General Accounting

What is a Virtual Accountant & Should my Business Have one?

Virtual Accountant

By Austin Miller, Content Marketing Manager

The Term Virtual Accountant might sound like something plucked from a George Orwell novel, but that couldn't be farther from the truth. They are very present, very real, and perhaps most importantlythey are very human.

 Via  Giphy

Via Giphy

What is a Virtual Accountant?

Thankfully, having a virtual accountant is not like having a nerdier version Siri, it's a cocktail of remote accountants working in sync with technology to bring you a seamless experience that doesn't require you do to any work. 

How it Works

Now each virtual accounting company might do things differently, but based off our own online bookkeeping service—the sign up process should be relatively easy. We'll use our sign up model to give you an idea of how it works:

Step 1: Sync Your Account

The first step in the onboarding process is to sync your bank account to the software so that your transactions automatically get imported into the software. Our accountants get read-only access, meaning they can't actually touch your money, but they can categorize the transactions (thus, bookkeeping). Our software syncs with hundreds of thousands of institutions, so likely there won't be any problems.

Step 2: Customize Your Preferences

Once you get your account synced up, you'll get a demo from one of our accountants. During this demo, you'll learn the nuances of our software, and we will learn the nuances of your business. Most importantly, we'll create custom rules around your preferences. Would you like something categorized a certain way? No problem. We'll make sure the software knows that so you never have to worry about it again.

Step 3: Relax + Stay in Touch

After the onboarding process, our software will be able to do most of the work automatically. But don't worry, every business owner is assigned a remote bookkeeper who reviews the work to make sure it's up to your standard.

If you ever have questions or concerns, you can text, email, live chat, or call your bookkeeper anytime to get feedback, advice, or even answers about tax strategy.

bookkeeping software

Is a virtual accountant right for my business?

Since we're in the business of providing online bookkeeping services for small business, we are definitely a little bias. But truth be told, we wouldn't have built a business around this product unless we didn't think it provided tremendous value to entrepreneurs.

In fact, the idea of Bookly came about when our CEO Zach Olson was the humble owner of a skate shop. Olson saw the pains of trying to run a business using traditional accounting solutions (the slow turnaround times, hourly fees for consultations, outdatedness and lack of tech) and decided to do something about that. Whether or not virtual accounting is a good fit for your business, depends on your understanding of the "Bookkeeping Trinity."

The Bookkeeping 'Trinity'

When it comes to bookkeeping frameworks, there are three main options AKA the “Bookkeeping Trinity." Here's how each one works, and what it means for your business.

The 'Traditional' Method

remote bookkeeping companies

The most traditional method of bookkeeping is to hire an accountant or accounting firm. (We’re talking local mom and pop shops and freelancers.) These guys offer great benefits over the DIY self method—like the fact that you’ll barely have to lift a finger and you’ll also be privy to expert insight (pending they’re qualifications of course).

Of course there are also some drawbacks such as higher fees and slow turn around times. Many of these places charge high hourly fees for consultations which can make it difficult to set a steady course for your monthly budget, not to mention their services can often be “behind the times” in terms of integrating technology.

When it comes to the traditional method, business owners will have to consider whether or not they want to hire an in-house bookkeeper or an external accounting firm. Both methods can be expensive with hourly consulting fees and salary/benefit considerations for in-house hires. In-house accountants can be a solid option if you own a large operation and need constant oversight. Smaller businesses however, might find that the costs don’t outweigh the rewards when it comes to hiring a full-time accountant.

The 'Semi-Traditional' Method

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Via Giphy

DIY software is an increasingly popular option, giving business owners a great UI to track their finances. Companies like Quickbooks and Xero provide robust software that can help facilitate advanced accounting functions. Not only are many of these types of tools extremely helpful, they can also save money when it comes to hiring a traditional accountant. Although this is a great option for accountants, it may not be optimal for business owners.

Having a good piece of software doesn’t make you knowledgeable about the US tax code, regulations or requirements. Business owners can miss out on deductions, disqualify themselves as a compliant business, and face IRS auditing through improper tax filing. Having simply taken an accounting class in college is no substitute for the wealth of knowledge an accountant brings to the table.

Even if you feel confident enough in your accounting, there is still the consideration of time. Anyone who has started a business knows that they will soon find themselves being pulled in lot’s of different directions. Bookkeeping is a time consuming task—business owners need to ask if reconciling transactions is the best use of their time.

