I finally hired an accountant last week. It's something I'd been putting off, which was certainly a mistake on my part. Of course, dreaded April 15th is still over 4 months away, but it's finally sunk in that the worst time to see an accountant and start thinking about taxes is April 14th.
I've used H&R Block's online tax return service for a few years, and while it may be great if you only need to file W2s, it's not a great solution at all for me as a sole proprietor. The key for me is that an accountant who I can sit down and talk face-to-face with is going to ask me important questions like, "how many miles did you drive last year between your office and Staples to pick up supplies?" The H&R Block form just assumes that you knew you could write that off, and would enter it in line 472C if applicable.
I am by no means an expert in accounting or taxation, and everyone's situation is unique, but I can share a little bit of my accountant's feedback:
Things my accountant didn't frown at
- I formed an LLC. The benefits of an LLC over other corporation types are mostly on the legal side, but an LLC allows you to be taxed as a sole proprietor, thus eliminating double taxation of C corporations.
- I setup a separate bank account for the business and only used my debit card for credit transactions. Unfortunately, it took me a few months to get the account established, as I had to wait for my federal tax ID number (and I procrastinated a bit). It's very confusing to try to weed out personal expenses from business expenses when looking at a single bank statement.
- I used Quicken (maybe I should look at Quickbooks?) to import my statements and track expenses. The cost of the software is well worth the time I would spend figuring everything out on paper or building my own reports in Excel.
Things my accountant almost smacked me for doing
- Not paying my quarterly estimated taxes. This is something that's burned me in years past, and I know better, but I just don't do it. Since I don't have anyone withholding taxes from my income, I'm supposed to send the IRS 25% of my estimated taxes every quarter or else I get penalized on April 15th. I have to send a couple fat checks to the state and federal government in the next few weeks, but at least it won't be as fat as what I would've had to pay them in April.
- Not keeping track of my mileage. I can go back and look at meeting dates and locations to figure out those numbers, but in my mind I'd only pictured doing that for longer trips. I'd figured that since most of my clients are located close to me it wouldn't matter enough to keep track of it, but it's looking like I was pretty wrong about that. And as I alluded to before, she pointed out that even my drive to Staples was fair game for a tax write-off. (What about driving to Starbucks?)
- Not using her in previous years. I thought my 2005 taxes were straightforward enough for me to do on my own, but she took a look at my returns and in a few minutes pointed out ways that I could've saved $400 or so. This was enough to have covered her fees with a little bit left over.
Her best advice: "If you read something on the Internet telling you such and such is the right thing to do, just send me an email and ask about it. Don't believe any bozo with a blog." (OK, maybe I took some creative liberties with that last part).