Doing Your Own Books or Hiring a Bookkeeper

Can I do my books with software, or do I need a bookkeeper?

You can do them yourself if you can support and classify each transaction, reconcile your bank and card accounts, and produce figures for required returns on time. Software records what you enter; you still need to check that the records are complete and correct. If reconciliations or reports fall behind, a bookkeeper can handle the routine work. Ask a qualified tax professional to resolve tax method, inventory or filing questions (IRS: Publication 583).

What does the IRS require my books to do?

Your books must show the income and expenses behind your returns, and you must keep documents that support the entries. Federal law requires records sufficient to establish your tax liability; the IRS generally lets you choose the system, including electronic records, if it clearly shows income and expenses (26 USC 6001; IRS: Publication 583). A software subscription does not supply missing receipts or decide whether a payment is wages, inventory, an asset or an owner's withdrawal.

Keep invoices or sales reports, bank and card statements, expense receipts, loan records, and records of business assets. Match them to the entries in the books. A bank deposit alone may not show whether the money was a sale, loan or owner contribution; a card charge alone may not prove its business purpose. The IRS says to retain records supporting return items until the applicable assessment period runs out, with longer rules for some records and assets (IRS: Publication 583; IRS: How long should I keep records?).

A partnership or corporation needs books for that business, apart from each owner's personal finances. A partnership files its own information return even though its income generally passes to partners; a corporation also has its own return (IRS: Publication 583). For the forms an entity files, see Which returns your business files.

Bookkeeper, accountant or CPA: who can prepare my return and speak to the IRS for me?

Anyone can keep the transaction records. Preparing a federal return for pay and representing someone before the IRS are separate jobs: a paid preparer needs an IRS preparer tax identification number, while CPAs, enrolled agents and attorneys have unlimited IRS representation rights (IRS: Preparer credentials).

Some preparers without those credentials have limited rights for returns they prepared and signed; others have no representation rights (IRS: Preparer credentials). A bookkeeper's title alone does not tell you which return or representation work they can do.

Do I need a separate business bank account?

The federal recordkeeping rule does not itself require a separate bank account, but the IRS recommends one and says to use it only for business. Separate transactions make it easier to trace income, expenses and owner transfers, and to reconcile the account against the books (IRS: Publication 583).

If you have mixed personal and business payments, identify each one before classifying it. A personal purchase paid from a business account is not automatically a business deduction. For a partnership or corporation, transfers to owners need their own classification in the business books; for an LLC owner's draws, see Paying yourself.

Cash or accrual: which method do my books use?

Use a permitted tax method that clearly reflects income. Your business books may use another method if you can reconcile them to the return (IRS: Form 1065 Schedule M-3 instructions). Check the method on an existing return before changing how income and expenses are reported. The first filed return generally establishes the tax method; changing it later generally needs IRS approval, often through Form 3115 (IRS: Publication 538).

An unpaid customer invoice is money owed to the business; an unpaid supplier bill is money the business owes. Cash and accrual methods generally recognize these at different times.

These are timing rules, not a choice to omit invoices or bills. Some corporations and partnerships with corporate partners face limits on using cash, with a small-business exception; inventory can also change the method for purchases and sales (IRS: Publication 538).

Does my business need a balance sheet on its return?

A sole proprietor's Schedule C does not include a Schedule L balance sheet. Partnership and corporate returns may require Schedule L, which reports assets, liabilities and owners' equity from the books at the start and end of the year (IRS: Schedule C instructions; IRS: Form 1065 instructions; IRS: Form 1120-S instructions; IRS: Form 1120 instructions).

Check the small-business question on the return you file: Schedule B for Forms 1065 and 1120-S, or Schedule K for Form 1120. A partnership must meet every listed condition, including timely partner schedules. Check the instructions for the tax year being filed before relying on an exception. Even when Schedule L is optional, keep records that support the return. When required, the balance sheet must agree with the books (IRS: Form 1065 instructions; IRS: Form 1120-S instructions; IRS: Form 1120 instructions).

How often do the books need to be updated?

There is no single federal rule saying every small business must post its books weekly or monthly. Update them often enough to meet filing and payment deadlines, and reconcile each bank account when its statement arrives; the IRS recommends monthly reconciliation (IRS: Publication 583).

A workable routine is to capture source documents as transactions happen, review deposits and payments each month, reconcile bank and card balances, and investigate uncategorized or duplicate entries before closing the month. Review income during the year because self-employed owners, partners and S corporation shareholders may need estimated tax payments (IRS: Estimated taxes). If your books are already months behind and a return is due, see Catching up on overdue books.

What changes once I have employees?

Payroll adds withholding, tax deposits, returns and employee records with deadlines tied to pay dates. The employer must track gross wages, withholding, employer taxes, payments and deposits, and reconcile payroll reports to the books and bank activity (IRS: Publication 15; IRS: Depositing and reporting employment taxes).

