Hacker News Reader

Comment by mattferderer | Hacker News Reader

Hire a good tax person immediately. Maybe hire 2.

A significant amount of your income earned is gained through having someone walk you through handling taxes & health insurance. I'm not suggesting cheating on taxes. There are common practices such as knowing how to best incorporate your business for your situation. How to best pay yourself (dividends vs income) & how to handle your personal & company expenses. This can easily make a difference of between 20-30% of your income.

By a good person, I mean someone willing to sit with you for over an hour & understand you family situation, what expenses you have & what expenses you plan to have as a business. Someone who will also sit down with you once or twice a year & re-discuss as well.

View on HN

What country are you basing this advice on? I think it’s good advice, but if your income can increase by 20-30% as a result of optimising your business structure for tax purposes, that’s a dysfunctional tax system. I’d like to believe that in some countries this advice is not necessary.

I run a small consulting firm in the United States - you can definitely goose dollars-in-pocket based on your type of consulting and other arrangements.

Imagine that I run two firms - one that provides primary top-level advice, guidance, etc. here in the states, and with the other doing some or all of the implementation work in a U.S. territory like Puerto Rico. Much of the profits can end up in PR, and when your continental entity needs cash it can borrow it from your PR-entity at a decent interest rate to further reduce states-based taxable income. You don't really even need to be a citizen of PR for that to begin working. That's one of innumerable ways to reduce your tax burden here. An ambitious accounting and legal team can help you ensure that you keep as much of your total billings as possible.

We don't do this - we're too small and due to ambitious growth we end up eating most or all of our earnings each year anyway. Definitely seen it before.

This advice is good for the UK too. Yes it is dysfunctional

However it is a pretty simple one off step to incorporate, which your accountant should handle easily for you. After that optimise to maximize cashflow, and don't get excited about other tax savings. Some people get bogged down trying to save little pieces of tax by, for instance, buying assets they don't really need. Optimise for best cashflow. Optimise for best cashflow. There I said it three times. I am a finance professional who has held fc roles. I think about tax very rarely. I think about cashflow constantly.

Optimise cashflow for consultants:

Charge more Charge up front If you supply anything make a margin on it, and get paid upfront Bill on time Bill on time. Seriously stop working and write your bill out. A well functioning finance department at the client will pay all authorised invoices around the due date. Authorisation takes time, get in the queue early. Chase your debts immediately, if you have large bills due for payment call your clients accounts payable (know who this is) and ask them if they have the bill and ask them to confirm what date it will be paid on and the amount. Send statements too. I see this every day, where someone is waiting for co to pay them but co has no record of the invoice, it is in spam, in the wrong persons inbox etc. AP departments don't mind being chased, they expect it, it is their job, don't be shy!

Copy your bills directly to accounts payable as well as your direct contact. AP are generally good at chasing internal people for things they know about

Apologies. I should have clarified. United States of America.

I don't believe it's dysfunctional for this particular reason. There are for sure trade-offs between simplification & trying to optimize for the best outcome. A simpler tax code would be nice but then people on all sides of the political aisle would start saying we should really give X a break for Y reasons and that's how it seems to get complicated.

There is literally a 20% tax break for most small businesses this year in the US.

Healthcare can be cut in half if you are below certain requirements but make a $1 more & you pay the whole bill. This one I agree seems silly. Though it's maybe to simplified & should be more complex with a sliding scale.

A popular move for freelancers is to start an S-Corp LLC where you pay yourself a fair wage compared to others in the industry. This money gets taxed hard. Harder personally for you than if you worked for someone else. You can pay yourself dividends though with any extra money your earn as long as it's less than your wage income. This money gets taxed much less.

How you invest your money is also taxed all sorts of different ways.

Note - I'm not a tax professional & the above is just my understanding. Someone who is a professional or has more experience would give better advice hence my original post.

It’s not a crime if they don’t catch you. But ensure that your taxation system does not have rules about transfer pricing to expressly prevent tax avoidance.

The cheaper (with AI and automation) it gets for IRS to chase for transfer pricing violations, the more likely it is to get a fine.

   It's not a crime if they don't catch you.

With that mentality, you're as good as caught, anywho.

