Small business accounting

A bookkeeper records your transactions and keeps the books current; an accountant reads those books, prepares tax returns and advises on structure and taxes. Choose a bookkeeper, or accounting software and a regular weekly session of your own, while your transactions are few and simple. Bring in an accountant (a CPA or an enrolled agent) when you hire staff, collect sales tax in more than one state or consider a loan or an investor.

You can if you record every transaction, keep every receipt and reconcile your books with your bank statement each month. Accounting software connected to your business account cuts most of the manual entry, and the Guides group on this page covers bookkeeping basics and expense tracking. Have an accountant review your first year-end books and tax return, since mistakes there carry into the following years.

Set it up before you pay your first employee. You need an employer identification number from the IRS and a registration with your state for withholding and unemployment tax; then you withhold income tax, Social Security and Medicare from each paycheck and deposit them on the IRS schedule. Independent contractors are paid without withholding, so collect each one's taxpayer ID before the first payment for your year-end reporting.

Choose cash if most customers pay you at the time of sale and you want simple books: you record income when it arrives and expenses when you pay them. Choose accrual if you invoice on payment terms or plan to borrow or raise money, since it matches revenue with the costs of earning it. The IRS limits who may use the cash method by average gross receipts and business type, so confirm the current limit with your accountant before your first return.

Keep the records behind every figure on your return: invoices and sales receipts, bank and card statements, receipts for expenses, payroll records and the papers for any equipment or property you buy. The IRS guide on starting a business and keeping records lists how long each kind must be kept. A scan of each receipt, stored with the transaction in your software, is enough for most expenses.

Federal law lets a sole proprietor working under their own name use a personal account. A separate account keeps your records clean and backs up every deduction if the IRS asks, so open one before your first sale. Banks usually ask for your ID, your employer identification number or Social Security number and, if you use a trade name, your assumed name filing. An LLC or a corporation also brings its formation documents.