When Does a Freelancer Need a CPA

Credit: photo by kozumel/flickr

There’s a point in every business when having a CPA becomes necessary. Your taxes get too complicated for the local tax preparer, you need to start thinking about saving for retirement and you generally need to make sure that you’re bringing in enough money to grow, at least a little. For freelancers, however, identifying that point can be tough.

A part-time freelancer with a day job almost never needs a CPA. Even someone who has been freelancing full-time for a while may not need a CPA. And if you don’t need a CPA yet, that’s fine — why pay for an accountant’s services when all you really need is some help from a tax preparer?

What Can a CPA Do For You?

Natalia Sylvester is a freelance writer. She’s been going to the same CPA for years — she started out bringing her taxes to her parents’ CPA when she landed her first job and stuck with that CPA when she need more help. “In the beginning especially, he helped me get organized in terms of my record keeping, what expenses I could deduct, how much of my income I should be saving for tax purposes, etc–basically educating me on how the whole process for freelancers differs from when I was employed. Aside from my yearly tax return, he also calculates my quarterly payments, so I send him all my records periodically. He’ll also say things like, ‘Wow, you’re really picking up steam,’ when I’ve had a really great quarter, so that’s always nice.

You may not need a certified public accountant for all your accounting needs, of course. There are a variety of other professionals whose skill sets overlap with CPAs to a certain extent. Mariette Knoblauch is a tax accountant and provides services such as startup consulting — setting up your books, getting a business license and so on — as well as tax preparation services. Knoblauch also helps small business and freelancers find ways to improve profitability, find more deductions and generally keep more money in their pockets. She points out, “Consulting with an experienced bookkeeper, accountant or CPA who does a lot of work with freelancers can save time and money. Getting your books set up properly gives a freelancer critically important information about costs and profitability in real time, so changes can be made if necessary to stop doing unprofitable things (or raise prices so they become profitable). Consulting with a tax professional (registered preparer, enrolled agent, or CPA) allows a freelancer to plan and arrange their business so that they can take advantage of all the deductions and credits available to them, and pay the lowest amount of tax they legitimately can.”

What You Need to Look For

There are accountants who specialize in working with freelancers, although that’s not necessarily a necessity — even for a freelancer who is looking for an accountant. Rather, it’s important that your CPA (or any other financial professional) is generally comfortable with the mechanics of small business, like Sylvester’s. She says, “He had worked with other freelancers, though it wasn’t necessarily something he specialized in. To me it was more important that I could trust him, and by the time I started freelancing I’d already been doing my taxes with him for several years, so we’d built a working relationship. It was also helpful that a lot of his clients were small business owners, some of whom had started out as freelancers and then formed LLCs or Inc’s, so I knew that we’d be able to continue working together as my business grew.”

While you may not need a full-fledged accountant right away, talking to a bookkeeper early on can help you get your books set up in such a way that your future accountant won’t feel the need to charge you extra just to clear up the mess. You’ll want to start looking at transitioning to an accountant as your freelance business grows and you need to start looking for more deductions and ways to help your business grows. It’s also helpful to have an acocuntant on your side if you run into problems — preferably before the problem even starts. Knoblauch notes, “A freelancer would need a CPA for any audit or review work, for example if reviewed financial statements are needed for a bank loan. A CPA, enrolled agent, or lawyer is needed in case of an IRS audit — those are the only people allowed to represent you before the IRS.”

Pricing can vary from accountant to accountant, ranging from $150 per hour to $400 per hour. Before that number scares you, think about how your own pricing works: you can charge more per hour as a freelancer because it typically takes you less time to complete a project in your particular field. It may take a CPA only two hours to complete a tax return that someone with less expertise would spend an entire day on. Sylvester points out that she feels that what she pays is definitely worth it. “I’d pay more if I had to. It’s not just a matter of my time being valuable (which it is), but the peace of mind from knowing that I’m handling my taxes correctly, and the amount of money I save by doing so, is worth it to me.”

Credit: photo by kozumel