The 'Virtual Accountant' Method

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Via Giphy

The third and final option (which no suprise, we’re big proponents of), is software as a service options. This hybrid option has been hailed as "the future of small business accounting" and provides the best of both worlds, giving users access to customized software as well as a dedicated bookkeeper. Instead of having to reconcile your own transactions, a bookkeeper (accountant) will do it for you. Some of these services like Bookly, offer unlimited consultation at no hourly cost. Instead they prefer the more modern “Netflix” model of a monthly flat-rate fee. This gives business owners comfort, knowing the can reach out for advice without fear of incurring extra costs and make more accurate monthly budget predictions.

This option will not be for everyone, for example—extremely large and complicated corporations or accounting firms (just covering our bases). However for the other 90% of business owners—this bookkeeping framework is likely to be the most inclusive and cost effective. It offers all of the good (and more) of the aforementioned methods without the bad. The hybrid mixture of cloud-based tech combined with a human element of a bookkeeper takes away the headache of navigating tax law and entering data—while still providing a high touch high tech solution.

Where Should I set up my Business?

north east city

Where should I set up my business?

Now that you have decided to form an LLC or Corporation, the next step is to determine to either set it up in your home state (physical location) or choose another state. This is a decision you should not make lightly or do it because "someone" said it was a good idea without investigating how it will effect you and your business specifically. 

For most small businesses there are two factors to considered when deciding where to form your LLC or Corporation: 

  • Cost of forming in your home state vs. the cost of forming in another state and foreign registering to do business in your home state. 
  • Taxation & Requirements of both states of registration.

1. Home state incorporation vs. foreign registration

If your business is owned by one or a couple members/shareholders and its primary business activity is conducted within your home state it is typically most efficient to register in your home state. This is usually more cost effective than registering your entity in another state and then registering as a foreign entity to do business in your home state. 

2. Requirements and taxation

Before registering in a foreign state it’s a good idea to research that state’s ongoing business requirements as well as general state taxation requirements. A company that foreign registers to do business in another state is subject to filing taxes and annual report fees in both states. 

Another factor to be aware of is the potential of litigation in each state you are registered to do business in.

What is a Resident Agent?

resident agent

About the Resident Agent (RA)

When you register a new or existing entity to transact business in any state you are required to have a Resident Agent in that state. The function of a Resident Agent is new to most business owners. Below is a summary of what a Resident Agent is and what role he plays for your business. 

A Resident Agent serves as the legal point of contant for "Service of Process". Essentially all important legal and tax documents are sent to the RA on behalf of a business. 

Resident Agent requirements:

  • Physical Address. The RA must be available during normal business hours and have a physical address in the state P.O. boxes and private rented mailboxes are not accepted as a physical address.
  • Publicly-Accessible. The RA’s address must be open to the public. 
  • Appointed Resident Agent. Individuals can act as the RA for your business. However, your company can't act as its own RA. 
  • Resident Agent Service Provider. Tax Alli can act as your professional resident agent service provider.

*A Resident Agent is also know as a Registered Agent or just RA for short.

How Does an LLC Work?

woman filing taxes

How many people are needed to form an LLC?

There is no rule that requires an LLC to have a certain number of members or to use specific titles such as President, Vice President, Secretary etc. However, the IRS does allow one-member LLCs (single member LLC) to qualify as a pass-through entity. 

How is an LLC managed?

An LLC may either be managed by its members (member managed) or managed by selected managers (manager managed). If the LLC is managed by its members, each member will have an equal vote in the company decision-making process based on their individual stake. If the members elect a manager or managers they will be in charge of the daily affairs of the LLC. 

If managers are not selected in the Articles of Organization the LLC will default into member management. 

What is the organizational structure of an LLC?

An LLC is owned by members. A member's ownership is represented by membership interest, which is either in a percentage or units reflected on a member certificate. 

How is a limited liability company (LLC) taxed?

After organization, by default the IRS will tax an LLC as a disregarded entity, however an LLC can elect to be taxed as an S corporation by filing Form 2553 or elect to be taxed as a C corporation by filing form 8832. 

LLCs are also subject to any franchise taxes imposed by the state. Franchise taxes are typically due annually, and the amount will vary by state. *California LLCs are subject to an annual minimum franchise tax of $800 per year. The first payment must be made within 3 months of forming your LLC. The state will send a bill to remind you to make this payment.

What is Required to set up an LLC?

working woman

How do you form an LLC?

In order to register a business as an LLC, Articles of Organization must be filed with the Office of the Secretary of State and the necessary filing fees paid. After organization, by default the IRS will tax an LLC as a disregarded entity, however an LLC can elect to be taxed as an S corporation by filing Form 2553 or elect to be taxed as a C corporation by filing form 8832. 

