Running your business-of-one comes with tons of benefits – and freedom in the way you work. It also comes with some serious business-y responsibilities a lot of us aren’t fully prepared to shoulder.
You thought you were finally going to get to be creative or focus on your services or create your products – then you have to file a tax return.
Managing finances as a small business owner can be complex and intimidating. But it doesn’t have to be. An online bookkeeping service can take the bulk of the money management off your plate, so you can focus on the parts of your business you love.
But first… you have to choose a service. Online bookkeeping services come in several flavors, including virtual assistants, CPAs, software and outsourced back-office services. The types of tasks they can handle and the price you’ll pay for each varies wildly.
In this guide, we’re going to tell you everything you need to know about the types of online bookkeeping services available to your business-of-one, what they do, how much they cost and how to choose the one that’s right for you.
What are online bookkeeping services?
Online bookkeeping services are any kind of program, business or service provider that handles financial tracking in your business. They might also help with taxes and some legal stuff, depending on what kind of service you use.
When you think of online bookkeeping, you might think of anything from a virtual assistant to software like QuickBooks. All are probably correct. Services run a wide spectrum to meet a range of business needs.
As your business-of-one grows from a simple freelancing or consulting operation into a bonafide business – whatever that means for you – your finances will get more complicated. You might have more clients to track down for payments, more income to track, contractors or employees to pay, and certainly more involved tax obligations.
There’s a good chance your business’s financial needs will eventually surpass your accounting skills. Or, at least, you’ll realize your time is better spent on other parts of the business, so it’s worth it to outsource the financial stuff.
That’s when it’s time to find a bookkeeping service.
Types of bookkeeping services for small businesses
Online bookkeeping comes in three main categories: virtual service providers, online software and outsourced services. Here’s what to expect from each.
Virtual bookkeeping services
A lot of small businesses and businesses-of-one hire a contractor or part-time employee who provides remote bookkeeping services. This person may handle the accounting, bookkeeping or tax-filing – or all three – for the business.
You can find service providers with a range of skills offering a range of bookkeeping services for small businesses. Depending on the size and complexity of your business, you may need some or all of these services:
- Income and expense tracking
- Client or customer invoicing and accounts receivable management
- Bill pay and accounts payable management
- Payroll and benefits administration
- Tax filing and planning
- Company formation and tax election
Find virtual bookkeeping services through freelancer networks, recommendations from other business owners or posting a job ad to your network.
Hiring a virtual bookkeeper is your most customizable option, because you’ll be able to bring on someone who works for your business and completes the tasks you need. That means this is also usually the most expensive way to do bookkeeping, even online. You’ll have to pay a contractor rate or employee wages, plus applicable taxes, to keep someone on your team.
Online accounting software
If your business’s finances are extremely simple, you may only need an online accounting program for self-employed business owners that helps you do your bookkeeping yourself.
Programs like QuickBooks, FreshBooks, Xero and Wave provide a range of small business accounting services, including:
- Online payments
- Expense tracking
- Time tracking
- Inventory management
- Estimates and proposals
- Financial reports
These programs typically require a monthly or annual subscription, with a few levels that include different services. You can sign up based on your business needs and upgrade as you grow.
Online software is usually the lowest-cost way to do bookkeeping for your business, but that doesn’t necessarily make it the best fit.
For many businesses-of-one, online accounting software offers more complex bookkeeping than you need, and the learning curve and subscription price might not be worth it for you. Plus, they often don’t provide services you do need, like help with formation and issuing tax forms, so you’ll have to pay for additional services to cover it all.
Outsourced bookkeeping services
Outsourced bookkeeping services, like what we offer at Collective, combine the comprehensive service of hiring your own bookkeeper and the cost effectiveness of using automated software.
And, to toot our own horn for just a second… we actually offer more than that!
By outsourcing your back-office tasks to a service like Collective, you get access to a suite of small business accounting services, including:
- Legal formation and tax election
- Quarterly tax estimates and returns
- Owner salary recommendations
- Business and individual income tax returns
- Issuing and filing tax forms
For an outsourced bookkeeping service, you’ll pay a monthly subscription price and get ongoing bookkeeping support from human service providers, plus upfront and periodic consultations with legal or tax experts to keep your business on track.
What do online bookkeeping services do?
Online bookkeeping services can run the gamut, so you have an opportunity to choose the service that’s the best fit and price for your business.
Formation and organization
How you manage your business’s finances is closely linked to how you structure your business. But financial and legal services are usually split. That can be confusing, inconvenient and costly for new small business owners.
Contract bookkeepers and online accounting software generally don’t offer help with forming your LLC (or other business structure) or setting you up for taxes with the IRS.
At Collective, our outsourced accounting services do include support for your company formation. We’ll help you:
- Set up an LLC in your state
- Create an operating agreement
- Get your tax ID number from the IRS
- File an S Corp election with the IRS
- Register your company as an employer in your state
- Provide a Registered Agent (i.e. someone authorized to handle your tax and legal stuff)
- Support you in annual filing for business registration and licenses in your state
Taxes and tax planning
Most bookkeeping services offer some kind of tax support. How much depends on what kind of service you use.
For full tax support, you need to work with an accountant (CPA) or IRS Enrolled Agent (EA). Bookkeepers can keep your financial records in order to make sure you’re prepared for tax time, but they’re not allowed to prepare and file tax returns for you like a CPA or EA is.
