Questions to Ask Before Hiring a Bookkeeper, and the Red Flags

What should I ask a bookkeeper before I hire them?

Ask for the answers to the questions below in writing, because the duty to keep correct books stays with you whoever keeps them. The IRS lets you use any recordkeeping system that clearly shows income and expenses, and it calls your duty to prove what is on your return the burden of proof. The IRS pages cited here set no required deliverables for a bookkeeper, so the written terms do.

If you ask only five things, ask for the monthly deliverables and delivery date, who deposits payroll taxes and from which account, who holds the software administrator login, who can move money, and how you leave. Refusing any of these in writing is the first red flag; the full list is at the end.

A case is not simple when:

• payroll or sales tax is part of the work, or sales tax covers more than one state;
• the books are behind, or the last bookkeeper left a mess;
• one owner has several entities;
• a partnership or corporation return will be built from these books;
• you cannot yet tell whether you need a bookkeeper alone or one tied to a CPA who files your returns;
• an owner, a bank account or a customer is outside the United States, or the books include foreign-currency amounts;
• an IRS or state notice has already arrived.

Gather before you start calling: the software you use now, three months of bank and card statements, a list of what the business must file (payroll, sales tax, 1099 forms, returns) and when, and the previous bookkeeper's contact details.

What will they do each month, and what will I receive?

Get the monthly deliverables as a written list with a delivery date, and ask to see sample reports made with fictional data, not another client's records. Without a list, "bookkeeping" can mean anything from sorting transactions to a full month-end close. Reconciling means comparing the books with the statement, correcting errors and listing outstanding items, such as checks not yet cleared, so the adjusted balances agree.

Ask:

• Which accounts do you reconcile each month: bank, card, loan, payment processor?
• Do I receive an income statement, a balance sheet and the reconciliation reports behind them?
• Is there a list of open items, the transactions you could not classify?
• Where are the receipts and statements stored, and can I open them myself?
• If my books are behind or wrong, how will you take over: from what date, will you redo earlier months, and is that billed separately?

A good answer names the accounts, the reports and a date. A profit and loss report with nothing behind it cannot be checked. See what a monthly service includes and checking your bookkeeper's work.

How fast do they close the books, and what is the cutoff?

The IRS pages cited here set no deadline for closing the books, so ask for a number of business days after month-end and for the cutoff, which is the day by which you must send receipts and answer questions. The test is whether the close lands before the dates your filings fall due.

A date on a weekend or legal holiday moves to the next business day, and the partnership and corporation returns can be extended with Form 7004, filed by the regular due date. Ask:

• How many business days after month-end do I get the books?
• What is the cutoff for my receipts and answers, and what happens if I miss it?
• When do I get final year-end books for the return and the year-end forms?
• Will you answer my tax preparer's questions and make the entries they ask for, and how fast?

"When it's done" is not a date. For the steps behind a close, see the month-end close checklist.

Who does the work: the person I meet, or a team behind them?

Ask for the name of each person who will handle your records, what each one does, and who reviews the work before you see it. Anyone given access to the books can usually see your bank activity and, if they work on payroll, your employees' Social Security numbers.

Ask:

• Will the person I am talking to do my books, or hand them to someone else?
• Who reviews the work, and who covers when my contact is out?
• Does any of the work happen outside the United States?
• Does each person get a login of their own to my systems?
• Have you kept books for a business like mine, and in which software?

IRS Publication 4557 is written for tax professionals, but its rules are fair to ask of anyone who holds your records. It says each person with access to client accounts should have a unique password and access should go only to those who need it. For the remote-or-local question, see local or online bookkeeper; for overseas teams, see hiring an offshore bookkeeper.

Are they a CPA, enrolled agent or neither, and can they speak to the IRS for me?

The IRS gives authority to speak for you by credential, not by job title, and bookkeeper is not on its list. Anyone with a preparer tax identification number (PTIN) may prepare returns, but only some credentials carry representation rights.

Ask for the license or enrollment and check it with the issuer: a CPA's license with the state board of accountancy, an enrolled agent or program participant in the IRS's directory of preparers. A name missing from the directory is a reason to ask, not proof of a problem. If the bookkeeper also prepares returns, ask who signs: a paid preparer must sign and include a PTIN on every return, and the IRS calls a refusal a major red flag. If someone else prepares the return, ask whether the bookkeeper and that preparer will work from the same file, and who fixes the books if the return turns up a difference.

