Self-Employed Bookkeeping & Accounting Services
For many people, self-employment is a long-term career goal. Finally achieving the ability to “be your own boss” can be very attractive, even though it carries more risk than traditional employment. Perhaps because of economic uncertainty, the U.S. self-employment rate has trended down since the mid-1990s, according to Bureau of Labor Statistics data. For 2015, the rate was 10.1 percent. For that high-achieving tenth of the workforce, there are some important self-employed accounting service considerations, which we’ll discuss here.
Many times, a young person receives that first paycheck from their first job only to end up crestfallen upon reviewing the paystub and seeing all of the taxes that were deducted. What are referred to as “payroll taxes” are more formally the Federal Insurance Contributions Act (FICA) taxes, comprised of Old-Age, Survivors, and Disability Insurance (OASDI)—Social Security—and Hospital Insurance (HI)—Medicare. There are two components to the tax: the employer portion and the employee portion. They are equal, with the OASDI rate at 6.2 percent and HI at 1.45 percent. OASDI is levied on only the first $127,200 in wages (for 2017; the amount is indexed and increases annually), but there is no wage cap on HI. Moreover, the Affordable Care Act added a 0.9 percent surtax on wages over $200,000, which is paid by the employee only.
Once you become the employer, however, both portions of the tax fall on you. What is referred to as self-employment tax is merely the combined employer and employee shares of FICA: 12.4 percent for OASDI and 2.9 percent for HI, totaling 15.3 percent. (The rate was temporarily reduced to 13.3 percent by tax relief legislation for tax years 2011 and 2012 but returned to 15.3 percent in 2013). As with all payroll taxes, accurate and timely calculation, reporting, and payment of self-employment taxes is critical.
Having the Right Legal Structure
Of 15 million self-employed workers in 2015, almost two-thirds—9.5 million—were unincorporated. This is unfortunate, as operating as a sole proprietor creates significant risks. The reason for placing a business within a legal structure such as a corporation or limited liability company (LLC) is that the business becomes an independent entity—a “person,” in legal terms. In a sole proprietorship, the owner’s liability for debts, judgments, and similar financial hazards is unlimited. In other words, your home, personal possessions, financial accounts, and other assets could be seized. Once a business is incorporated, losses are limited to the assets of the business that are owned within the legal entity. Even within the same business, it is possible to achieve additional asset protection through the use of multiple legal entities.
Self-Employed Accounting Services
Having employees creates a number of additional complexities and expenses when running a business. Payroll has to be processed, vacations and sick days accounted for and covered, and if the best people are to be hired and retained, benefits provided. Workers’ compensation insurance becomes a requirement.
Yet even if you operate a self-employed business, such as a consulting or professional practice, there are certain tasks that must be accomplished. At the top of the list is accounting services. Customers must be invoiced, payments collected, and bills paid. Certainly you can do that work yourself, especially when the business is young, but if your consulting rate is $350 per hour, how much money are you losing when you must devote unpaid hours to your bookkeeping?
Fortunately, it’s possible to operate a lean organization while keeping those responsibilities off your shoulders. Outsourced accounting services are the perfect answer for your self-employed business, since you pay only for what you use and have no responsibilities for managing, paying, or insuring employees.
Hire a Third Party Accounting Firm Today
BroadCreek provides affordable self-employed accounting services that are scalable to the size and needs of your business as it grows. BroadCreek accounting and finance professionals can also advise you on questions regarding the best legal structure for your business and self-employment taxes, among many other areas of concern for the self-employed.
Contact us today to find out how we can take your business to the next level.