A tax professional can help you with:
- Quarterly tax estimates
- Salary recommendations to meet IRS S Corp requirements
- Business and individual state and federal income tax returns
- Tax planning throughout the year to stay compliant and minimize your tax bill
If you hire a virtual bookkeeper for your year-round financial needs, you’ll likely need to hire a separate accountant to help with taxes. Some CPAs offer year-round bookkeeping, but some only provide assistance with tax preparation and planning.
Online bookkeeping software usually provides quarterly tax estimates and reports at a high enough subscription level. Some let you pay a special fee to work one-on-one with a tax professional at tax time.
Through Collective, our outsourced bookkeeping service includes full tax support with our single monthly price.
All bookkeeping services include some kind of accounting. Any bookkeeper – or bookkeeping software – can cover basic accounting tasks, which are basically just financial recordkeeping.
A bookkeeper or accounting software keeps track of your income and expenses in the business. That’s important for the reporting you have to do and for taxes. It’s also important internally. It helps make smart decisions about how to price your products or services, and how to keep costs manageable.
A CPA is qualified to do much more complex accounting, which larger businesses might need. They’re certified in various types of accounting and standard accounting practices that keep your books in line with cross-industry accounting standards.
For a business-of-one, even with contractors or a small number of employees, simple bookkeeping is usually sufficient. You’ll likely only need CPA support for tax filing.
Depending on what kind of business you run, you may get paid through monthly invoicing to your clients or customers.
This is a fairly simple task you’ve probably done yourself. But it’s time-consuming! You can get an assistant who doesn’t necessarily have bookkeeping or accounting expertise, because invoicing is largely data entry and tracking.
But having your bookkeeper handle invoicing could make sense because your accounts receivables (i.e. money owed to your company) are tied to the other financial tracking a bookkeeper does, and often live within the same software.
Payroll and bill payment
Paying employees and contractors can be time consuming and a little intimidating when it comes to issuing tax forms and paying payroll taxes.
Services like Gusto simplify payroll and taxes for both small and large businesses, from those with just a few contractors to organizations with employees and robust benefits packages. The drawback? This payroll service doesn’t include accounting.
You can get it through Collective, though! Our back-office solution includes all the accounting and tax services you need, plus a free Gusto subscription and unlimited automated payroll runs, W-2 and 1099 filing – and automated payroll taxes.
Some online accounting software, including QuickBooks, offers upgrades for payroll services, but they don’t typically include tax payments or tax form filing.
How much does online bookkeeping cost?
How much you pay for online bookkeeping depends on what kind of service you use and which accounting tasks you need.
- Virtual bookkeepers charge by the hour, and typically cost anywhere from $25 to $100 or more per hour. On the higher end are usually CPAs, while the lower-cost folks offer only bookkeeping. If you hire a lower-end bookkeeper, remember to factor in the cost of hiring a CPA for tax support at least once a year.
- CPAs usually charge a flat rate each year for income tax returns, with a range based on the size of your business, revenue and other factors. For a simple business-of-one, this rate will probably fall around $500 – $1500, but that could vary depending on your state and your business structure. If you go the DIY bookkeeping route the rest of the year, factor in the cost of your time and any software you use.
- Online accounting software comes with a monthly subscription fee, usually with a slight discount if you pay annually. Cost can be as low as $100 per year for just invoicing and expense tracking, up to $300+ per year for companies with dozens of clients and multiple users. Payroll and tax services are add-ons that’ll cost an additional fee. (Also note the cost of your or your employees’ time when using software!)
- Outsourced bookkeeping services tend to charge a flat monthly price for all-inclusive service. At Collective, our fee is $269 per month (or $229 when paid annually) for our full suite of formation, accounting, bookkeeping, tax and payroll services, which includes software subscriptions to Gusto and QuickBooks.
What to consider when choosing an online bookkeeping service
You have a lot of options for managing your business’s finances. And there’s a lot of noise out there that could steer you toward services you don’t need or that aren’t comprehensive enough to cover your needs.
To choose the right online bookkeeping service for your business, consider:
- How many clients or customers do you have?
- How many invoices do you need to send per month?
- Do you run a product-based business (with inventory) or a service-based business?
- How many contractors and employees do you work with – and how fast do you plan to grow?
- What’s your annual revenue – and how fast do you expect it to grow?
- How do you prefer to be paid?
- Do you work with international clients or customers, or all within the U.S.?
- Do you work with international contractors?
- Do you need assistance with legal formation and tax election setup?
- How much tax support do you want throughout the year and at tax time?
- How much do you want to oversee your bookkeeping process versus hand it off to a service provider?
- Do you want to manage a contractor or employee?
TL;DR: Sorting through online bookkeeping services
Choosing a bookkeeping service for your business may seem like a throwaway task – something you just have to check off your list to keep all your ducks in a row. But it’s actually an integral business decision.
How you manage your finances early in your business will have a major impact on your ability to grow and how smooth that growth will be in the future.
You have a lot of options, and each comes with benefits and drawbacks.
Hiring a virtual bookkeeper to manage your books gives you completely personalized service, but comes with the cost of an employee or contractor plus the effort required to manage a team member.
Using online accounting software is the cheapest option, but don’t forget to factor in the time you or an employee spends managing it. Software is also usually tough to customize. You end up missing out on services you need or upgrading to higher subscription levels and paying for services you don’t need so you can get your bases covered.
Outsourced bookkeeping services like Collective balance the benefits of the first two options by offering personalized human services for an affordable monthly price. You won’t get the benefit of a dedicated person on your staff — but you won’t have the cost or drawback of managing them, either.
Consider your circumstances and unique business needs to choose the model for bookkeeping that makes the most sense for your business.