When Should You Hire a CPA?

What is a CPA?

CPAs are tax experts who can file your business’s taxes, answer important financial questions and potentially save your business money. While CPAs have accounting degrees, their certification differs from traditional accountants. [Related Article: What’s the Difference Between Accountants and Bookkeepers?]

CPAs have passed the Uniform CPA Exam – a rigorous exam testing one’s understanding of tax law and standard accounting practices – and obtained a state license. (The state license includes ethical requirements, too.) They must take professional education courses to maintain their license, and may lose it if they are convicted of fraud, negligence or ethics violations. Furthermore, CPAs have unlimited representation rights to negotiate with the IRS on your behalf.

CPA vs. accountant

An accountant is someone who has earned their bachelor’s degree in accounting or finance. A CPA has a bachelor’s degree and has earned additional designations upon graduation.

To become certified, an accountant must have work experience, pass the Uniform CPA Exam, and meet all state licensing requirements. The exam covers their knowledge of business, accounting, tax and auditing. Additionally, CPAs are required to take continuing education courses throughout their careers to stay up to date on laws and regulations.

Because of this certification, a CPA has a fiduciary responsibility to their clients, while an accountant does not. This means CPAs are legally required to act in the best interest of their clients, whereas a standard accountant does not have a license to lose.

What does a CPA do?

CPAs can wear many hats for your small business. They handle bookkeeping, preparing important financial documentation (e.g., tax documents and profit-and-loss statements), financial planning and tax filing, among other tasks.

They can also provide sound financial advice for your business as you continue to grow, so you can concentrate on running your business. These are the general responsibilities you can expect from a CPA:

• Tax filing, planning and advice: CPAs are qualified to handle all of your business tax needs, including year-round recordkeeping and filing tax extensions with the IRS.
• Tax and financial compliance: If you are audited, CPAs can reduce the cost of audit findings by negotiating with the IRS on your behalf. Because of their extensive knowledge, CPAs can catch financial and tax problems before they become an issue, thus preventing an audit.
• Consulting: CPAs can assist you with important financial decisions, budgets, financial risk management problems, and other financial services. They can also provide valuable advice on complicated financial matters.
• Forensic accounting: CPAs can help monitor your books and prevent fraud.
• Payroll: If you’re not already using top payroll software, CPAs can set your business up with a platform that works for your company.
• Bookkeeping: CPAs are qualified to help you create, maintain and review financial books throughout your business lifecycle.

When should you hire a CPA?

You don’t necessarily need to hire a CPA as a full- or even part-time employee to benefit from their business finance knowledge. Many CPAs offer their services as consultants. These are times you should consider hiring a CPA:

1. Before you start your business

When you’re launching a business and money is tight, the idea of paying hundreds of dollars for a few hours with a CPA may seem extravagant. However, like many other startup costs, it’s an investment (and it’s a deductible expense).

A CPA can help you set up your business so you can avoid costly mistakes. These are some of the decisions a CPA can assist you with as you get your business up and running:

• Your business structure: CPAs can recommend the best business structure for your company. The legal structure you use to set up your business, sole proprietorship, partnership, LLC, corporation or co-op, affects your taxes, liability and reporting requirements. It can also be difficult to change later on. A change in business structure could possibly require you to reapply for licenses, get a new employer identification number, or notify your bank and insurance company.
• Your accounting practice: A CPA will help you determine whether cash or accrual accounting is the best fit for your business. When you’re setting up your accounting software, one of the first questions it asks is which type of accounting you use. Generally, new businesses use cash accounting, as it’s simpler. However, there are instances when the IRS requires accrual accounting, such as if you sell goods to consumers and maintain an inventory. The alternative is the accrual method, which is  recording income and expenses when they’re billed rather than when you receive the money.

2. Tax time

CPAs can prepare tax documents, file tax returns, and strategize ways to minimize your tax liability for the following year. Also, CPAs can represent you if the IRS has questions about your return or if you or your business are audited, which is an important consideration. 

Business taxes are different from personal taxes. Even if you’ve always done your taxes yourself, you may want to hire a CPA if your tax situation is complex. For instance, if you hire employees, or if you sell products to customers in multiple states or countries, hiring a CPA to file your taxes can save you time and heartache.

These are other ways CPAs can assist you with your taxes:

• Compliance with tax laws: CPAs help you understand and comply with tax changes. When the tax code changes, such as it did with the Tax Cuts and Jobs Act, a CPA can help you understand if and how the changes affect your business.
• Appropriate deductions: CPAs help you understand which deductions you qualify for. While you want to take as many deductions as you’re entitled to, you also don’t want to make questionable deductions and trigger an audit. A CPA can help you decide when you should or shouldn’t take certain deductions.

