you owe any taxes, you should have the records for at least 3 years. In case you own any property, you would have to keep all the associated records until the period of limitations expires for a year where you dispose of the property. In case you have any reportable income and you do not report it, plus it is more than 25% of the total income on the tax return, you would have to keep the records for at least 6 years.
Payroll is an important part of tax recordkeeping in small businesses who have employees. It is the act of recording all employee compensations, keeping track of all the withheld money from the paychecks of the employees, and calculating the employer and employee share of benefits and taxes. And the process of payroll can be completed in four simple steps:
- Hire Employees
- Gather all the important employee documents
- Calculate & record the paychecks
- File and pay the taxes on time
Also, calculating the payroll incorrectly can cause conflict in the workplace. It can cause up to more than one-third of the businesses to face penalties during the tax period. This is one reason why it is important to have the payroll done right so that the taxes you pay to the government is as accurate as possible. It would also help you in enjoying the proper deductions when filing the tax return.
What is Payroll Tax?
Payroll tax is withheld taxes from the paychecks of the employees in a company. There are a lot of tax deductions made from paychecks in the US, but the most common ones include income taxes, Social Security, and Medicare Taxes. These taxes are withheld by the company from their employees paychecks. And when the time comes, the company pays these taxes to the government on behalf of the employees.
The government then uses these payroll taxes to fund programs like workers’ compensation, unemployment compensation, health care, and Social Security. A few local governments also collect the small payroll tax to maintain or improve the local programs and infrastructure.
These deductions are itemized on the pay stub of the employee, allowing them to know how much has been withheld by the company for taxes. Let us talk about the main payroll taxes that are withheld to understand better:
- Income Tax – This is the tax on the earnings made by the individual. As per law, each person (employee) has to file an income tax return annually to figure out their tax obligations. The company mostly has to withhold federal income taxes for the employee and pay it to the government. In case there is any state income taxes, the company would have to withhold the state income taxes as well.
- Social Security Tax – The tax withheld from this goes into the Old-Age and Survivors Insurance (OASI) Trust Fund that is used for paying the survivor and retirement benefits. It also goes into the Disability Insurance Trust Fund that is for disability benefits. It is important for every employee to pay this tax, which is why it withheld from their paychecks by the company.
- Medicare Payroll Tax – This tax is also given to two trust funds – Supplementary Medical Insurance Trust Fund that covers expenses like lab tests, ambulance service and so on, and the Hospital Insurance Trust Fund which takes care of the administrative costs in Medicare.
- Federal Unemployment Tax – This tax is based on the Federal Unemployment Tax Act (FUTA) that permits the government to tax businesses to collect revenue that would then be the state unemployment agencies. The tax is then used to pay unemployed workers who have the eligibility to claim unemployment insurance. As per this Act, the businesses have to file the IRS form 940 (explained below) annually along with paying the applicable tax.
Payroll Tax Forms
Once you have withheld the taxes in the payroll process, the next step of the bookkeeper is to file the respective files for these taxes. To help you understand better, each form that you might need has been briefly explained below:
- IRS I-9 Form – This form is to be filled out by the employer to verify that every employer they have is a US citizen or has the right to work in the USA. This form is filed along with supportive documents like driver’s license, birth certificate, visa, or Social Security card.
- IRS Form W-2 – This is a form filled by the company and given to the employees by letting them know the summary of the wages they received and how much was deducted from it. It has to be given to them by 31st January every year along with the Social Security Administration (SSA).
- IRS Form W-3 – This form is a summary of all the W-2 forms that have been given to the employees. You would also have to give the Social Security Administration along with the form.
- IRS Form W-4 – The W-4 form is for employees to fill and share details on their marital status and number of allowances they want to take for their children and any dependents. Using these details, you would then have to calculate the total amount of income tax that you need to take from their paycheck.
- IRS Form 941 – This form is used to report the Medicare and Social Security Taxes (FICA – Federal Insurance Contributions Act) that is withheld from the employees.
- IRS Form 940 – This is used to file the Federal Unemployment Tax as per FUTA. In this, the employer would have to pay a 6% on the first $7,000 that every employee earns with the form to the government.