What is a publication requirement?

There are a handful of states that require a notice to be published in a public newspaper that you hav e formed an LLC. States with this requirement include: 

  • Arizona
  • Nebraska
  • *New York

*A New York, limited liability company is required to publish notice of their formation in two seperate New York newspapers and to file proof of publication with the Department of State within 120 days. The publication is made at the county level in two newspapers. If you fail to publish the required information by the deadline the state reserves the right to prohibit you from conducting business.

LLC vs. S Corporation

woman thinking

For most small business owners choosing between an LLC and an S Corporation is the most common dilemma when picking a business structure. You should consider the advantages of both the LLC and S Corporation before you make your pick. Selecting the right structure from the start can help you maximize your chances for success. Here is a break down of the major differences to help you compare the two:

First, let's look at what is similar

  • Limited liability protection. Both entities offer a level of liability protection.
  • Separate entities. Both entities legally separate the owner(s) from the business.
  • Pass-through taxation. Both entities can be taxed as pass through entities. *LLCs require a special IRS tax election (additional filing)
  • Ongoing state requirements. Both entities are subject to filing annual reports and paying renewal fees.

What is Different?

IRS restrictions

  • S Corporations can have no more than 100 shareholders vs. LLCs can have an unlimited number of members;
  • S Corporations may not have non-U.S. citizens/residents as shareholders vs. Non-U.S. citizens/residents can be members of LLCs
  • S Corporations cannot be owned by other entities, such as Corporations or LLCs vs. LLCs may be owned by other entities

Maintenance

  • S corporations are required to: Adopt bylaws, issue stock, hold initial and annual director and shareholder meetings, and keep meeting minutes with corporate records.
  • It is recommended, not required that LLCs: Adopt an operating agreement, issue membership shares, hold and document annual member meetings/manager meetings and document all major company decisions.

Management

  • S Corporations encompass directors, officers and shareholders. A board of directors oversees corporate affairs and handles major decisions whereas the daily operations are managed by elected officers i.e. CEO, CFO, CIO etc.
  • LLCs can either opt to have members or managers manage the LLC. A member managed LLC is similar to a general partnership. Decisions are made in a consensus of all members usually by a vote. Whereas a manager managed LLC is similar to a corporation leaving members to act as more of a board of directors. 

Lifespan

  • S Corporations are perpetual and are not required to list a dissolution date.
  • LLCs in most states are required to list a dissolution date. Typically you can request an LLC to last for 99 years.

 

Can I Deduct my new Armani Suit as a Business Expense?

can I claim a suit as a business expense

Now that you’re a small business owner, it’s time to step up your game when choosing clothing. After all, you can’t meet potential clients for coffee wearing break-away sweat pants. So you head out to the mall to pick up an Armani suit or two. Since you’re doing this for your business, it’s tax deductible. Right? Sadly, the IRS small business deduction for clothing doesn’t work like that. 

Can I deduct Clothes as a Business Expense?

It's true that you can deduct the amount you spent on the purchase and upkeep of work clothes, but your clothing must meet two requirements before you can claim the costs as an “other expense” on the Schedule C tax form where you report self-employment income and expenses: 

• You must wear them as a condition of your employment. 

• The clothes cannot be suitable for everyday wear. 

Taking a look at these conditions, it looks like you won’t be able to write off those designer suits, since they wouldn’t be distinctive enough to meet these requirements. So no, you can’t write them off. Are your clothes a requirement for your job? But wait, there’s more. Just because some clothing might be distinctive, that is not enough for the write-off. Your employer must specifically require you to wear it as part of your job. 

Additionally, you cannot make the claim that since you do not wear the clothing away from work, you should be able to deduct its costs. Part of the distinctiveness test is that the clothing must not be suitable for taking the place of your regular clothing. Say, for instance, that you are a real estate agent. You probably dress up a bit to show properties to your clients and to attend open houses. If you were walking down the street wearing the Armani suit you wore to a showing earlier in the day, would someone be able to tell you’re a real estate agent for a particular agency? Probably not -- so the clothing would not be deductible. But let's say you’re in the medical profession and wear scrubs. You probably wouldn’t wear your scrubs (given a choice) out to dinner or to the movies. And other people would likely identify you as a member of the healthcare field because of your clothing. So, read on… Yes, this is clothing you can deduct. 