Ask who would answer an IRS letter or attend an audit. A bookkeeper without a listed credential can be named on Form 8821, which lets that person inspect and receive your tax information for the taxes and years you list but not speak for you. Only an eligible representative can be named on Form 2848. See bookkeeper, accountant or CPA.

Do they handle payroll and sales tax, and who is responsible if a deposit is missed?

If you are the employer, you remain responsible even when a bookkeeper or payroll provider makes the payment. The IRS says the employer is ultimately responsible for payroll tax deposits, owes the taxes, penalties and interest if a third party fails to pay, and may be held personally liable for certain unpaid federal taxes. The Trust Fund Recovery Penalty (section 6672) is one such liability: it can be assessed against any responsible person who willfully fails to pay withheld tax, a group the IRS says includes payroll service providers and others who control the funds. One exception: the tax code treats a certified professional employer organization (CPEO) as the employer for federal employment taxes on the wages it remits to your worksite employees, so ask whether a payroll provider is one, check the IRS's public list of certified CPEOs and read the contract.

A late deposit carries a penalty of 2% to 15% of the unpaid deposit, depending on how many days late it is and whether the IRS has already sent a notice. The rates do not stack. Who owes what after a miss is in when a payroll provider did not pay your taxes.

Ask about payroll:

• Who runs payroll, and who makes each deposit, from which account?
• Is the payroll provider a CPEO, or an ordinary provider?
• Will deposits go under my employer identification number, so I can enroll in the IRS's Electronic Federal Tax Payment System (EFTPS) with my own PIN and see every deposit? The IRS says to do this and to check periodically, and that enrollment gives online access to 16 months of payment history. A CPEO deposits under its own number and its customers cannot see those deposits in EFTPS, so ask a CPEO for proof of each one.
• How will you tell me the day a deposit or filing fails?
• Who files Forms 941, 940, W-2 and 1099-NEC, and the state payroll returns?
• Whose address is on file with the IRS? The IRS strongly suggests keeping it yours, because notices go to that address.

Ask about sales tax:

• Which states do you file in, and who decides when I must register in a new one?
• Who signs in to each state account, who pays, and who receives the state's notices?

Sales tax is set state by state. See filing sales tax returns.

Which software will they use, and will the file and data stay in my name?

A software account in the business's name, with you as main administrator and the bookkeeper as a user, keeps the books within reach if the work ends. The IRS says that when books are kept in accounting software, examiners in small business and self-employed audits request a backup file of the books early, with the administrator's username and password. It expects to ask in most such audits and may not need the file for a narrow one. A taxpayer can set a temporary administrator password for the backup instead of giving out the everyday one. A file re-created for the audit does not meet the request, and the taxpayer remains responsible for the books and records.

Ask:

• Which software, who pays for it, and whose name is on the account?
• Will I be the main administrator, with the bookkeeper as a separate user?
• Can I export a full backup of the file whenever I ask, and at each year-end?
• If you use your own system, what do I receive when we part, and in what format?
• How long do you keep my records after the work ends?

A bookkeeper who holds the only administrator login, or who gives you reports but never the file, may leave you unable to answer an examiner. See giving a bookkeeper access.

What access do they need, and can it be limited so no one can move money?

A bookkeeper needs a login of their own with the least access that does the job. Many owners keep bank administration, payment release and payroll tax enrollment with themselves or a second person. Publication 4557 says to limit access to people who need it and to keep audit trails that record who did what, when, and what changed. The IRS also lists a preparer who steers a client's refund into the preparer's own account as a warning sign.

Ask:

• Which bank role do you need, and is there one that can view accounts but not pay, add a payee or change a limit?
• Who approves and releases payments?
• Will you use your own login, never mine?

The IRS pages cited here do not describe bank roles, which differ by bank, so ask the bank and get the answer in writing. The steps are in giving a bookkeeper access to your accounts.

How is the price set, and what is extra?

Ask what the fee is based on and what triggers more, because quotes are comparable only when the work is the same. None of the official sources cited here sets bookkeeping fees, so the engagement terms decide. See what a bookkeeper costs per month.

Ask:

• Is the fee flat or hourly, and what volume does it assume: transactions, accounts, entities?
• What is billed on top: payroll runs, contractor forms, sales tax returns by state, catch-up months, year-end work, rework?
• What happens to the fee if volume grows, and how much notice comes with a price change?
• Is anything paid in advance, and how do I get a receipt?

