Why you shouldn’t get an accountant
Often people who are starting self-employment are advised to get an accountant. This is usually overkill.
First let’s look at what an accountant is. An accountant is a professional or quasi-professional who is skilled at auditing, determining the costs of things, and assessing the value of different business strategies. Given enough data and time, an accountant can tell you how much it costs per day to keep a pallet of Cascade on a shelf in a warehouse, whether you’re selling enough Cascade to justify the inventory you’re keeping, and how much high you’d need to price off-brand dishwashing soap in order to get an acceptable return on capital. Accounting is not particularly dry or boring, in my very limited experience with it.
But since as a software solo practitioner, you’re not managing inventories, have very low captial requirements, and relatively simple expenses, you don’t have much need for the higher-level abilities of an accountant. All you really need is to keep track of your income and expenses, generate a couple of reports at your year-end, and file minimal tax forms with the state/provincial and federal governments. Hiring an accountant to do this is like hiring a Jamie Zawinski to ‘program HTML’.
All you really need is a bookkeeper. So let’s look at the typical transactions after a year of software self-employment: you’ll write a dozen salary checks, deposit checks from at most 2-3 clients per month, and reimburse yourself for some expenses. You will depreciate a computer and maybe your desk and chair. That’s at most 100 transactions per year. For many people it will be more like fifty. Even if you save up all your bookkeeping and do it at the end of the year, it shouldn’t take you more than an hour. (I just looked at my last year’s books and we did 111 transactions, including maintaining bank accounts in two currencies and two sets of monthly payroll checks.)
So: why should you do your own bookkeeping? I’m sure it feels nice when you hand over your mess of papers and receipts and check stubs to somebody else and get back a neatly printed tax return. It feels less nice when you reflect that you’re paying at least $1,000 for work that you could have done in an hour or two — and if you spread the work out over the year, as I recommend, you don’t even notice the minute here and minute there that you spend on it.
Incidentally, $1,000 for a simple business tax return might be obsolete. After the Enron/Andersen mess, accountants got slapped with a pile of new regulation which, as far as I can tell, makes them more liable for failing to detect and document your mistakes, evasions, etc. This has the valuable effect of making accountants more careful and meticulous when they prepare books for large publicly traded companies. It has the irritating effect of making accountants treat everybody as a potential Enron, and also inspiring accountants to carry professional liability insurance, which of course increases their rates.
The other thing you can get from an accountant — auditing — is not particularly useful to you as a solo practitioner. If you’re the only employee and the boss and the shareholders, you can only steal from yourself. (Arguably you could be trying to steal money from the government by cheating on your taxes, but it’s not really the accountant’s job to prevent that.)
Directions this will eventually go: how to set up your bookkeeping, some more discussion of the accountability (or lack thereof) including responding to some of the points raised by Ben in his comments about startups vs. solo practice.