June 12, 2017

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How to meet your bookkeeping needs: employee, contractor, or firm?


How to meet your bookkeeping needs: employee, contractor, or firm?

Every business (and every nonprofit) needs bookkeeping services. There are a lot of options: you could hire a bookkeeper as an employee, contract the work out to an independent bookkeeper, work with a bookkeeping firm, or some combination of these options. This article will help you choose the best option for your organization.

The trade-offs involved in this consequential decision are tricky to navigate and important to get right. An in-depth look at these options will help you understand the factors at play. You’ll learn:

  • Why small businesses in cities should not hire a bookkeeper as an employee
  • When you should consider using an independent contractor
  • Why many businesses in the US are switching from employees and contractors to bookkeeping firms
  • And much more!

Option #1: Hire A Bookkeeper As An Employee

If you find the right person, having your bookkeeper be a full-time employee in your organization makes it easy for your bookkeeper to stay in touch with other team members and keep up to date on your day-to-day operations. Hiring your own full-time bookkeeper is an option worth considering if the bookkeeper will need to communicate on a constant basis with many other team members in your office or if you wish to give the bookkeeper responsibilities that can only be completed within the office.

However, there are many downsides to hiring a bookkeeper as an employee. The biggest downside is cost. Unlike independent contractors and bookkeeping firms, hiring an employee involves a very significant set of increased costs, including:

  • Payroll taxes (both state and federal)
  • Increased liability and workers compensation insurance premiums
  • Office space
  • A computer, related equipment and software
  • Increased management overhead

There is also a huge hidden cost to hiring an employee who works the same number of hours each week. Bookkeeping workloads typically change a lot, especially at small businesses. The amount of bookkeeping work often changes from week to week based on the cyclical nature of bookkeeping (with increased work at the end of the month and the year). Bookkeeping workloads are also very sensitive to business growth, seasonality, and other changes in your business. If your bookkeeper employee works the same number of hours each week, they’ll probably be working too many hours on some weeks (i.e. you overpay) and too few on others (i.e. you don’t get the availability you need).

For businesses in cities, hiring a bookkeeper as an employee is an especially costly way to go. In major metropolitan areas, the average wage for bookkeepers tends to be much higher than in outer suburbs and rural areas. However, the rates of independent contractors and bookkeeping firms are usually less sensitive to the location of your business.

Given all the costs, it is generally recommended that small businesses avoid hiring bookkeepers as employees.

For businesses that do choose to hire a bookkeeper as an employee, it is important to carefully assess their qualifications. Bookkeeping is a highly technical field that requires specialized training. A bookkeeper who isn’t aware of certain bookkeeping best practices and the latest regulations can get your business into trouble very easily. Plus, having familiarity with the latest in bookkeeping technology can make a huge impact on how efficient and productive your bookkeeper is. (For free advice on finding highly qualified local bookkeepers, call our helpline: 888-902-6657.)

Option #2: Use An Independent Contractor

Many businesses try to avoid the costs involved in hiring a bookkeeper as an employee by working with independent contractors. There are a lot of solo practice bookkeepers who consult for a number of clients at once. With these contractors, you pay less in taxes and also reduce some of the other costs involved in hiring an employee, including insurance, office equipment, and management overhead. 

This can be a good option for some businesses. There are some disadvantages, however. Research by BooksTime has shown that over 65% of independent bookkeepers can’t answer basic questions about accounting best practices and certain financial regulations that apply to small businesses. Of the independent bookkeepers who correctly answered these questions, the vast majority (92%) charged at least $85 per hour, which is quite a high rate for ordinary bookkeeping services no matter where you are located.

If you manage to find one of the few independent bookkeepers who is both qualified and reasonably affordable, there are still other disadvantages to consider. 

One disadvantage is availability. Independent contractors, just like employees, take vacations, get sick, and can only work a certain number of hours per week. Additionally, with their limited availability, it’s inevitable that their other clients will get priority over you from time to time. You don’t have to worry about issues like these when you work with a good bookkeeping firm (see below).

Perhaps the biggest downside to working with an independent contractor is that even if they are very knowledgeable, there are necessarily limits on their range of expertise. When you work with a good bookkeeping firm, you get a team of experts with a variety of specializations. You get the collective experience and knowledge of the whole team. Firms can therefore offer a much broader range of expertise than any individual. 

Option #3: Work With A Bookkeeping Firm

Outsourcing to independent contractors is fairly common, but the industry has seen a giant shift in recent years to a third option: professional bookkeeping firms. The shift has been driven by the significant advantages firms offer over employees and independent contractors.

One of the clearest advantages is cost-effectiveness. Working with a bookkeeping firm is more cost-effective than hiring your own in-house bookkeeper, because such a firm’s economy of scale drives the price of its services well below the cost of maintaining an additional full-time employee.

Working with a firm avoids the non-monetary drawbacks of depending on an individual person as well. People get sick and take vacations, but a good bookkeeping firm is always there for you. And if you are a small company with fluctuating bookkeeping needs, a firm can give you the hours and services you need at the times and in the amounts you need them, while an individual, in-house or external, will desire regular, year-round work.

Finally, with a bookkeeping firm, you get a whole team of specialists who can offer a wider range of expertise than any individual (whether employee or contractor).

This trend towards bookkeeping firms has only accelerated with the the innovations of cloud computing, which makes it easy to perform bookkeeping services remotely. Given recent innovations, you no longer need to do find someone down the street to come into your office to sort through shoeboxes full of receipts and filing cabinets stuffed with old bank statements. A good bookkeeping firm can help you get your receipts, statements, and other documents converted to electronic formats and get you going with a paperless (or almost paperless) process. For businesses that need to retain paper records, a bookkeeping firm can help organize and track those records.

Each of the 3 bookkeeping options discussed above will be right for some companies and wrong for others. You are now well on your way to possessing the knowledge needed to make the right decision for your business. For a free consultation to help you decide which option is best for you, drop us a line at contact@bookstime.com or call 888-90-BOOKS (888-902-6657).

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Author: Charles Lutwidge

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