These are some instances when you might need a CPA’s advice:

• You’re starting a business and need to know which startup costs are deductible.
• Your business started as a hobby and you want to know how the IRS will classify your company.
• Your home and small business intermingle, and you’re not sure which expenses are deductible. For instance, can you deduct your home office if you also have a desk at another location? If your vehicle is primarily used for work, should you or your business own it? Is your cell phone a business expense? If you take a business trip and extend it for a few vacation days, which expenses can you deduct?

3. Special circumstances

As you run your business, there may be specific instances when you need a CPA’s expertise. For example, if you receive a letter from the IRS notifying you you’re being audited, you should hire a CPA to represent you. You should also hire one if the IRS contacts you simply requesting additional information about your return. CPAs have experience dealing with the IRS and can help you respond appropriately, supply the information it needs, and resolve the issue as painlessly as possible.

These are some other situations that may prompt you to hire a CPA:

• If you’re thinking about taking out a small business loan, a CPA can help you decide if financing fits your long-term goals. They can recommend the best business loan for you, figure out the loan’s size and the cash flow strategies you should implement. They can also prepare financial statements for your loan applications.
• When events in your personal life have the potential to affect your business finances or structure, you may need to hire a CPA. This could include if a business partner who is also a family member passes away, or if the business is a marital asset and you’re getting a divorce. CPAs can advise you on whether the event has tax implications, help calculate the value of the business, or prepare financial statements for a sale.

4. When you acquire, merge, sell or close

When you’re facing significant structural or operational changes to your organization, you should consult a CPA about the tax implications for your business and for yourself. Structural or operational changes could be purchasing a business, merging with another company, planning to sell or close your business, or dissolving a partnership. 

If you’re purchasing a business, a CPA can help you analyze its financial records, verify its assets, and perform your due diligence. If you’re selling your business, a CPA can also determine your business valuation when you’re ready to sell, and prepare your financial reports and statements.

When you have a serious buyer, they expect you to have perfect accounting records. A perfect record needs an accurate valuation – and you may lose potential buyers or receive a lower offer if you don’t meet these expectations.

What’s the average cost of hiring a CPA?

The short answer is it depends largely on your business and the services you need. According to the U.S. Bureau of Labor Statistics, the median hourly wage for CPAs is $43.65. This may not, however, cover specific fees for certain services and consultations.

It’s important to have an idea of the kind of services you need before you meet with a prospective CPA. This way, you can have a clear discussion on how they are going to bill you.

By itemizing costs, you can gain a realistic idea of how the CPA could help your organization thrive. You’ll also be able to weigh the cost and benefits of outsourcing certain services that you may be able to complete through a software program or other means.

While it’s hard to pin down a concrete number for how much you can expect to pay a CPA, it’s important to have a knowledge of typical fees and expenses. These are some typical expenses to review before you meet with a CPA:

• Hourly rates
• Administrative fees
• Paperwork fees
• Other fees and services

What to consider when hiring a CPA

Hiring a qualified CPA can be a lifesaver come tax season, but as you can see, a CPA can help you at every stage of your business. If you’re searching for the right person, here are a few things to keep in mind.

1. Look for a CPA who’s familiar with your industry.

It’s important to find a CPA who’s familiar with your industry and the needs of businesses like yours. For instance, if you run an e-commerce business, then your small business accountant should have experience working with online companies.

2. Ask for referrals from other business owners.

If you’re friendly with other business owners in your area, ask them for recommendations. The best place to start is a local networking group. If you don’t have anyone to ask for a referral, you can search the American Institute of CPAs.

3. Make sure they’re registered in your state.

Before you hire anyone, use the CPA Verify tool to check that individual’s certification status to ensure they are up to date with their requirements.

4. Check their reputation.

Lastly, when considering a CPA, check their online reviews or their Better Business Bureau accreditation. By doing your due diligence, you will have the best chance of hiring a highly qualified CPA.

Develop peace of mind with a professional CPA

When you work with a professional CPA, you can rest assured your accounting is being handled by an expert. Not only does that provide you with peace of mind, but also guidance and insight into how to best structure your business’s finances. This can help boost your profitability and help your business grow faster. So, while many entrepreneurs are often tempted to go it alone, hiring a CPA is one of the most important investments you can make in the early stages of your business.

Tejas Vemparala and Matt D’Angelo contributed to this article.