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Setting up Your Own Accounting Freelancing Business

By bvalleydev

  • March 21, 2017
  • 5 min. read

If you’ve never gone through the process of starting your own accounting business before, all the red tape that goes along with self-employment may seem imposing.

Here’s a quick crash course covering four areas that you’ll want to address:

  1. Insurance
  2. Taxes
  3. Retirement
  4. Record keeping
    Let’s start with insurance…

Insurance
What insurance will you need?

To figure this out, we recommend taking this 5 minute assessment from PolicyGenius. They’re a startup whose mission is to get people the insurance coverage they need to feel good about it.

Health insurance and disability insurance are generally recommended to everyone, and life insurance for those with dependents. We’re just going to skim the surface on these three:

Health Insurance
You likely won’t qualify for health insurance subsidies. A quick and easy way to get competing quotes from various providers is to search for quotes on eHealthInsurance.

Disability Insurance
Disability insurance is a bit more complicated, as insurance companies tend to be a bit slippery in the way they define disability in their insurance contracts. We recommend going through an experienced broker.

We went with Your Wealth Partners, an Atlanta-area broker with decades of experience in this field.

Look for a broker who specializes in disability insurance, and be sure they can explain to you the implications of various definitions of disability to ensure they’re mindful of this characteristic. The last thing you would want is to have your insurer deny a legitimate disability claim based on how they define disability in your contract.

Life Insurance
If you’re single or don’t have children, you probably don’t need life insurance. If you have dependents, those in the know will almost always recommend term over whole life policies.

Taxes
A benefit of being a full-time employee is that your company pays the employer portion of unemployment taxes on your behalf. As a self-employed freelancer, you’ll have to cover this portion.

This may seem like a significant negative for self-employment; however, there are several areas of the tax code which benefit the self-employed professional.

The key is structuring your company the optimal way, as well as taking advantage of all possible deductions.

Legal structure
For those planning on freelancing long-term, creating a single-member LLC and electing S Corp status is generally the most effective route. Doing so allows you to determine an annual salary for yourself, and you’ll pay employment taxes only on the amount you pay yourself as salary.

Anything you earn in excess can be distributed as an owner’s distribution, which circumnavigates both the employer and employee sides of payroll taxes.

Be careful though. The IRS mandates that you determine your salary amount to be reasonable.

In order to pay yourself a salary, you’ll have to set up payroll, and we recommend setting up payroll through Gusto. It’s fast and easy, and the tax savings will easily outpace Gusto’s monthly fee.

Expenses
Being a small business owner allows you to deduct many expenses that, as an employee, you would likely incur anyways. As a few examples, the IRS allows you to deduct a portion of the following business-related expenses:

  • Rent or mortgage (for space used for home office space)
  • Cell phone expenses
  • Utilities
  • Mileage

Retirement
SEP and Individual 401k accounts are the business owner versions of the 401k plan you would have as an employee at a company.

SEP vs Individual 401k
Refer to this website for an overview of some of the differences between SEP vs Individual 401k. SEPs are generally the way to go for new business owners, as they’re far easier than an Individual 401k to set up.

A huge benefit of being self-employed: with either a SEP or an Individual 401k, you can defer up to the lesser of 25% of your earnings or $54,000 per year. This is likely far more than you could defer under a traditional 401k as an employee.

Record Keeping
Big picture: You’ll need to send invoices, pay bills and track revenue/expenses.

Invoicing
As a first step, you can use invoice-o-matic to begin sending invoices. Just be sure to save a copy of each invoice, and you’ll have the support you need for revenue. Eventually you may want to use a more legitimate bookkeeping solution, such as Xero or Quickbooks Online.

Bill Pay
You’ll want to apply for a business credit card and begin running your company’s expenses through there. If you’re clever about optimizing for credit card signup bonuses, you can accumulate hundreds of thousands of travel miles with minimal effort as you can run all of your business expenses through credit cards.

Revenue and Expense Tracking
To track receipts, we recommend a mobile app called TurboScan. It allows you to scan receipts and documents by snapping a quick picture using your mobile device. As long as you have your mobile device automatically back up to the cloud periodically, you can sleep well at night knowing all of your receipts are stored safely in the cloud.

For tracking business mileage, check out the mobile app MileIQ. Anytime you drive it tracks your mileage. Periodically you can then categorize all of your trips by swiping left for ‘Personal’ or swiping right for ‘Business’. Sound like another app you may have used in the past?

In Closing
So that summarizes the majority of the red tape you’ll deal with as a small business owner. It’s a mild hassle to deal with at first, but you can knock out the majority of these tasks in your first week of self-employment. Each state has its own requirements on things like business licenses, taxes, and so forth, so be sure to research your particular state’s requirements on the Secretary of State website.

There’s something to be said about the experience of creating your own small business.

Several of the skills we’ve picked up through running the internal operations of our own company translated over to client work, allowing us to add value to our clients in ways that we never would have anticipated back in our public accounting days. We’ve heard similar feedback from other independent consultants as well.

And here’s our obligatory disclaimer. These things are nuanced, so do your own research. If you have any questions, contact a professional who can provide personalized advice.

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