FAQs About Tech Startup Accounting

Written by Amanda Bower    |    Published: October 18, 2022

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tech startup accounting

When you’re at the helm of a tech startup, your specialties probably include running the day-to-day of your business, leading your team to success, and innovating in your space. One thing that’s probably not high on your to-do list? Learning the nuances of tech startup accounting. 

While tech startup accounting probably isn’t one of the most exciting aspects of your business, it’s certainly one of the most crucial. If you’re part of the $5.3 trillion global tech industry, the financial infrastructure of your business matters. Tech startup accounting makes it possible to fuel your operations, pay your people, and pave the way for expansion and growth. Without proper accounting practices and procedures, those things might just remain pipedreams.

If you’re in the tech startup space but accounting isn’t your specialty, you’re definitely not alone. There are tons of rules, regulations, and practices to be aware of, to make sure you’re not only deploying best practices, but that you’re also up to snuff when it comes to compliance.

With that in mind, here are some commonly asked questions in the tech startup accounting world, and their answers.

What Happens if the IRS Audits Me?

For most tech startup leaders, just about nothing sounds spookier than the words “IRS audit.” What exactly is an IRS audit, and what happens if it happens to you? First of all, an IRS audit simply means that they’re taking another (and closer) look at your business’ tax returns

According to the IRS, you can be chosen at random, based on a computer screening, or if someone you do business with is chosen for an audit. The IRS will typically notify you by a letter outlining the scope of the audit. You’ll then need to prepare documents and data related to the questions of the IRS, as well as present other information that helps your interpretation of something on your return. For example, if the IRS is disagreeing with the legitimacy of a business deduction, you can explain why you believe it’s valid. After this, the IRS will close the audit, either leaving it as-is or by proposing changes to your tax return. If this is the case, you can request an appeal.

The possibility of IRS audits is one of the reasons why having excellent tech startup accounting is crucial. If you have well-kept financials (such as payroll processing), excellent financial reporting and bookkeeping, and most importantly, professional accounting services, you’ll be well-poised to respond to an IRS audit – because you’ll have documents and data that support your business taxes.  

What Should a Chart of Accounts Look Like?

A chart of accounts is a handy organizational system that lists out all of your business’s financial accounts in one place. The purpose of a chart of accounts is to clearly demonstrate the financial health of your company, by showing things like assets, liabilities, expenditures, and revenue. A chart of accounts is a fairly simple tool and should include every account that is on your ledger, with a name, identification code, and description of the account. For example, the account number might be 220, the name might be “Taxes Payable,” and the account type might be “Liabilities.”

Why Do Companies Incorporate in Delaware?

Ah, the great state of Delaware, where 94% of all U.S. initial public offerings are registered. Have you ever wondered why so many companies incorporate in this state? It’s not because of the weather or the cuisine (although it might be nice, we can’t say for sure). Instead, it’s a common tech startup accounting practice because it can come with a litany of tax benefits

To start with, corporations that are registered in the state but don’t actually do business there are exempt from corporate income tax. There is also no sales tax in Delaware or investment income taxes (just to name a few). Other potential perks of incorporating in Delaware include speedy business filings and privacy protections.

Incorporating in Delaware isn’t always best for every business, and there are many things to keep in mind when making this decision

How Do You Pay Foreign Contractors?

One aspect of tech startup accounting that might seem complex is foreign contractors, and how to pay them. Logistically, there are a few ways you can go about paying foreign contractors. Since you’re not withholding income taxes or providing foreign contractors with benefits, you simply need to pay your contractors the amount of money they’re due.

One option is with your business bank account, which might have the option for international transfers. Another common option is to use a third-party payment platform such as Bill.com. If you’re using foreign contractors through a freelancing platform, you can pay them directly through the platform. New ways of paying foreign contracts are still emerging, and one new practice involves payments with cryptocurrency.

Do Most Startups Use an Outsourced Accountant?

While every startup decides to do things differently, choosing an outsourced accountant is a very common tech startup accounting decision. Startups are often limited with how many full-time employees they can bring on board, and having a full-time in-house accountant might not be the most practical choice for a growing startup. In one 2021 survey, 80% of small businesses said they planned to outsource some aspect of their business, in the interest of saving time and money, while working with experts. 

When Do I Need to Start Bookkeeping?

Good bookkeeping for startups should start with the birth of your company. If you haven’t already started bookkeeping practices, now is an excellent time to start. Bookkeeping, or keeping records of the financials for your business, helps your business with everything from cash flow to investor relations. When you have good bookkeeping practices, tax deadlines won’t be stressful (because your documents will already be in order), payroll will be smooth, and you’ll have an excellent understanding of your business’s cash flow.

What Tech Startup Bookkeeping Practices Do I Need to Follow?

We’re so glad you asked. What does good bookkeeping actually look like for tech startups? Firstly, your business should be keeping any and all documents related to your financials, including receipts, bills, credit card statements, invoices, and tax returns (all electronically, of course). Then, there are regular bookkeeping tasks that need to be executed, either by yourself, another company leader, or by an outsourced accountant. These tasks might include organizing transaction data into a document or program, entering receipts, paying vendors, and bank account reconciliation. 

What’s the Best Way to Run Payroll?

When you’re a brand new tech startup, you might pay your first employees with individual bank transfers or checks. But as most people quickly find, paying employees individually and manually is slow, tedious, and leaves room for error (especially when it comes to withholding and taxes). Instead, turning to a payroll processing system is usually the best solution. 

Payroll options include either online programs or outsourced payroll services. If you have an in-house accountant or someone else who can own the task of payroll, then using payroll software might be a great choice. But many tech startups choose to use outsourced payroll services because these services involve a hands-on approach to payroll, where things like taxes are taken into account.

How can I Best Prepare My Tech Startup’s Taxes?

Business taxes are certain, so it’s best to take steps to prepare for them to ensure they’re filed on time and correctly, every time. The last thing you want is for a small mistake to cost you big time when it comes to your business’s taxes. There are many things to keep in mind when it comes to your tech startup’s taxes, such as tax deadlines, regulatory compliance (such as withholdings), and how your business is taxed (because, for example, the way an LLC is taxed is unique from other business structures). 

What Other Ways Does My Business Need to Be Compliant?

There are plenty of regulatory, financial, and HR compliance needs that tech startup leaders need to be aware of, especially when it comes to tech startup accounting. For example, the Family & Medical Leave Act allows covered employees to “take ​​unpaid, job-protected leave for specified family and medical reasons,” while protective scheduling laws protect your employees from disruptive schedule changes. Being aware of what aspects of compliance impact your business is the first step in actually staying compliant

We Love Answering Questions About Tech Startup Accounting

If you think this is us nerding out, we can happily say it’s just the tip of the iceberg. We’re deeply obsessed with the tech startup economy because it’s our specialty. Here at hiline, we’re trusted by founders, CEOS, and leaders at tech startups to handle their most crucial financial matters. Our team of accounting and finance experts is ready to help you with accounting, bookkeeping, taxes, payroll & HR, and so much more.

Interested in finding out how hiline can help transform the way your business tackles accounting? Check out our outsourced accounting services for more information.

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