In France this is good advice too. If ones doesn't like doing tax things this is generally good advice.

And don't be the cheap client yourself in that regard 120€/hour for a good/excellent freelance accountant, I never want to go back to less experienced/professional/passionate ones.

Some examples: When you open a one person business in France there is a program to give you a 0% tax rate in the first year, but you need to apply and for that you need to know it exists.

Employing yourself can cost you 70% taxes. At the start when you rates might be low you can pay around 25% with the right corporate structure, instead of up to 45%.

edit: typo

This is applicable in most civilised countries.

What are some ways to (a) tell a good tax person from a bad one and (b) look for a tax person in such a way that increases your odds of finding a good one?

As a professional I always have my credentials and certifications framed and hung on my office wall for everyone to see. The same goes for awards and associations meberships.

So when it comes to hiring someone where I don't get a personal reference I always look for this, I also start with professional association member lists and or their referal services.

Most good accountants will provide you with a free consultation at their office or at the very least over the phone, just don't get hung up on fancy clothes and expensive furniture as that can all be just a facade.

The best accountant I ever had wore jeans and plaid shirts, drove a twenty year old car and his desk was always stacked with papers but he knew his stuff and was a huge part of my success, unfortunately he retired but again as a good accountant he referred me to another account before he retired.

Are they willing to sit down, be kind & patient & hear you out?

Do they seem like they care about your best interest?

Are they explaining things or making it sound over complicated?

Are they trying to sell you on services or nickel & dime you.

Remember, you can always fire them & go somewhere else. It's why I also suggested going to two different people. They're fairly cheap for small businesses.

I found my tax person through a referral. Went in and chatted with him about some questions and that was that. 15 years later I still use him, though I don't consult any more.

This points out another good tip: find a network of other software consultants that you can trust and ask questions of. I found mine, years ago, by keeping in touch with past colleagues; some of them had gone independent. Now I'd probably look on a local slack and organize a few lunches.

1) Do they sound interested in what your business actually does? 2) Do they work with other people in your industry, or comparable ones. 3) Did they get back to you in good time 4) Do they take documents electronically etc.

Most of all

Recommendation

This is very true, a good accountant is worth every penny. If you follow a good accountants advise you will almost always succeed, the tricky part is following said advice. A good accountant will help you delvop a business plan, theres alot of merit to the saying "Plan the work, then work the plan"

I live in a small remote town, and I'm very unlikely to find an accountant familiar with tech work here. Any advice on finding a good accountant remotely?

I'd say try the biggest city close to you.

You might not want an out of state accountant unless they're familiar with the peculiarities of your state (or even city)

That's a good suggestion. I'm in Alaska, to be specific, and I was thinking of looking down south. I'll try to find someone in-state first.

Nah. Just create an LLC and make an S-corp election if flying solo. That way you can pay yourself a salary, and pay the income tax just from the salary as opposed from revenue, which is much larger. There, I just saved you at least a hundred thousand dollars (if you're in the US and charging market rate). You can totally do it yourself - it's not complicated.

It's not quite that simple. If you're not cheating, you have to pay yourself a market rate salary that you are fully taxed on (you are setting your market rate at a reasonable level, right...?) and you're still going to be taxed on the business distribution in excess of your cost basis, just not federal payroll or self-employment tax. Be careful of state laws and fees as well - California specifically really loves to get their pound of flesh any way they can. Depending how much you make in business income and what your expense situation looks like it may or may not make sense to go through the extra hassle. Talk to a tax professional.

I'm not in CA, my condolences to anybody who is - it's a notoriously business hostile state. I pay myself about $14K/mo pretax (modulo B&O which is paid on revenues) - enough to comfortably sustain a family of 3 in my area. This is obviously lower than market rate for what _I_ do, but not out of the line for software engineering in general. I also don't do any distributions. I expect that at some point I'll only be working _very_ part-time on whatever it is my clients want me to do, and spend the rest of the time on my own stuff, and this is where most of the tax savings will come from: you pay less tax overall if the salary you pay yourself yearly is less.

An S-Corp will increase your risk of audit. Don't go it alone, make sure you and your accountant are dotting all i's and crossing all t's.

Reply on news.ycombinator.com