Worth it to hire a CPA for a side gig that only brings in <7,000K?

[Isaac W.]

Hello All,

Very new here, both to the community and to investing/real estate at large.

I'm wondering if you all think it's worth it for me and my wife to find a CPA.

Our financial situation is pretty simple. We both have modest W-2 jobs. We (filing jointly) would be taxed at the 22% bracket, but put away a considerable sum into our retirement accounts (401(k) and 403(b)) such that we're taxed at the 12% bracket. I have a side gig that brings in less than <7,000 a year. In time, we hope to invest in RE. At the current time, though, does it make sense to seek out a CPA, e.g. to assist with entity creation? As it is, I am structuring my business as a sole proprietorship. Of note, given the nature of my side gig, I essentially have no deductions (it's basically just me, my brain, and my laptop!).

I read Tom Wheelwright's Tax-Free Wealth, and he seems to reiterate the importance of finding a CPA; at the same time, his audience would appear to be those with significantly more assets/investments.

Thank you in advance for your wise feedback. If I'm neglecting to provide any key information, please do let me know.

[Schyler Smiley]

Hey Isaac,

If the return is relatively simple and you use good tax software, you can usually file your own return without the need to hire a CPA because the software does most of the work for you. You add your W-2 information to the return and the software is usually going to calculate the proper result for you. Wage earners claiming the standard deduction usually just copy and paste the numbers from their W-2’s into the software.

It can become more complex when you start adding in other sources of income like self-employment income and/or rental income. An untrained taxpayer can easily start missing things. They tend to miss certain deductions they would otherwise be eligible for or they deduct things they shouldn’t. Additionally, the more complex the return, the more necessary it becomes to understand how the information is being displayed and taxed on the various forms. Though tax software is very accurate most of the time, there have been numerous times that I’ve had to override the software to achieve the proper result while preparing returns.

As far as entity creation goes, I usually recommend that a new individual starting a business use the default classification when they're just starting out. A sole proprietorship is the default classification for a single person and you include the activity from this business on a Schedule C on your individual tax return. No separate return required. A partnership is the default classification for two or more individuals and you first need to file a separate partnership return prior to filing your individual tax return. It's the same whether you create an LLC or not. You do not want to elect corporate status (C or S Corp) without first understanding the tax implications in doing that. A lot of new small businesses prematurely elect S Corp status and the election ends up not being beneficial and it can become a nightmare to try to terminate and can yield very unfavorable results versus if they just left it as a sole proprietorship/single-member LLC to begin with.

Also one other thing to note. Although placing most of your money into a pre-tax retirement account may save you a decent amount of tax now, don't automatically assume that it's the best option. The current tax law (TCJA) is scheduled to expire in 2025 after which we revert back to pre-2018 tax law, which it not as generous to taxpayers. If you expect your income to either remain consistent or to increase over the years, you may want to consider contributing to a post-tax retirement plan now such as a Roth IRA or 401(k) if the option is available to you. Although you don't get the benefit of the deduction now, you're being taxed at lower rates in this tax environment. When you take the funds out during retirement, not only is the original contribution tax-free (because you've already paid the tax when you first contributed), but the compounded earnings are also tax-free! Not so with a pre-tax account. The original contribution plus accumulated earnings are taxed in full. Just something to consider.