QuickBooks vs Xero: Which Fits a Small US Business

QuickBooks or Xero: which is better for a small US business?

Neither wins on the tax rules. The law asks for books sufficient to establish your income and deductions, and the IRS lets you choose any recordkeeping system that clearly shows income and expenses (26 CFR 1.6001-1; Publication 583). The IRS record rules cited here name no required or approved product. Four tests decide it, in this order:

1. Your accountant. The person who files your return works from your books. If they work in only one of the two, start there.
2. What the business must carry. Payroll, contractor forms, sales tax, inventory, or more than one entity.
3. Total yearly cost. Every line, not the lowest plan.
4. The exit. A complete copy of your data that you can keep.

Then check either product against the record test: reports that reconcile to your books and return, with detail back to source documents.

A third or cheaper product goes through the same tests; see QuickBooks alternatives your accountant supports.

The case is not simple when:

• You have not recorded a transaction yet. The software, chart of accounts and start date are set once, and your accountant should agree before the first entry.
• The books do not tie to your return. A different product will not by itself close that gap.
• The books are behind, years are unfiled, or personal and business money are mixed. A new product can carry all of it over.
• You have employees, or the business is a partnership or corporation. Payroll is a legal duty, and each owner's capital must reconcile to the return (a partnership reports tax-basis capital).
• The IRS has asked for your records. The original data is what it asks for.
• You already have history in one product. Moving it takes a switch date and opening balances.

Gather first: your entity type, whether you pay employees or contractors, whether you sell taxable goods or services, three months of bank and card statements, last year's return, and which software your accountant uses.

Which one will my accountant work with, and what do I ask?

Your accountant's workflow often limits the choice, because the return is prepared from your books, and no official list says which products an accountant must support. The IRS says it can read the files of the programs most businesses use, and tells taxpayers to consult the examiner before submitting any electronic file (IRS software records FAQ, question 4). Here, your accountant is whoever prepares and files your return and your bookkeeper is whoever enters and reconciles transactions during the year; one person can be both (see bookkeeper vs accountant vs CPA). Ask before you buy:

1. Do you work from QuickBooks Online or Xero, and is either a problem for you?
2. Do you want your own login, a file, or monthly reports, and which reports?
3. Does your fee change with the product I choose?
4. Do you make year-end adjustments in my file or on a copy?
5. If you use neither, which do you use?

With no accountant yet, choose the accountant first. See choosing an accountant for a startup and questions to ask before hiring a bookkeeper.

What must small business bookkeeping software do to satisfy IRS record rules?

It must let you produce legible records that support the entries on your return, reconcile with your books and return, and show enough detail to identify the source documents. That is the test for any computerized system, and it is the same for QuickBooks Online and Xero (Publication 583). Revenue Procedure 98-25 reaches smaller businesses too, when information the return needs exists only in the electronic records (section 3).

Using a hosted product does not move the duty to the vendor: a third party that provides services for your records does not relieve you of your obligations (Rev. Proc. 98-25, section 3). Publication 583 says to reconcile your checking account each month, and a bank feed alone does not do that; see bank feeds are not reconciliation.

Will the books map to my Schedule C, partnership or corporation return?

It can, if the chart of accounts keeps apart what each return line separates. Every product ships its own categories, while the return uses the definitions in the IRS form instructions, so your accountant maps one to the other. A chart of accounts (the list of accounts your entries go into) that you can edit makes that mapping possible.

Test before you commit: load three months of real transactions, run the profit and loss and trial balance, and have your accountant mark each account with its return line. The reports for each return are in books to the business tax return.

What will it really cost over a year?

Add every line below for a full year, for each product, and compare the totals; the monthly plan is only the first line. Plans and prices change often and no official source compares them, so get current quotes in writing.

Some paid add-ons have free official routes. Federal tax deposits through EFTPS are free (IRS), the Social Security Administration offers free electronic filing of Forms W-2 (Publication 15), and the IRS lets you file most information returns for free through its IRIS portal (IRS).

The trap is choosing on price alone, then paying for add-ons or rebuilding the books after a later switch. For the labor line, see doing your own books or hiring a bookkeeper and bookkeeping cost per month.

Do I need payroll, sales tax or 1099 reporting, and does the software carry them?

