(photo: JD Hancock)
For about ten years, I’ve been running a service business, selling my writing. By the Small Business Administration’s definition, I’m a small business. But the SBA has a big tent: they define a small business as one with under 500 employees. That covers 99.9% of all the businesses in America (by number of employees, not by revenue).
There’s no cachet in being in that kind of non-exclusive club. I’m a microbusiness. My business consists of me and no one else. The census calls us “nonemployer firms.” And it’s still a pretty big club: there were 21.4 million nonemployer firms as of 2008. Most are unincorporated sole proprietorships, like me.
I was wondering about these figures partly because I’m a number-loving nerd and partly because of my friend Molly Wizenberg. Like me, Molly is a self-employed freelance writer, and she has spoken highly to me of her accountant. I’ve never hired an accountant; I do all my books and taxes myself. So I asked Molly if I could call up her accountant and see what I’m missing out on. (Molly, I should disclose, is also my business partner in a very small venture.)
“Money is very important to me and I’m easily overwhelmed by it,” said Molly. “I’m fine with handling Quicken and doing my own personal bookkeeping, but I’m not comfortable going any further than that.”
The question I had in mind: should I have an accountant? Should everyone who runs a microbusiness have an accountant? Or are we better off bringing our DIY ethic to our dealings with the authorities?
So I called Molly’s accountant, Charlene Fleming of KE & Associates in Seattle, who began with a denial. “Molly doesn’t have an accountant so much as she has someone who does her taxes,” Fleming explained. An accountant is a big-time bookkeeper who prepares financial statements for a business. Molly keeps her own books in Quicken.
I put the question to Fleming directly: should I hire a tax preparer, too? I expected this to be like asking an insurance salesman whether I should buy some insurance, but she didn’t give me the hard sell. “When you think that you’re going to save more money than it’s going to cost you to do this thing, that’s when you pay someone to do it for you,” she said. How do you know when you’ve hit that point, though? “When the numbers seem to be getting out of hand for you. When it’s taking you two weeks to do the TurboTax.”
It takes me about two hours to do the TurboTax, I told Fleming. Fine, she said, with one caveat. “I tell people that the difference between them and me is that they do one [tax return] a year and I do 500 a year. I speak fluent IRS-ese.”
At this point, I had convinced myself that regardless of Charlene Fleming’s foreign language skills, I could handle this myself just fine and save on her fee, which is about $150 for a sole proprietor’s tax return.
Then we started talking about deductions.
“Usually one of the first questions that a person asks me are the types of things they can deduct,” said Fleming.
I have always been hopelessly unclear on this, and so (is the IRS reading this?) I am extremely conservative about what I deduct. If it’s not obviously an expense incurred in the course of a paid assignment, I leave it off. “There are people in the population who are a little more timid about their deductions,” said Fleming, “and I have to tell them that while it’s their choice, they are leaving money on the table.” (Of course, she also sees people who think they can deduct everything in sight.)
Fleming hasn’t taken a look at my books, but my interpretation of what she told me is that I’m probably underreporting my R&D expenses, and that if I think I’m avoiding an audit by being timid about deductions, I don’t understand how the IRS works. “Things typically don’t get defined in granite,” said Fleming. “They end up being a range of possibilities for deductions.”
Molly pointed out that if she does get audited, she wants an experienced tax professional on her side. Actually, the way she put it was, “I like knowing that if the s—- goes down, she’s the one who has to speak for it, not me.”
I haven’t decided yet whether I’m going to give Fleming a call next spring. I’m leaning toward yes. In the meantime, I have two contradictory recommendations:
1. If you’re a microbusiness and are flying blind when it comes to deductions, spending a couple hundred bucks to talk to a tax professional could save a bundle down the road. Ask a friend in your field for a recommendation.
2. If you’re a microbusiness, know what to deduct, and have always had a professional prepare your taxes, consider doing it yourself one year. TurboTax.com makes filing a Schedule C easy, and it’s cheaper than a human tax preparer. (I’ve been using it far longer than I’ve been writing for Intuit (INTU).) You don’t have to pay for the product until you file, so if you get partway through and give up, you only wasted an hour.