Key Takeaways
- Accounting fees for small businesses can range from $500 to $5,000 per year
- Fees vary based on your business’s needs
- An accountant is an investment in your business, helping protect you from costly mistakes
- Not choosing the right business structure, misclassifying employees, and making bookkeeping errors and tax compliance mistakes can cost you thousands or even tens of thousands of dollars
- You need to ensure that you hire the best professional, not the cheapest one
Business owners have to wear multiple hats, especially in the first few years of operation. They often juggle sales, marketing, recruitment, human resources, and everything in between, including accounting and taxes. A competent entrepreneur can do a lot, but accounting is one area where they should call in an expert. The tax code around small business taxes is extremely complicated, and unless you’re a tax professional, it can be almost impossible to know all the rules.
Small mistakes such as not tracking revenue properly or forgetting to record expenses can unnecessarily increase your tax burden. More significant errors such as not filing sales tax returns can threaten your business – many states revoke business licenses for not staying compliant with these types of taxes.
Accounting fees for small business owners can look expensive, especially when you’re trying to safeguard resources and maximize profits. These fees, however, are an investment in your business. The accounting and tax compliance mistakes that entrepreneurs make in the first few years of business far outweigh the cost of accounting fees – just check out a tax attorney’s opinion on the benefits of outsourcing your accounting and bookkeeping.
Hiring an accountant can be a daunting process, but to safeguard your business, it’s one of the best decisions you can make. This guide outlines accounting fees for a small business and also covers costly mistakes and how an accountant can help.
What Are the Average Accounting Fees for a Small Business?
The average accounting fees for a small business can vary depending on the size and scope of the business and the type of help needed. A sole proprietor with a simple bookkeeping system, for example, may need to pay only a few hundred dollars per year for tax preparation services. A small business with multiple employees and a complex financial situation, on the other hand, may need to pay several thousand dollars per year.
In general, businesses can expect to pay anywhere from $500 to $5,000 per year for accounting services. The exact amount varies depending on the needs of the business.
Costly Mistakes Often Caused by New Business Owners
Running a business requires you to be an expert in multiple areas, but it’s impossible to know everything. Everyone makes mistakes, but accounting mistakes are often the most costly. Here are some of the profit-gouging mistakes that new business owners often make in the early years of running their organizations:
1. Choosing the Wrong Business Structure
Your business structure has a direct impact on your tax obligations and your liability risk. Sole proprietors and partnerships, for instance, are pass-through entities. That means the business profits flow from their Schedule C or partnership returns to their individual 1040 tax returns.
Thus, they incur both self-employment and income tax on that income. S corporations, in contrast, pay the owner a salary that’s subject to self-employment and income tax, but the rest of the business’s profits are subject only to income tax. The self-employment tax is 15.3%, meaning that you save $153 on every $1,000 of business profits that aren’t subject to that tax. That can really add up.
An S corp, however, is certainly not the right business structure for every situation. Businesses with over 100 stockholders, for example, must register to be C corps – they’re not allowed to be S corps. Sole proprietors and partnerships with low net profits may also not be the right fit to elect to be taxed as an S corp.
You also have to consider the liability risks of different business structures. Sole proprietors are one and the same with their business. The owner is liable if the business faces lawsuits or incurs debts. Forming a limited liability company (LLC) can give you some relief from the risks.
The wrong business structure can lead to unnecessary expenses, undue paperwork burdens, or liability risks. A small business accountant or tax attorney can steer you in the right direction.
2. Not Classifying Employees and Contractors Correctly
The IRS has strict rules on the differences between employees and independent contractors. Paying an independent contractor is easy. You just cut them a check, and at the end of the year, you generate a 1099-NEC if you paid them more than $600. You don’t have to worry about payroll taxes or employee tax forms.
Hiring an employee is a bit more labor intensive, but you cannot just classify someone as an independent contractor to save time or money. They must meet the criteria. The basics are that they must control how and when they perform their work. They may even need to provide their own tools and assume the risk of profit or loss.
Misclassification can lead to a significant tax bill and penalties. You may end up on the hook for Social Security contributions, Medicare premiums, federal unemployment insurance, and state unemployment insurance if the government discovers that you’ve classified an employee as an independent contractor. You may also have to pay sick leave and vacation pay if required in your state.
An accountant can help you ensure that you classify your workers correctly. This helps you to minimize your tax and paperwork burden up front, and it also ensures you don’t incur an unexpected bill for taxes and benefits down the road.
3. Failing to File or Pay Employer Tax Returns
Employers have to make monthly deposits for the Social Security, Medicare, and federal income tax withheld from their employees’ checks, and they also have to pay the employer amount for Social Security and Medicare. Late deposits can lead to late fees.
