How Do You Start a Tax Preparation Business?
Starting a tax preparation business can be a profitable and flexible career path, because millions of individuals and small businesses rely on tax professionals every year. Whether you want to work from home, open a storefront, or build a full-service financial firm, the steps below will help you launch your business with confidence.
Understand the Role of a Tax Preparer
What Tax Preparers Do
Tax preparers assist individuals and companies in the filing of federal and state tax returns. They interpret financial data, use tax regulations, recognize deductions and credits, and keep their clients in the proper state of compliance with the IRS’s requirements.
Skills You Need
You don’t need to be a CPA to start a tax preparation business.
However, you should be comfortable with:
- Fundamental accounting and bookkeeping
- Tax forms and tax filing regulations of the IRS
- Tax preparation software
- Customer service and communicating with clients
Training, certification, and practical experience will enable you to acquire the expertise required to work with clients.
Obtain Required Credentials
Tax preparation does not have a high barrier to entry as compared to some financial professions. Nevertheless, the IRS demands certain qualifications, and other certifications can enhance your credibility.
Obtain a PTIN (Preparer Tax Identification Number)
- The IRS requires any paid tax filer to receive a PTIN
- You can apply online; it takes approximately 15 minutes
- It must be renewed every yea
- There is a small annual fee.
Apply for an EFIN (Electronic Filing Identification Number)
- You will require an EFIN if you intend to e-file tax returns
- You must apply on the IRS e-Services portal
- Background check will be expected and can take several weeks
Upon approval, you are allowed to electronically file returns on behalf of your clients.
Consider Additional Credentials
Not mandatory, but can make you stand out:
Enrolled Agent (EA): This is a prestigious IRS qualification that enables you to represent clients in front of the IRS.
AFSP (Annual Filing Season Program): It is an IRS program which offers training and is listed on the IRS directory.
State Licensing: Some states, including California, Oregon, and Maryland, are also subject to further registration or exams.
With credentials added, it is easier to gain trust, charge more, and to attract more business clients.
Gain Training and Experience
Although you may know taxes, you need practical application.
Take Tax Preparation Courses
You can find beginner-to-advanced tax courses through:
- Community colleges
- Online tax schools
- Training programs that are approved by IRS
- National tax franchises (such as H&R Block or Jackson Hewitt)
Such courses educate you about real-world tax scenarios and also introduce you to the most recent tax laws.
Practice With Tax Software
The majority of tax preparers employ professional programs.
Popular options include:
- Drake Tax
- TaxSlayer Pro
- ProSeries
- Lacerte
- TaxAct Professional
Test the software prior to tax season to be well-versed in filling out forms, importing documents, and running reports.
Choose Your Business Structure
The type of business organization influences your taxes, fees, and legal obligations.
Common Structures for Tax Preparers
Sole Proprietorship: The easiest to start; the right choice when one is a solo preparer.
LLC (Limited Liability Company): This provides protection of liabilities and flexibility in taxation.
S Corporation: This is good in growing businesses or companies that have more than one employee.
Register Your Business
You might be required to:
- Form a business with the Secretary of State
- Apply for local business license
- Register a DBA (Doing Business As) as trade name
Obtain an EIN
You will need an IRS Employer Identification Number if you will employ any people and in case you will act as an LLC or corporation.
Set Up Your Office and Tools
The startup expenses are based on the business model.
Home Office vs Storefront
Home Office: Low overhead, flexible working schedule, and suited to lone preparers.
Storefront: Provides visibility and foot traffic, but comes at a higher rental and utility price.
Equipment You Need
- Internet-enabled computer with good internet
- Confidential filing/storage system
- Professional tax software
- Printer and scanner
- Phone system
- Client portal to share documents (not mandatory, but suggested)
Data Security Compliance
Being a tax preparer, you deal with sensitive client information.
The IRS demands Written Information Security Plan (WISP), and such security as:
- Encrypted devices
- Strong passwords
- Antivirus protection
- Secure backups
Set Your Pricing Structure
The price depends on experience, location, and complexity of client returns.
Common Pricing Models
- Flat fees per return type
- Complex tax work rates per hour
- Individual and business tiered packages
Make sure your cost is sufficient to cover your software, business costs, and the time you invest in further education.
Market Your Tax Preparation Business
When your business is ready you need clients. Marketing does not necessarily need to be costly; consistency is what counts more than money.
Create a Professional Brand
- Select a business name that sounds credible
- Develop a clean logo
- Build a simple, clear website
- Create a local presence on Google Business
Use Online Marketing
- Run local Facebook ads
- Post tax tips on social media
- Post your knowledge as blog posts or videos
- Request clients to post online reviews
Use Local Networking
- Collaborate with bookkeepers or accountants
- Drop business cards at local businesses
- Join the Chamber of Commerce
- Provide tax education in your community
Stay Compliant and Keep Learning
Tax laws are dynamic. Effective tax preparers engage in lifelong learning.
Complete Annual Continuing Education (CE)
CE credits are needed by many professional organizations and states on a yearly basis.
Follow IRS Tax Law Updates
IRS constantly changes forms, credits, deductions, and filing regulations. Keep up on IRS newsletters.
Keep Detailed Records
Keep proper records of client returns, receipts, communications, and WISP updates as a precautionary measure in case of an audit.
