Maybe TurboTax isn’t as easy as it looked. Maybe you’re seduced by H&R Block’s claims that they save the average tax payer $1800. Maybe you just don’t know how categorize that shoebox of receipts you keep under your desk, but chances are, you’ve wondered whether you should hire professional help.
This tax season I bit the bullet and hired an accountant. I hired a guy who is both an accountant and a lawyer, and I figured that he would know enough loopholes and secret deductions to more than make up for his $375 price tag (for comparison purposes, H&R Block charges about $300 in San Francisco). That did not turn out to be the case, but I’m still glad I hired him.
It turns out, partially due to the research I’ve done for this blog, that I would have paid the right amount of taxes had I filed them myself. This meant, however, that I did not have a lot to explain to my accountant during our one-hour session and got to spend most of my time asking questions and receiving advice. Here are some of the things I learned:
- Unless you run a business that is really open to litigation, you may want to think twice before changing your sole proprietorship to an LLC. LLCs require a lot of paperwork and things like officers and meetings. Also, in California, the annual filing fee is $800, which is a lot more than your typical liability insurance premiums, so you’re better off just getting insured.
- Watch your inventory. You can only deduct the cost of inventory you sold last year, not all the inventory you bought.
- Always look out for standard deductions (like 48.5 cents/mile for car costs) and compare them to your itemized deductions. Very often one will be much higher than the other.
- If you use bookkeeping software like QuickBooks (which works great with TurboTax), file your taxes according to cash accounting reports, not accrual accounting reports.
- Gifts under $12,000 are always tax free for the recipient, so that birthday check from Grandma is not taxable income.
- You can’t deduct your home office if your self-employment income does not exceed your expenses, but the deductions keep carrying over from year to year until you post a profit, so keep track of them as they pile up.
In the end, the knowledge I gained from my meeting was well worth the expense. I am new to self-employment, and I liked having the peace of mind that I had prepared things correctly. Since next year will be my first year of inventory, I will probably hire my accountant one more time. In my third year of business, however, I am aiming to strike out on my own and file my taxes by myself.
I like QuickBooks
So why is “striking out and doing your own taxes” part of your third year business plan? Developing a long term professional relationship with an acountant is as important for your business as a good doctor is to your health. If your business grows at all, new and interesting challenges will arise which are better suited to the tax professional thus allowing you to remain focused on your business.
The short answer? Because I don’t want to pay for it. Though my business has grown, it is still a sole proprietorship with no employees and the same inventory/sales structure, etc. No new challenges have presented themselves as yet. At this point, my accountant does little besides entering the numbers I’ve prepared into the tax forms, which isn’t worth $400 to me. Perhaps I will hire him again in the future, when things have changed and I have more questions. Having taken some bookkeeping, accounting, and tax classes, however, I feel comfortable enough to do my own taxes this year.
You stated that LLC’s are complicated with a lot of paperwork. There is no paperwork with an LLC here in Arizona and in most states. You are not getting the right tax advice because you should make an S-election to have the LLC taxed as a corporation. If your business is netting at least $30,000 a year after expenses you will save several thousand dollars a year in self-employment taxes by setting up an S-corp. If your business is netting less than that there probably is no benefit and you should remain a sole proprietorship, but you may want to form an LLC for liability purposes. My fee for preparing a typical S-corp return ranges between $300-$500 depending on complexity.
You’re right, perhaps I wasn’t clear in the post above. From what I understand, it’s the S Corporation (or C Corporation) set up that is somewhat costly and time-consuming, and it does require more forms at tax time than filing as a sole proprietorship. Maybe as you say this is only true in California. If I’m wrong about this, please let me know.
You are also right that an LLC provides liability protection. As I said above, due the annual filing fee in California, being an LLC is more costly for me than just buying comparable insurance, which I why I encourage people with minimally risky businesses to think twice before incorporating–but I don’t assert that it is a bad option across the board. Maybe this wasn’t clear either.
As far as tax savings go, I know you can save on self-employment taxes as an S-Corp shareholder, but that an S-Corp is taxed the same as a sole proprietorship. If you are a sole prop. like me then, are there any tax savings if you are the only shareholder in your company? Does anyone know the answer to this?