The federal deposit schedule is generally monthly or semiweekly; small balances may be paid with a timely return, while large liabilities can trigger a next-business-day deposit. States can impose separate payroll duties (IRS: Publication 15; IRS: Depositing and reporting employment taxes). Keep employment tax records for at least four years after the tax is due or paid, whichever is later (IRS: Publication 583). Using a payroll provider does not erase the employer's duty to make correct deposits. If withheld taxes are willfully unpaid, the IRS may assess the trust fund recovery penalty against responsible people, including an owner who controls payments (IRS: Publication 15).

What changes when I collect sales tax?

Track sales tax collected by state and reconcile it to each state return. For federal income tax, tax imposed on the buyer and remitted to the state is generally excluded from income; tax imposed on the seller and collected from the buyer is included in gross receipts (IRS: Publication 334). Where and when a business must collect is a separate state-by-state question; see When you must collect sales tax.

What changes when I pay contractors?

Keep each contractor's identity, invoices, payment amounts and payment methods so you can determine which information returns apply. Request Form W-9 from a U.S. payee; a foreign payee generally needs an appropriate foreign-status form instead (IRS: W-9 requester instructions). For payments made during this tax year, Form 1099-NEC generally applies when reportable service payments to a payee reach $2,000; backup withholding can require the form at any amount (IRS: Information-return guidance).

Most payments to corporations are exempt, but attorney fees can still be reportable. Furnish and file required Forms 1099-NEC by January 31 of the following year, or the next business day if that date falls on a weekend or legal holiday. Track card and qualifying third-party network payments separately because the settlement entity reports them on Form 1099-K, rather than you on Form 1099-NEC (IRS: Forms 1099-MISC and 1099-NEC instructions). A person's contractor label does not settle worker status: the IRS looks at the facts of control and the working relationship (IRS: Independent contractor defined).

Does carrying inventory make do-it-yourself books harder?

Yes. Selling goods adds purchase and sales records. If you use tax inventory accounting, track cost of goods sold and goods held at year-end. An eligible small business may choose a permitted method without keeping tax inventory, but still needs records supporting that method (IRS: Publication 538).

Keep purchase and sales records, including quantities and returns. If using tax inventory, also record losses and goods still held. Eligibility for the small-business method depends on receipts and other conditions; the method must still clearly reflect income. A change in inventory method can itself be an accounting-method change (IRS: Publication 538). Decide the method with the return preparer before the first return rather than treating every purchase as an immediate expense.

If someone else keeps my books, am I still responsible for mistakes?

Yes. You remain responsible for the records and figures used on the return, even if someone else records transactions or prepares the return. The IRS advises taxpayers to review a return before filing, and federal recordkeeping duties remain with the taxpayer (IRS: Topic 254; 26 USC 6001).

Keep access to the books and source documents. Agree on who will enter transactions, reconcile accounts, review unusual items, prepare payroll or sales tax returns, and approve filings and deposits. Each month, review the bank reconciliation, outstanding invoices and bills, and any tax balances. Ask about differences before a return is filed.

When do my obligations outgrow do-it-yourself books?

The trigger is whether you can complete the required records, reconciliations and filings accurately by their deadlines, not a particular sales level or software feature. A simple service business with few transactions may manage its own books; the need for help rises when the work includes payroll, several sales tax states, inventory, multiple owners, complex asset purchases or a required Schedule L (IRS: Publication 583; IRS: Form 1065 instructions).

Before handing off the books, gather the account list, bank and card statements, prior return, filing calendar, payroll and sales tax registrations, and any inventory or loan records. Decide who will provide missing documents and who will review the monthly close. If the business is new, the separate question of filing its first return is covered in Your first business tax return.

Example

Illustrative US dollars only; the figures do not set a tax threshold.

A sole proprietor runs a service business with one bank account and no employees or inventory. In a month, customer payments total $10,000, business payments total $4,000, and the owner transfers $2,000 to a personal account. The owner records the $10,000 of receipts, categorizes and supports the $4,000 of payments, and records the $2,000 transfer as an owner withdrawal rather than a business expense. The $4,000 increase in the book's bank balance comes from receipts less payments and the withdrawal. The owner reconciles that balance to the bank statement, accounting for deposits in transit and uncleared payments and recording any bank charges, then reviews unpaid bills separately. If that routine stays current, doing the books personally may be practical. Adding wages or goods for resale would add records and deadlines that need a new review.

Different for you?

• Your books are behind and a return is due: use Catching up on overdue books before relying on a current profit report.
• You are filing a first business return: see Your first business tax return for the filing sequence.
• You do not know which return your entity files: see Which returns your business files.
• You collect sales tax in several states: check each state's rules in When you must collect sales tax.
• You take money from an LLC or pay yourself through an S corporation: see Paying yourself, S corporation owner salary and How S corporations are taxed.
• Your U.S. single-member LLC is foreign-owned: track money, property and other dealings with the owner because they may be reportable on Form 5472; see Foreign-owned single-member LLC filing (IRS: Form 5472 instructions).
• Your corporation is Canadian: its year-end requirements differ; see Year-end financial statements for a corporation.
• Payroll, inventory or a required balance sheet is stretching your routine: bring the account list, reconciliations, registrations and filing calendar to Bookkeeping.