If you've ever wondered what the differences are between different types of financial service providers, and which ones are the best to hire for your business, this post will help to sort that out for you!
Bookkeeper vs. Accountant — How are they different, and which one is right for you?
When it comes to hiring help related to the financial aspects of your business, there are four primary types of service providers you can choose from:
- Tax Preparer
- Tax Accountant
All four have distinct roles and areas of expertise, and there are rules for each position. The purpose of this post is to help you understand the difference between them, and determine which ones you need to help you make the financial aspects of your business run smoothly.
A bookkeeper organizes the financial information for a business. For example, they enter income and expenses into an accounting system. They may also write checks and deposit money into a bank account.
In many cases, business owners are their own bookkeepers, or they may hire someone to handle bookkeeping for them.
A tax preparer's only role is to prepare your taxes. They don't know the ins and outs of the deeper parts of your business, but are trained to ask some basic questions to get the information they need from you to prepare your taxes. They then take the information you provide them, and put it in the proper place in your tax return.
A CPA has a higher level of knowledge than a bookkeeper or tax accountant, and they have a deeper level of understanding regarding what questions need to be asked regarding the financial aspects of your business.
For example, they may see that you have listed auto expenses, and may ask questions such as, “What's included in auto expenses?” If your answer is, “gas and repairs,” they may suggest that you take a mileage deduction instead of your actual vehicle expenses.
A CPA will also talk you through different scenarios. For instance, if you're a small business owner, they may ask questions such as, “Do you work from home?” If the answer is yes, then they can walk you through different deductions you may be eligible for related to having a home office.
A real advantage to having a CPA is that they know the types of questions to ask to help you maximize deductions.
Tax accountants are highly specialized in the tax field. They can help you maneuver higher end, more complicated situations such as selling a business. They can advise you in how to structure things and make investments in such a way to minimize your tax bill.
Different Rules and Expectations for Different Roles
One of the most important things to understand with each of these roles is that they have different areas of expertise, and in some cases, rules that determine what they can and cannot do.
For example, a bookkeeper can do a lot for a business, and it makes a lot of sense to give a pile of receipts to a bookkeeper to enter into an accounting system, rather than asking an accountant to handle that task; while accountants can handle that task, they charge more, so it's more cost effective to hire a bookkeeper to do that type of task for you.
However, a bookkeeper can't do a lot of things that a CPA can do, such as issuing audited financial statements that are accepted by banks and other organizations.
Consequences of Having Just a Bookkeeper
While having a bookkeeper is a great place to start, since bookkeepers don't have the same level of training or authority, as an accountant, you could get into hot water if the only financial professional you hire is a bookkeeper.
When one of our clients first came to us, they only had a bookkeeper. The bookkeeper came in once a week and spent about three hours doing the books.
The bookkeeper did a fine job as far as her role was concerned, but the company started getting notices from the IRS because they hadn't filed their payroll taxes on time. The bookkeeper simply didn't know that certain forms needed to be filed, so the forms were filed late, which resulted in financial penalties.
Determining What You Need
When deciding what types of financial professionals to hire, it's important to think through what your business actually needs.
One of the best ways to do this is to ask a lot of questions of the people you're considering hiring. For example, if you're talking with a bookkeeper, it would make sense to ask about taxes, and since the bookkeeper isn't qualified to handle taxes, he or she may refer you to a CPA.
It's also important to consider your budget, and what you can afford. For instance, a CPA can enter items into an accounting system for you, but since they charge more than a bookkeeper, they may be able to refer you to a bookkeeper who can handle that aspect for you, at a lower cost.
The great news is that in this day and age, you're not required to work with people only in your own area, since so much can be handled online.
The Bottom Line
The bottom line is that hiring a bookkeeper or entering information yourself into an accounting system is a great place to start, but in order to stay out of hot water and to minimize your tax bill, you will also need to hire, at minimum, a tax preparer or CPA.