Payroll applies if you pay an employee; contractor forms and sales tax apply only when the conditions below are met. The law puts each duty on you; software only helps you meet it. Check each one before you choose.

If you outsource payroll, you remain responsible for the deposits, and the IRS suggests registering for EFTPS so you can confirm that payments were made (IRS). Withheld tax that goes unpaid can also make the people responsible for paying it over personally liable (Publication 15; trust fund recovery penalty). How long to keep employment tax records is in how long to keep business records.

Can I get my data out if I switch later?

Test the exit before you commit, because the recordkeeping duty stays with you and the IRS asks for the original data in an examination. The IRS says it asks early for the accounting software's backup file and the administrator login, and that a backup file lets it test the original records in a way a spreadsheet export does not (FAQ, questions 2 and 11). A file re-keyed for the IRS does not meet the request, and condensed data is not acceptable for the years under audit (FAQ, questions 10 and 14).

Ask each vendor:

• What is the closest thing to a complete copy of the original entries, with attachments, and in what format?
• How long after I cancel can I still log in or download?
• Can I hold the administrator role (the top-level login)?
• Can my accountant have a separate login?

What to export is in records to keep when cancelling QuickBooks, and timing is in switching accounting software mid-year.

When is the software not the problem?

A new product does not by itself fix books that are behind, mixed with personal spending, or kept for several entities. A new file can carry the same problems.

Example

These examples are illustrative and use US dollars.

A new single-member LLC

A single-member LLC taxed as a sole proprietorship expects $90,000 of revenue, has no staff and files Schedule C. It asks its accountant whether the accountant works from QuickBooks Online or Xero, and the accountant names one. The owner loads three months of real bank transactions into a trial file, and the accountant marks each account with its Schedule C line: contract labor on one account (line 11), accountant fees on another (line 17). A freelance designer, a US sole proprietor paid by bank transfer, is paid $3,000 over the year, above the contractor reporting threshold, so the owner collects a Form W-9 before the first payment and totals the payee for Form 1099-NEC. The decision rested on the accountant's answer and the Schedule C mapping, not on the lowest monthly plan.

An S corporation with the owner on payroll

An S corporation with $400,000 of revenue pays its one owner through payroll and also takes distributions. It tests each product with the same questions: do wages, employer taxes and liabilities post to the books; are officer pay (line 7), other wages (line 8) and distributions on separate accounts; will the year-end balance sheet agree with Schedule L. How much pay is reasonable is a tax question for the CPA, not a software setting; see S corporation owner salary.

A bakery switching in July

A bakery with $250,000 of revenue, four employees and ingredient inventory wants to move from one product to the other in July. The product is not the hard part; the switch date and the history are. Whether to move in July or at year end, and what balances to carry over, is settled in switching accounting software mid-year and switching payroll providers. The bakery keeps the old file and its exports either way.

Different for you?

• You have not recorded a transaction yet: the choice, the chart of accounts, the start date and who keeps the books are set once, and your accountant should agree before the first entry. See setting up books for a new LLC and get bookkeeping help.
• You use one product and the books do not tie to the return: a different product does not by itself close a reconciliation gap. See books to the business tax return and bookkeeping cleanup or start fresh, then bookkeeping help.
• You have employees, or your books are months behind and a return is due: payroll and catch-up work are done by a person, not a setting. See setting up payroll and catching up on overdue books, then bookkeeping help.
• You want to switch partway through the year: the switch date and opening balances matter more than the product. See switching accounting software mid-year and opening balances after changing accountants, then bookkeeping help.
• You are cancelling a subscription, or the IRS has asked for your records: the original data is what the IRS asks for. See records to keep when cancelling QuickBooks, then bookkeeping help.
• You are an S corporation or a partnership: see S corporation bookkeeping software and partner capital accounts, then bookkeeping help.
• Your business has several entities or locations: see outgrowing QuickBooks and books for several companies, then bookkeeping help.
• You have rentals, an online store, or foreign income or owners: see books for an LLC per rental property, Amazon seller bookkeeping, foreign currency accounts in US books and books for a US subsidiary of a foreign parent.
• You want cheaper software, or an app for a sole proprietor: see QuickBooks alternatives your accountant supports and bookkeeping app for Schedule C.
• You are in Canada, or run a two-country business: see accounting software for a Canadian business.