Should you hire an Accountant? YES.

When I started my business "officially" in 2005 I was lucky enough to already have a family Accounting Firm in place. Well, not really my family, but my husband's family. They'd been using this firm for 20+ years for their own business and were kind enough to have them take care of our tax needs as well. I thought, "GREAT!" That's one thing we don't have to worry about. I kept my own books to make things easier on the Accountants, and I'll admit I find it sort of fun to keep my own books. I use Quickbooks, should any of you be wondering, and after the initial setup (chart of accounts, invoices, etc.) it was pretty easy to manage. I like knowing exactly how much money I've got coming in and going out, and I'm able to track each month and each year, and compare it with previous years. At the end of each year I know approximately how much I grossed and how much I netted, so typically there are no surprises when the Accountants come back with the final numbers.

Everything sounds perfect, right? Well... not really. Nearly every year since I started my business we've had some kind of surprise at tax time. I've tried talking to the Accountants a few times over the years and never got much response, if any, and too many times there's been stress and wonder. Worst of all, I kept thinking it was my fault. Sure, I've made a few mistakes over the years to which I've corrected and become more aware of what I should and shouldn't be doing... but to have something new come up every year which means more money out of pocket, well, that's not right.

It was thanks to another member of my husband's family who called me to tell me they'd be dropping the "family" Accountant, that my eyes were opened. Apparently they'd been having many of the same issues we had. And most of all I just never felt comfortable with them. I couldn't call and ask for advise, and not knowing how much they charged the "family", I didn't want to risk creating undo expenses. So, it was time to start looking around for a new Accountant. Someone I could talk to, get tax advise from, and who would hopefully clean up and fix any mistakes that had been made in years past.

Holy shit have I learned a lot these past few weeks. I decided to interview a few different Accountants here in town and all three asked me the same question, "Why are you operating as a Sole Proprietor?"

That's a great question, but not for someone who doesn't know the answer. As a freelancer and (very) small business, my question back to them was "Why shouldn't I be?". Apparently, as a small business, once you reach a certain level of income there are some big tax advantages to becoming what's called and S-Corporation. Huh? Let's break it down a bit.

Sole Proprietor
Starting a business as a Sole Proprietor is pretty easy. Just file a DBA (Doing Business As), grab a Federal Tax ID number (also known as an EIN Number) and you're pretty much in business. Just remember that as a Sole Proprietor you will pay (as of right now) 15.3% of your income (after deductions) in taxes. So if you have a taxable income of $50,000 per year, you'll pay $7,650 in taxes. Also, should you ever get sued for any reason, your business is YOU. Meaning, your personal property can be seized to pay off a business debt. This is putting it in simple terms, but you get the idea.

S Corporation
Now I'm not a tax professional, and should you need any tax advise (blah blah blah) don't come to me and don't take anything I'm saying here as tax advise. Every business is different and your situation may differ greatly from mine. Now that I have that out of the way, here's my understanding of the differences in an S Corporation. First off, legally, as an S Corp, the business is liable in itself for any debt and I, as an individual, am no longer personally liable. Meaning if something happens or if someone sues the corporation, they can't seize my personal assets - only those of the corporation. Pretty cool.

Next, and this is the better part, the S Corporation would pay me a "Fair Salary" to which I would pay my normal taxes as usual, and anything earned beyond that salary would be considered profit... meaning it's taxed differently (far less). I'm not gonna get into all the terminology because I still don't even understand it all, but of course that's why I (now) have a new Accountant.

So let's use the previous example of a $50,000 a year income (this is just a round figure for easy math) and we'll say you live in Lafayette, Louisiana. As a Graphic Designer in the town of Lafayette, Louisiana, the median salary is approximately $38,000 per year. The city or town you live in may be higher or lower, but we'll use this as an example for now. That means your S Corporation will pay you a monthly salary of about $3,167, and you'll pay taxes on that salary, equaling about $5,814 per year. The rest of that money is paid out as ordinary income (also known as profit sharing) and not subject to the same taxes (they're only subject to the shareholder's income tax rate), which in Louisiana is somewhere between 2% and 6%. If we round it out to 4%, then you'd only have to pay an additional $480 on the $12,000 in profit.

Confused yet? Well, here's the bottom line: With a $50,000 per year income, as a Sole Proprietor you'd pay a total of $7,650 in taxes. As an S Corporation you'd pay a total of $6,294, saving you $1,356 in taxes to Uncle Sam. Maybe not too much of a difference now, but as your business grows and you make more money, the savings can become substantial. This is something my former Accounting firm neglected to tell me, and makes me all the happier that I've fired them and hired someone new.

So, if you're in business for yourself, and you think you're doing fairly well... I might advise that you talk to an Accountant and just have them look at your company. You might be surprised at some of the things you've been doing wrong, and some of the things you've been doing right. Most Accountants will give you a free consultation and I'm here to tell you that for me, hiring a professional that is easy to talk to and appears to know what they're doing is by and far worth the money you pay them. I was also very surprised at how little the Accountant I hired charges. Funny things you find out when you actually look for them.