- IRS Form 944 – This form is used to report federal income tax along with the FICA tax (Social Security and Medicare taxes) on employee wages. In fact, not all businesses are supposed to file this form. If you are eligible, the IRS would notify you about filing the IRS Form 944. With this form, you notify yourself as responsible to pay the taxes on behalf of the employees once a year and not quarterly (which is filed with the form 941).
Duties of a bookkeeper
From the above, you might have become clear on many things about a bookkeeper. But to help you understand better, a bookkeeper can do anything from:
- Setting up a budget for the company
- Reconciling bank accounts
- Handling quarterly/monthly tax payments and payroll tax payments
- Verifying the credit card statements
- Checking Receipts
- Sending the invoices to vendors and clients
- Categorizing personal and business transactions and expenses
- Preparing the financial reports and taxes for a CPA
- Monthly processing & reporting of Profit & Loss statements and Balance Sheets
In short, all the recordkeeping you can think of is handled by a bookkeeper. To help you understand in detail what tasks are performed by a bookkeeper, the next section will give you a detailed checklist of the duties of a bookkeeper.
Now that you are clear about what a bookkeeper needs to do, let us take a look at the checklist of the bookkeeping tasks that has to be handled in a year by a bookkeeper.
Daily Bookkeeping Tasks
Following are the daily bookkeeping tasks that the bookkeeper would have to perform:
- Check the amount of cash that you have on hand for the business. It is important to know how much you have as every business has to spend money every now and then on little things.
- Keep tabs on all the incoming and outgoing payments.
End of the Month Bookkeeping Tasks
The following are the tasks that are taken care of at the end of every month:
- Payroll – For small businesses, payroll is a must. You can also take the help of an application like Quickbooks or any other accounting software.
- Pay Federal Payroll Taxes – With all the payroll taxes and the payroll withholdings that has been taken care of, you need to pay taxes to the federal government. The forms that you would need includes the form 941 which has been explained above.
- Pay State Withholding Taxes – If you have taxes withheld for the state, you would need to pay them as well. Remember to use the proper forms as per your state.
- Big 3 Financial Statements – Ensure that you keep all the 3 main financial statements ready in the tax recordkeeping file. These would include:
– Cash Flow Statement: This is to determine the financial health of your business.
– Profit & Loss Statement: This is also known as the income statement or the P&L statement. It shows the amount of money you made or lost in the last month.
– Balance Sheet: This shows the detailed list of all the equity, liabilities and assets in the company.
- Review Your Cash Flow & Adjust your Goals – At the end of the month, have a look at how much you have grown and achieved. Set new goals where needed.
End of the Quarter Bookkeeping Tasks
When you reach the quarter of the year, you would need to take care of some additional tasks that include:
- Evaluation of all loss & profit estimates – You need to know where your company stands and eventually plan how to take care of any errors that have been made to make your business better.
- Distributions – Based on your company structure, you might want to take distributions as a supplement with the regular paycheck. But before you decide to do this, ensure that you take advice from a professional.
- State Quarterly Tax Return – Based on the rules of your state, you might have to file quarterly returns. Ensure that you comply with any important rules, if there are any.
- File Form 941 – Although you have the monthly withholding payments, you will still have to file the form 941 (Employer’s Quarterly Tax Return).
- Pay State Unemployment Taxes (SUTA) – Check with your state and pay (if needed) the State Unemployment Taxes on a quarterly basis
- Pay Federal Unemployment Taxes (FUTA) – In case your company has employees, you would have to pay unemployment taxes on a quarterly basis to the federal government through the file IRS Form 940. The details on this tax has been shared above.
- Personal Estimated Taxes – In case you work for yourself, then you would have to pay estimated quarterly income and FICA taxes to the government (that is if your business is not withholding taxes from your salary).
- Pay Quarterly Sales Taxes – Another tax requirement that you might have to fulfil. You can find out more about the taxes that you need to pay from your state government office or lawyer.
End of the Year Bookkeeping Tasks
As soon as the year comes to an end, these are the tasks that you would need to take care of:
- Analyze the Year-end Inventory – Review how the year went for you and plan for the next year.
