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Should You Use QuickBooks Self-Employed?

Picture of sole proprietor who might use QuickBooks self-employedShould you use QuickBooks Self-employed? It’s a great question to ask if you run a small business and you’re wondering which version of QuickBooks to use.

But to answer this question, we have to explain just what sort of business QuickBooks Self-Employed is even for.

In a nutshell, Intuit’s QuickBooks Self-Employed product is designed for sole proprietorships, and it really only works for sole proprietors (or LLCs taxed as sole proprietorships).

To understand why all this is the case, we’ll need to first explain what a sole proprietorship is, if you’re not already familiar.

What is a Sole Proprietorship?

A sole proprietorship is one of the oldest types of legal entities (the other being a general partnership). It’s a business owned by one person, and there is no legal distinction between the person and the business.

This concept can seem a bit odd in this day and age. We’re so used to the idea of corporations that, to many people, it seems only natural  that a business is a separate thing from its owner. But this concept is actually pretty new, and you should know that you need to file special paperwork with your state’s secretary of state if you want your business to legally be something separate from yourself.

When your business isn’t legally considered a separate thing from yourself, it means that you personally are liable for the business’ debts (because you and the business are one in the same thing). If things get bad and your business owes a lot of people a lot of money, a court could order that your personal assets be used to pay back your/your business’ debt.

Once you understand what a sole proprietorship is, you realize that the way the federal government taxes sole proprietorships makes a lot of sense.

If you own a sole proprietorship, you report the income from the business on your personal income tax return. It’s a schedule (Schedule C to be precise) that goes inside your 1040. (This is in contrast to partnerships and corporations, which are legal entities separate from their owners and thus, predictably, have to file their own tax returns.)

Note: Sometimes you can own a business that is a separate legal entity from yourself, but is treated on your tax return as if it’s a sole proprietorship. This is called a “disregarded entity.” Usually these entities are single-member LLCs, but sometimes foreign entities (like an offshore corporation) can be disregarded entities, too.

Why QuickBooks Self-Employed?

Once you have a general understanding of what a sole proprietorship is and how it’s taxed, it makes a lot more sense which types of businesses QuickBooks Self-Employed is for, and why it’s not scalable.

QuickBooks Self-Employed assumes that your business is not its own separate legal entity, and thus doesn’t have its own bank account. Instead, the program assumes that business expenses are paid out of a personal bank account. The user interface built around this assumption, allowing you to mark different expenses in your bank account as either “business” or “personal.”

As a result, QuickBooks Self-Employed can’t produce a full set of financial statements for your business. It can produce a simple profit and loss statement, but it can’t produce a business balance sheet. The business’ balance sheet is just your personal balance sheet (since again, you are the business), so the best way for sole proprietors to get a “balance sheet” using Intuit’s cloud-based apps is to use Mint.com to build a personal balance sheet (including all of your bank accounts, your house, your car, etc.)

What’s more, QuickBooks Self-Employed isn’t scalable. As of this writing, if you add a partner to your business, you can’t simply upgrade your subscription to “real” QuickBooks Online and continue using the same accounting system for your business. You have to just start a new subscription to QuickBooks Online as of the date the new partner joins the team. In a way this makes sense; once you get a business partner, a new legal entity is formed (the partnership) and you will definitely at this point want to get a separate business bank account, if you haven’t already done so. However, for many businesses this lack of scalability is a problem, particularly if the business starts off as an LLC that’s a disregarded entity for tax purposes.

Summarizing the Situation

In summary, if you’re someone who works as an independent contractor or freelancer, and you have no plans for your business to go beyond that, QuickBooks Self-Employed plus Mint.com is probably all you’ll ever need to manage your personal finances, and it’s darn cheap compared to QuickBooks Online. But if your business could ever grow beyond that, you should know that QuickBooks Self-Employed isn’t scalable, and whenever you outgrow it you’ll need to transition to a new accounting system.

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About Carol St. Amand

Carol St. Amand

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