Businesses also have to file quarterly reports to summarize these taxes. Failure to deposit the taxes withheld from their employees’ taxes can be very expensive. The IRS assesses the trust fund recovery penalty to employers who don’t pay these taxes, and it is 100% of the tax.
This mistake can double your tax bill. You’ll also incur interest on the unpaid balance. An accountant will help to ensure that you make your payments and file your returns on time.
4. Recording Bookkeeping Errors
Bookkeeping can be complicated, and small mistakes can lead to big issues. Say that a bookkeeper mistakenly classifies a $100,000 loan as business revenue. They include this amount as sales when they file their sales tax return, artificially inflating their sales tax liability.
A mistake like this can have grave consequences. The business would pay $7,000 in extra sales tax if it was in an area with a 7% sales tax rate – even more in an area with a higher tax rate. A professional accountant can ensure that these types of mistakes don’t happen.
5. Making Mistakes on Business Tax Returns
Businesses report their revenue and expenses on their tax returns, and the difference is their taxable profit. That’s the simple explanation of a business tax return, but the details can be a lot more complicated. You need to know how to deal with everything from employee taxes to gift card sales to sales tax payments. That’s just the beginning.
There are also lots of unique deductions and credits for business owners. Sole proprietors and self-employed people, for example, can write off the cost of their health insurance as a business expense even if they don’t pay for it through the business. Many businesses qualify for tax credits that change on an annual basis.
Business owners who do their own tax returns often overlook deductions or credits. They frequently make mistakes that either increase their tax liability or put them at risk of noncompliance. A small business accountant can help to protect you from these mistakes.
Accounting and bookkeeping errors can soak up a significant portion of your revenue. Extreme mistakes can even obliterate your profits. Small business accounting fees help to protect your business from these unnecessary costs.
How to Optimize Accounting Fees for a Small Business
Accounting fees are an investment in the financial health of your business, but that doesn’t mean you should blindly throw money at an accounting professional. You need to ensure you optimize what you spend. Keep these tips in mind.
1. Look for an Experienced Small Business Accountant
Accountants all have different areas of expertise. You need someone who understands the nuances of small business accounting. Talk with an accountant about their experience, and read customer reviews before you hire them.
2. Schedule a Consultation to Talk About Your Needs
Most accountants offer a free consultation when you first contact them. Take advantage of this opportunity. Talk with them about your needs, and see if the services they offer are a good fit for you.
3. Identify What You Can Do In House
You may be able to handle many accounting tasks in house but outsource others. Many businesses, for example, do their own bookkeeping, but they pay someone to file their tax forms. Others pay someone to help them get set up on QuickBooks, but once they know the ropes, they do it themselves.
4. Automate as Much as Possible
Automation reduces errors and saves time. Identify as many tasks as possible that you can automate. You may be able to sync your payroll and bookkeeping software, for example, so that you don’t have to manually enter payroll numbers into your accounting journal.
Automation reduces the number of tasks you need to hire an accountant for, but at the same time, it reduces your in-house burden as well.
Your business’s financial situation will change as your business grows and develops. The accounting and tax practices that work in the first few years may need to be altered as time goes by. Check in with an accountant on a regular basis to ensure you are optimizing your finances. They can let you know when you need to change your approach.
Mistakes to Avoid When Hiring a Small Business Accountant
Your accountant plays an extremely important role in your business. They help keep you compliant with tax regulations. They also ensure you’re not paying more tax than you should. They can also provide advisory services to help you make effective financial decisions for your business. Avoid the following common errors when hiring an accountant:
- Going for the cheapest option: Don’t choose a subpar professional just because they offer the lowest fees. Look for pricing that is competitive, not cheap. You need someone with the experience to drive your finances in the right direction.
- Not hiring someone with the right credentials: An accountant is anyone with an accounting degree. They don’t have a professional license. A certified public accountant (CPA), in contrast, has to pass an extensive exam and complete continuing education credits every year. They also have to abide by the ethical rules of Circular 230. Note that usually only CPAs, tax lawyers, and enrolled agents can represent you in front of tax agencies.
- Doing everything yourself: You can do some bookkeeping and accounting tasks on your own, but doing everything on your own to save money will cost you in the long run.
The biggest mistake you can make is to ignore your accounting. Financial habits, not income, play the most significant role in financial wellness. This applies to both personal and business finances. You need strong financial habits if you want to safeguard your assets, maximize your profits, and stay compliant with tax obligations.
Get Help From the Silver Tax Group
We can help you with your small business accounting needs. We offer consulting services to help you identify your tax needs and plan for future tax liabilities. We can also help you if you’re dealing with unfiled tax returns, tax debts, IRS audits, or emergency tax needs. Just contact us at the Silver Tax Group today to learn more.
Don’t let accounting errors put your profits at risk. Hire a small business accountant to help you today – their fees for services are worth it to help you avoid costly errors and mistakes.