- Close Your Books – As soon as you have reviewed all the financial details, balance and close your books for the year. Also, ensure that you print a copy of all the 3 big financial statements of your company for the year.
- File W-2s and 1099s via Form W-3 – It is important to file these with the Social Security Administration before March 31. You can register for an account and file at – SocialSecurity.gov/employer.
- Send W-2s and 1099s – In case you have paid contractors or employees in excess of $600 for the year, you need to send them either a 1099-MISC form or a W-2 before January 31 each year.
- File W-2s and 1099s with State – Another form you would need to file with the state is the W-2s and 1099s forms. Check the due date on the form to know more.
- File Business Income Taxes – Based on the business structure, you would have to file the form 1120 (as a corporation), while the S-Corporations should use IRS Form 1120S for the income tax return. Just ensure that you file the forms before the deadline.
Cost of Hiring a Bookkeeper
Let us now talk about the cost of hiring a bookkeeper. Just to be clear, the cost of hiring a bookkeeper would be based on many different variables. Some of things that would be considered is the lifecycle of the company, the company size, number of balances sheets to reconcile, number of employees, how payroll is processed, number of monthly transactions, and many more.
Let us take a look at the four kinds of bookkeepers that you can hire and how much you would spend in hiring each:
1. General bookkeeper
A general bookkeeper is a person who handles all the financial transactions and postings of the company. This person would be able to work either on easy single-entry bookkeeping or more detailed double-entry bookkeeping. Basically, the general bookkeeper has the task of just recordkeeping, posting invoices and payments and handling the monthly bank reconciliations. Hiring a general bookkeeper would cost you about $15-25 an hour, or about $28,000 annually.
2. Full Charge Bookkeeper
The full charge bookkeeper has the same responsibilities like the general bookkeeper. But along with those duties, this person also handles the payroll and financial statements in the company. The salary of this person can be around $30-40 an hour or $35,000 annually, based on the location.
3. Certified bookkeeper
The certified bookkeeper is much more knowledgeable person in bookkeeping and tax recordkeeping for small businesses. This person handles all that the full charge bookkeeper handles and many other daily tasks. The only difference is that the certified bookkeeper must have at least 2 years of proven experience working in the accounting field. Additionally, they should have passed a four-part national exam. The salary of this person again depends on the location. You can expect to pay around $45-75 an hour, or $44,000-$85,000 annually.
4. Outsource your bookkeeping
The last option is to hire a bookkeeper remotely, that is outsource your bookkeeping. As a matter of fact, you would not have to pay them a salary and it would cost you much lower than otherwise. Being a small business, you do not need a full time bookkeeper. By outsourcing your bookkeeping at just $200 or more for a month, you would be able to save money and get much more professional services. Just ensure that you cross-check all about the firm you are hiring for the services.
Having an inhouse or outsourced bookkeeper – Which is better?
From the above, it is a good option to have your bookkeeping taken care of by outsourcing your bookkeeping. This is the best option for small and medium sized businesses as hiring a full time bookkeeper means spending a lot of money. This person would not have worked for most of the week, other than handling the payroll and tax recordkeeping.
Until your company grows and the number of employees increases, it is better to outsource your bookkeeping. Here are some of the reasons why:
- Greater Financial Expertise – You would be able to hire a highly qualified firm to handle the bookkeeping. This would give you the best results you need and you would not have to worry about the bookkeeping.
- Accuracy and Timeliness
- Cost Savings
- Focus on Your Business – With the time & money saved by outsourcing your bookkeeping, you would be able to spend it on your business and grow.
Having a business means that you would have to focus on things that would help you make money. Nonetheless, it is crucial that you do not ignore the need or hiring a bookkeeper for your business. As underpaying or missing deadlines can trigger fines that would eat a lot out of your company’s budget and profit.
We hope that this article helps you to understand all about bookkeeping enough to hire the best candidate for the job. And do not forget, if you are just a startup, the best way to do so is by outsourcing the bookkeeping tasks. It would help you save both time and money. And in case you have not yet started your business and need help with registering it, IncParadise can help you with it. Contact us to know more or visit to learn more about our services!