As we kick off October, sometimes it's really fun to be scared. Many of us are readying our costumes and watching scary movies, maybe reading scary stories or books. So, I thought I would kick off this month with some SPOOKY STORIES about what can happen if you have someone who isn't qualified working as your bookkeeper.
1. The Tale of the Unknown Sales Tax Obligations
A ton of new laws have gone into effect making it so that many companies are required to charge Sales Tax to their customers. As experienced accountants, we're constantly taking classes to make sure that we are up-to-date on who has to collect and file Sales Tax, how frequently and at what rate. If the person who is doing your books doesn't know this stuff inside and out, and also stay on top of the constant changes, they could put you in a situation where you are under-collecting and under-reporting your Sales Tax obligations.
So, what could happen?
For any business that has customers in multiple cities, each city could come after you for what they believe you should have filed, and assess penalties and interest on the delinquency as well. The different jurisdictions aren't going to sympathize with the fact that you didn't know you had an obligation to file and remit Sales Tax to them. They are going to expect to collect on their assessment of what you owe (tax + penalties + interest) immediately. For some businesses, this could present a huge cash flow problem... or worse.
2. Beware the Reconciliation Discrepancies
In the modern day, software can make many tasks easier than ever before. However, sometimes the methods for making things easy now can make a bigger mess for later than anyone intended.
For example, when you're reconciling a bank account, the amounts need to match exactly. Down to the very last penny. If you try to reconcile when the amounts don't match, some popular bookkeeping software will show you a fun little message that says they can fix it for you and will ask you if you want to do that. An inexperienced bookkeeper will say "Uh, YES!" A qualified bookkeeper would know to never, ever do that.
When you let the software adjust the reconciliation for you, it sweeps the unmatched transactions under a rug (known as "Reconciliation Discrepancies") to lurk there until someone eventually notices. If you're lucky, that someone is the accountant you hire to do your taxes, but if you're unlucky it could be the IRS during an audit. "Reconciliation Discrepancies" is not a legitimate categorization and is the software's sneaky way to make a bookkeeping task seem easier than it really is.
3. The Case of the Failed Audit
A big, big issue for businesses is whether to classify someone as an employee or a contractor. Many businesses believe that they can avoid the burden of payroll taxes, work comp insurance and all of the other complications that come with having employees by simply paying the people they work with as independent contractors. We've seen a few businesses make this fatal misstep in the past, and often by the time they hire us to defend them in the audit, it's too late: their business is poisoned.
Here's what happens: Some department, for example the Department of Labor and Employment, will start a routine audit. All they want it a list of employees, payroll reports, contractor list, etc. You, of course, comply with their requests because audits are scary and you believe you have nothing to hide. You show them that you don't have any employees, you only have contractors and therefore you don't need to pay unemployment, right?
If your bookkeeper is under-qualified, probably wrong.
Before you know it, the auditor tells you it is their determination that some, maybe even all, of your contractors should actually be employees because of how you pay them, how they work for you or any number of other reasons. The state is now reclassifying them as employees, and you owe all of the taxes that you should have been paying along the way as part of having employees. Let me repeat that: Now you are not only looking at all of the costs associated with having employees now, but you also are expected to immediately pay all of the taxes that you should have been paying since you hired the first person. They can assess those taxes as far back as they want to, and most businesses can not survive suddenly having to pay year and years of employment taxes at once.
This situation is incredibly common, and can literally kill a business overnight. A conscientious and qualified person working on your books can help you to avoid this fatal mistake by making sure you know for sure whether someone should be an employee or a contractor.
4. The Vicious Tax Bill -or- The Case of the Unknown Net Profit
When you own a business, much of your tax burden comes from the Net Profit of your business. Wise accountants can sit down with their clients near year end and make strategic tax planning decisions based on Financial Statements from their books. However, this is a fool's errand if their books are being done by an under-qualified bookkeeper.
You see, when an under-qualified bookkeeper is allocating transactions, a lot of times they can end up in the wrong spot. A payment made to your credit card, for example, is not a deductible expenses that should go straight to the Profit and Loss. However, someone without specific education and training is likely to believe that it is. So, if you use your credit card frequently, you could have thousands of dollars of mis-allocated "expenses", making your net profit seem much lower than it actually is. If you do your tax planning based on a net profit that isn't true, then your tax plan isn't going to be very accurate either.
So, for those that are using an unqualified bookkeeper, tax time can be very stressful. There's no way for us to forecast or plan for the unknown elements until we really dig into the books, and once the clock strikes midnight on 12/31 of each year there is very little we can do to mitigate that sting of a substantial net profit.
5. The Man Who Didn't Know He Was Running A Bank
It's a tale we hear time and time again.
"I have lots of revenue and we're very busy, so why don't I have any money?"
My first question is, "how much are you carrying in accounts receivable and for how long?"
Common answer: "Oh. I don't know. We just create invoices in a spreadsheet and send them out. I don't really track any of that. Most people are pretty good about paying."
While there are more many ways to send out invoices, if those invoices are tied and tracked to a general accounts receivable ledger, it's easy to lose track of who owes you how much and how long that's been true.
In one instance we have encountered of the DIY bookkeeper, a small company with 3 employees, which had an average ticket of $350 had accidentally put themselves in a position that they had more than $100k owed to them that was more than 90 days past due.
"Did you extend credit to these people, and offer to act as their bank? Are you charging them interest for this?"
"Uh... no. I wasn't even aware of it."
Fact is, if a qualified bookkeeper had been paying attention to these books, it's unlikely the company would have ended up in this situation. It's one thing to knowingly extend your customers credit or offer to accept installment payments. It's another thing entirely to just find yourself in a position where most people aren't paying you.
For some reason, somewhere along the way a lot of people got the notion that anybody can do bookkeeping. I hope that these stories have made you think about the difference between "can" and "should".
I CAN work on my car myself. I shouldn't. I'm not qualified. I'll likely make a bigger mess of things than there was in the first place and it will be more expensive to take a professional to fix than it would have been if I had just taken it to an actual mechanic from the start. Not to mention all the heartburn, headache and possible physical injury I am risking by taking it on myself. Not worth it.
You CAN do your own bookkeeping (or, more commonly, enlist the help of an under-qualified friend of family member). You shouldn't. It's unlikely that you know all the ins and outs, risks and how to avoid them that are ever-changing in the world of accounting. A few honest mistakes could be very expensive mistakes. And if you try to use the excuse of "I didn't know" the IRS or any applicable enforcement agency is going to tell you that it doesn't matter and you should have hired someone who did.
We have full service bookkeeping packages available. Give us a shout to learn more: firstname.lastname@example.org or call 303-284-1096