Final Thoughts on Claiming Clothes as a Business Expense

The cost of some types of protective clothing worn on the job -- like safety shoes or boots, safety glasses, hard hats, and work gloves -- can be deducted on your return. You would have to list your profession on your return as the type of work that requires this kind of clothing, such as if you were a carpenter, electrician, steamfitter, someone who works with chemicals, or a fishing boat crew member. The rules on when you can deduct the cost of work clothing can be confusing. If you do run across something that you don’t understand, check with a good accountant who can advise you. It is better to understand all your options rather than making a rash decision about a potential tax deduction.

5 Things You Don't Want to Say to Your Accountant (But Should)

bowtie

Talking about finances can be difficult for anyone. But just as you should always tell your doctor your symptoms (no matter how embarrassing) or your spouse what’s really bothering you, you should always be open, honest and truthful with your accountant. 

Here are five things you might not want to say to your accountant, but that you really should: 

1. You’re running late on your taxes

Nobody likes to miss a deadline, especially a small business owner who prides herself on her tireless work ethic. But sometimes you’ll simply need more time to get all of your numbers together. And there’s nothing wrong with that! But your accountant needs to know ahead of time so that she can help you make the right financial moves – and avoid fines and penalties. Did you know that practically everyone can get a tax deadline extension beyond April 15th (March 15th if you’re a corporation) and all it really takes is a simple form you can submit electronically? 

2. You made a mistake

Maybe you cashed out your 401(k) or accidentally bought a business asset for more than it was worth. It can be embarrassing to admit that you aren’t as money savvy as you thought you were. Tell your accountant – and tell him as soon as possible. He can give you advice to mitigate the harm. Just don’t wait until tax filing time. By then it might be too late to make the right tax moves within the taxable year. 

3. You aren’t making money

Making big bucks is another point of pride for small business owners. But some quarters, or even some years, just aren’t as flush as others. Once again, don’t be afraid to tell your accountant and tell her quickly. If you’re just starting out, she’ll be able to help you determine write-offs like startup costs. Even if you’ve been in business for a while and things have taken a downturn, she’ll have savvy financial advice. 

4. You don’t understand something

Depreciate what? If your accountant is making a move that you don’t understand, speak up and ask! Ultimately you, not your accountant, are responsible for any financial moves you make or tax returns that you file. Don’t keep silent and find yourself in bigger trouble later. 

5. Something seems unimportant

Did your brother-in-law move in and start spending his nights on a couch in your home office? Uh oh. While this may not seem like important information to share with your accountant, it can actually have big implications on your tax return, since that means you could lose your hefty home office deduction. Things like buying or selling vehicles or moving can also have tax implications. Be sure to share all this with your accountant so he can help you plan for a secure financial future. 

 

Why to Turn to a Professional When the Tax Man Comes Calling

work crew

A note from Bookly CEO Zach Olson:

I remember how naïve I was my first year in business. As a sole-proprietor, I thought I could handle my small business taxes all by myself. It was just filling out a Schedule C along with my form 1040, right? How hard could that be?
Well, as it turned out, a lot harder than I thought. I did end up filing my own taxes that year, but I have a feeling that if I went back and looked at that old form 1040, I wouldn’t be too happy with myself. I’m sure I missed a lot of deductions I could have taken, and I’m sure Uncle Sam is happily spending money that could have come back to my pocket. 
These days, I turn to a certified public accountant to take care of my taxes. Why hire a professional? These are just a few of the good reasons I’ve found: 
1.) Peace of mind – With a professional you know that your taxes and other accounting duties are going to be taken care of right, and on the first go round. If left to my own devices, I’ll procrastinate until April 14th to start fumbling around for my tax paperwork. I have peace of mind knowing my tax return is in a pro’s hands. 
2.) Tax breaks – When’s the last time you randomly read about a new tax break for small business owners? (Or parents? Or students?) You may have seen something in passing on the news, but who has time to delve into the annals of the IRS and really dig out the nitty gritty? Your accountant, that’s who! A professional keeps abreast of the tax breaks available to their clients, so you can spend your time doing other things – like running your business. 
3.) Mistakes are costly – Have you ever made a mistake on your taxes? …Are you sure about that? I, for one, have had to shame-facedly file a 1040X on at least one occasion. A pro, though, will be less likely to make a mistake on your taxes. And if, for some reason they do, they will often fix it for you at no charge. No more wasting your time making your tax return and checking it twice. 
4.) In case of audit – If the government does come calling, you want someone on your side who knows what she’s doing. Mistakes you make during an audit – such as providing too much information – could compound your trouble. Turn to a professional should you ever find yourself the subject of an audit. 
5.) Keeping up with changes – “The mileage rate is 55 cents per mile right? That sounds about right,” you think to yourself as you jot down a note in your bookkeeping app. Except that the amount you can deduct per mile driven for business actually changes per year, and sometimes more often than that. (In fact, the current standard mileage rate is 56 cents!) Little things like this change up from year to year, but they can add up to big mistakes on your taxes. This is why I let an accountant take care of it. 
Personally, I think hiring a professional to help me with my taxes beats tearing my hair out over esoteric IRS instructions and obscure tax law changes any day. Do you use an accountant, enrolled agent or other tax preparer to help with your taxes? Tell us in the comments!