The IRS lists cash-only payment with no receipt and fees based on a share of a refund among the signs of a bad preparer, and lists charging for services not performed as misconduct. For the terms to put in writing, see the engagement letter guide.

How do they protect my data, and what happens when we part?

Ask for their security practices before you send anything, and for the exit terms before you sign. Publication 4557 says tax professionals must protect client data under the FTC Safeguards Rule, which calls for a written information security plan, and it lists basic steps. The IRS page does not say whether the rule reaches a bookkeeper who prepares no returns, but the questions are still fair.

Ask about data:

• Is there a written security plan, and who is in charge of it?
• Is a second login step required for everyone who reaches my data?
• How do you receive and send documents: a secure portal or encrypted transfer, not plain email?
• Are files encrypted and backed up?
• Will you tell me if my data is exposed?

Ask about leaving:

• What do I receive when we part: the full file, the supporting documents and the open-items list, and how fast?
• Will you remove every login and withdraw from any IRS authorization? Publication 4557 tells practitioners to withdraw authorizations for clients who are no longer clients, and the instructions for Form 8821 and Form 2848 explain how to revoke one yourself.
• When are your copies destroyed?

Keep your own copy: the IRS tells employers to keep employment tax records at least four years after the tax becomes due or is paid, whichever is later, and other records as long as they may be needed to prove income or deductions on a return. The IRS also lists failing to return a client's original records as preparer misconduct. For a handover, see replacing your bookkeeper.

Who can I ask for a reference, and which red flags mean no?

Ask for two or three current clients with a business like yours, and ask each whether reports came on time, whether a deposit or filing was ever missed, whether they had to chase answers, and how any handover went. None of the official sources cited here supplies reference questions. The red flags below come from the risks above and from what the IRS lists as preparer misconduct. A bookkeeper who prepares returns or runs payroll falls under those lists, and the same behaviors are fair tests for one who does not.

Example

These examples are illustrative. Figures are in US dollars.

Three quotes for one online store

A Phoenix e-commerce LLC gets three quotes. The owner asks each bookkeeper the same questions: which accounts are reconciled, which states are filed in, who runs payroll deposits, and what is billed extra.

The answers show three different jobs, so the quotes are not comparable until the scope is the same.

Who is responsible for payroll deposits

A restaurant owner asks who runs payroll deposits. The provider, an ordinary payroll company that deposits under her employer identification number, says the owner remains responsible. She enrolls in EFTPS with her own PIN and, each quarter, compares the deposits it shows with the payroll reports. A deposit missing even once is the red flag the IRS describes, so she asks the provider about it right away.

Full banking access for a flat fee

A freelancer is offered full banking access with a fee of US$150 a month. She asks for view-only access and a written scope first. The bank has no view-only role, so she sends statements each month, keeps the payment login herself, and signs only after the scope and exit terms are written down.

Different for you?

• You are shortlisting bookkeepers, often after a bad first one: settle scope, close timing, access and exit terms in writing before you sign. Whether you need a bookkeeper alone or one tied to a CPA who files your returns depends on payroll, sales tax, your entity and what the return needs. Talk it through with bookkeeping help.
• The books are behind, or the last bookkeeper left a mess: see catching up on overdue books, and get bookkeeping help before a return depends on them. Ask a new bookkeeper how they will take over the file.
• A payroll deposit was missed, or an IRS or state notice arrived: see behind on payroll taxes and an IRS notice to your business. Penalties and personal liability are fact-dependent, so have the affected months reviewed with bookkeeping help.
• A partnership, a corporation or several entities will file returns from these books: see bookkeeper, accountant or CPA and ask about bookkeeping help tied to the return.
• An owner, a bank account or a customer is outside the US: ask whether the bookkeeper has kept books for foreign-owned or two-country businesses, and see foreign-currency accounts in US books and cross-border tax help.
• You are comparing an online bundle, a CPA firm, a local or a remote bookkeeper, or you are a startup: see online bookkeeping service or CPA firm, local or online bookkeeper and choosing an accountant for a startup.
• You already have a bookkeeper, or are not sure you need one: see checking your bookkeeper's work, replacing your bookkeeper and doing your own books or hiring a bookkeeper. If the answer depends on payroll, sales tax or the return the books feed, talk it through with bookkeeping help.