You can get an accountant to do your taxes. Why not get one to help you with your business?
Accountants are trained in business, and it is their job to think about how businesses make money all day long. They know what makes a good business.
This is one of those things that sounds easier than it is. Itâs not the same as getting a consultation with a tax accountant, or hiring an accountant to help you file your taxes. Those are important, but they are only incidentally about money. What I mean here is that you should hire an accountant to help you find ways to save money.
If you donât have one already, find one who will make it his or her business to be on top of all the latest developments in tax law and give you regular reports about how you can save more money.
Hiring someone like that isnât cheap, but if youâre paying attention it will pay for itself many times over.
I donât know what the right answer is, and I donât think you can know either. So ask an accountant.
Accountants and tax lawyers exist to help people avoid mistakes with money; to keep you from doing things that make it harder for you to reach your goals, and to help you reach your goals more efficiently. Thatâs why theyâre valuable; thatâs what youâre paying them for.
If you talk to them before you start a company, theyâll tell you whether you need to worry about taxes at all. If thereâs no tax issue, great! Pay an accountant $1K and move on. If there is a tax issue, theyâll tell you how much attention it deserves: maybe $5K in accounting fees and $10K in legal fees in the first year or so, or maybe $50K in accounting fees and $500K in legal fees for the whole life of the company. This is information that can literally mean the difference between success and failure.
And the accountant may know something interesting that you want advice about. Maybe one of your investors wants to sell back his stock early, but youâre worried this will trigger an IRS audit; or maybe some VC has given you a term sheet with crazy terms that you donât understand.
If you are not already using an accountant, ask one to help you prepare your first tax return. You may think you know how the tax system works, but until you have actually filed a return, you wonât really know whatâs involved.
If your income is below the level at which your state collects income taxes, you donât need to file a state tax return. If it is above that level but below that for which you would have to pay federal self-employment tax, then it is worth checking to see whether you are better off filing as an employee or as self-employed.
Notice that I said âworth checking.â Your accountant can go through all the alternatives with you and let you make the choice after having considered all the pros and cons. Accountants are not obligated to do this for their clients, but many will if they have not previously prepared a clientâs return.
Most people have to use accountants because the tax code is too complicated for them to do their own taxes by hand. The fact that you need an accountant to figure out your taxes means that you probably donât have a good enough grasp of the consequences of every choice you make. If you did, you could go to a site like TurboTax or TaxCut and put in a few numbers and get a good idea of what your tax bill would be.
Most people donât have a good enough understanding of the consequences of their choices to do that. Thatâs not just an opinion; itâs been proven in randomized experiments again and again. People given clear information about retirement plans, for example, will often pick one that is either much better or much worse than the one theyâre currently in. In other words, theyâll pick something whose consequences they donât understand well enough to realize.
Since you canât do your own taxes by hand, you need someone else to do them for you. But if you canât understand the consequences of many of your choices well enough to explain them clearly to someone else, then there is a substantial chance that you will end up poorer than if you had never tried to save money by doing your own taxes at all.
And even if âI canât afford an accountantâ is what you say, I think the real reason is that you would rather hire a talkative person to answer phones than an un-talkative person to do arithmetic.
And Iâm not just saying that because youâre my competition. Hereâs a true story:
A friend of mine, who shall remain nameless, was having trouble with his small business. He was doing $6 million a year in sales, but he didnât know if he was making any money. His brother-in-law recommended an accountant named Frank, who found several thousand dollars in unpaid taxes that my friend had overlooked. My friend then asked Frank to set up his books for maximum profitability.
My friend had no idea how to do this; he didnât even know what questions to ask. However, fortunately Frank did know how to ask those questions, and now my friend knows exactly where his business stands at all times. And now he asks Frank for advice about everything, from how much inventory to carry to which employees are worth retaining.
The moral of this story is not that every small business needs an accountant. The moral is that if you have a small business, you need an accountant.
I met an accountant once who was furious with me. I had told his clients they didnât need him.
âEveryone needs an accountant!â he said.
Bad advice, of course. But I can see how he got mad at me.
An accountant is not just someone who prepares financial statements. The name âaccountantâ comes from the word for adding up, and that is still what accountants do todayâbut itâs on behalf of their clients, not for the accountants themselves. Accountants help their clients keep track of what they own and owe by keeping track of themselves. And if their clients do a good job keeping track, the accountants donât have to do much.
Accountants are supposed to be experts at keeping track of books and records, which is easy if you enjoy it but boring if you donât. What does that have to do with getting rich?
Accounting is a tool for making money, and a good accountant will know how to use it better than anyone else. An accountant will never make you rich all by himself, but he could make you rich without you ever knowing it was his idea.
Emil is a contributor at Accountant Log. We are committed to providing well-researched, accurate, and valuable content to our readers.