So You Hired a Contractor? Now What?

girl on cell phone

Before (s)he Starts Work

Sign a Contract – A contract breaks down expectations on both parties, clearly states payments and milestones, and legally protects both parties should the relationship hit a snag. Your contractor may send you a contract. If she doesn’t, you should send her one. Even if you’re in a hurry to get started, a service like DocuSign can make this process very quick. Or if you’ve hired your freelancer through a marketplace like oDesk or eLance, rest assured that your contractor has already signed a contract with that service. Of course, even with those services, you may desire extra legal protection if your project is sensitive or out of the ordinary in some way. 

Fill out Form W-9 – If you pay your contractor more than $600 in the calendar year, you are required to send her a form 1099-MISC during tax time. (More about this later!) 

Download form W-9 from the IRS website, have your contractor fill it out, and keep it on file for tax time.

After the Work is complete

Give Feedback Where Appropriate – Your contractor is constantly honing her skills, so be sure to give her honest feedback about her work and the process of working with her. Professionals appreciate honest feedback. If the feedback is at all negative, of course, use your discretion and couch it in polite terms. 

Give a Testimonial – If you loved your contractor’s work, offer to give her a testimonial. She’ll be able to use this in your marketing materials and on her website so find more clients and stay in business for a long time to come. 

Give a Referral – Even better than a testimonial is a referral. If a contractor did a great job for you, she’ll likely do a great job for your friends. Don’t keep her to yourself! 

At Tax Time

Send Form 1099-MISC – As mentioned above, if you paid your contractor more than $600 within the calendar year, you must send her a form 1099-MISC at the end of the year. If you kept her form W-9 on file, you’ll have everything you need to send this document. Be sure to get it to her by the deadline, January 31st. Be sure to be timely. Failure to do so can lead to fines and penalties. 

3 Things Your Accountant Wishes You Knew

working woman

Motorcyclists, cops, and Trekkies all of their own "codes." And although your accountant's code of conduct might not be as obvious as the others', they still have one. What you say and how you deal with them makes a difference. But like other arcane worlds, it's hard to learn the ins and outs on your own. 

That's why we've taken the time to reach out to accountants and ask them what they wish their customers knew before they walked in the door. 

Be Proactive

One common response we got from accountants is that they wished clients would take more responsibility for their actions and finances. Often clients will hand off a box of receipts and ask the accountant to basically do a magic trick and fix everything. However, it’s better if you actually participate. 

“Spending the time to review your business operations on an annual basis can be a time to create opportunities for tax savings or keep your compliance in check,” says Lauren Stinson from Windward Tax. “We are here to help you.” 

“I cannot get your return done without all the information I ask for,” says George Sleeman of Tax Man to You. The only way to do this is if you understand your own finances, at least on some level. Otherwise you’ll be more inclined to leave something out accidentally. 

Ask Questions

If you’re confused, don’t stay silent! The more you understand the better off everyone will be, including your accountant. A well-informed client also means an accountant can quickly do what they need to do and not face unnecessarily backlash from someone wary of everything they’re doing. 

“Give me a call if you have a question,” says Chris Peden of The Accounting Scribe, “no matter how insignificant the matter may seem. I would rather have them ask me what they think is a stupid question, than not ask and have something that should have been reported go unreported.” 

“Not all spending is deductible,” Sleeman also said. “Also, you cannot expense everyday clothing because you wear a suit to work.” 

The more questions you ask about subjects like this, the sooner you stop trying to get away with expensing items like this. This makes the accountant’s (and your) life much easier. 

Be Realistic

Don’t expect miracles from your accountant. While sometimes it does seem like they wave a magic wand and everything is fixed, they go through a lot of hair-pulling and mind-warping to get your money in order. However, the more you pressure them, the more heavy sighs you’ll hear when you walk through the door. 

“I cannot get your return done in an hour,” Sleeman continues. Such ridiculous expectations are not only stressful to both parties, it’s just not possible. Also, the chance for errors skyrockets if you put unnecessary pressure on them. 

Has anything in this post opened your eyes about your accountant? Let us know in the comments!