Everything You Need to Know About Starting Your Tax Prep Business
Everyone needs to get their taxes done, right? Starting a tax business can be a step in the right direction if you’re looking for a new career.
Tax prep businesses are pretty easy to get off the ground. However, it will take some effort to get started. This article will provide valuable information on what you will need to do to launch your new career.
Why Should I Start a Tax Preparation Business?
There are many reasons why tax prep is a great industry to get into. Here’s why you might consider it for your next career move.
Minimal Start Up Costs
A tax prep expert will look at minimal startup costs. They will need to take a tax course and register with the IRS. They will also need to take ongoing classes. This may add up to maybe $2,000 in initial fees. They will also have to invest in software that may cost another $2,000. This is relatively inexpensive as compared to most startups.
Once those are paid for, there is very little overhead. With tax prep going virtual, individuals may be able to work from home. They can start as one man operation and expand as they go.
As a tax practitioner you will be able to create a schedule that suits your needs. You can work only during tax time to bring in income that can last for a good portion of the year. You may also choose to expand to offer year-round services. But even with the extra workload, having the option to work virtually will allow you to plan your workday.
No Formal Education
Contrary to what most people believe, you do not need any formal education to become a tax preparer. You won’t need a CPA or accounting degree. Simply take the required classes and you are on your way to a new career.
If you decide to grow your business, you may consider adding certifications by participating in the IRS Annual Filing Season Program or by becoming and Enrolled Agent. However, these are entirely optional and neither requires extensive schooling.
I’m Interested! How Do I Get Started?
Getting your tax prep business off the ground is not difficult, but it will take a bit of work. Here’s what you will need to do.
Getting Your PTIN
A tax preparer does not need any licenses or degrees, but they will need a Preparer Tax Identification Number (PTIN). This is a unique nine-digit number that lets the IRS know who is responsible for preparing any given tax return.
Anyone can apply for a PTIN online within about 15 minutes. Your number will be processed in four to six weeks.
And while anyone can apply, if you plan on preparing people’s taxes for money, it’s a good idea to know your stuff. You may consider enrolling in the IRS Voluntary Annual Filing Season Program (AFSP) . This is an 18-hour continuing education course that includes a six-hour tax refresher course.
Those who complete the course will be issued an Annual Filing Season Record of Completion certificate which will look impressive to clients, and they will also be placed in the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.
Once you are established you may consider expanding your services by becoming:
- An enrolled agent
- A CPA
- A licensed attorney
Be Aware of State Requirements
When starting your business, you must check with your state to see if your local government requires any other sort of special education and training.
For instance, in California, tax preparers must complete a 60-hour California Tax Education course, and get a background check, before offering services. They must also purchase a $5,000 tax preparer bond and pay a $33 registration fee to get started. The state also enforces ongoing educational requirements and renewal fees.
Get a Business Name
Decide what you want to call your business. Then do a corporate name search to make sure the name is not taken.
Register Your Business
When registering your business, you will have to decide if you want to be a corporation, a sole proprietorship or a partnership.
Registering as a corporation or LLC will require fees and paperwork, but it also provides advantages that other types of businesses do not. For instance, it will protect your personal assets from business debts.
If you choose to move forward as a partnership or sole proprietor, you will not have to register your business, but you may have to file a DBA or ‘Doing Business As’. This will be the case if you want your business to have a name that is anything other than your first and last name.
Obtain an EIN
An EIN or Employer Identification Number will be necessary to open a bank account under the business name. It is required for partnerships and corporations. You can easily apply for an EIN through the IRS web site, and it is completely free to get one.
Open a Bank Account
If you are operating as a corporation, it is necessary to open a business bank account. This will keep your personal and business accounts separate preventing debtors from going after your personal assets.
Obtain an Electronic Filing Identification Number
If you process more than 11 tax returns, you will need to file them electronically. This requires an EFIN.
To obtain an EFIN number you must:
- Create an IRS e-services account
- Submit an application
- Pass a suitability check
It will take up to 45 days for the IRS to approve your application. Once it is accepted, you will receive an acceptance letter acknowledging that you are an Authorized e-file provider.
Acquire Tax Software
In this day of digital, it will be almost impossible to work as a tax preparer without the right software. When choosing software, consider the pricing structure. You must also think about how many clients you expect to be serving, what type of forms you’ll be filing, the types of clients you’ll be working for (i.e. individuals, businesses, etc.) and the state you’ll be working in.
Take Measures to Protect Customer Data
Nowadays, taking security measures to protect customer data isn’t just preferable, it’s required. Tax preparers must have a written security plan in place as part of the new Taxes Security Together Checklist.
Get Business Insurance
The right insurance will help your business reduce debt liability. It will also protect you from being sued if errors, omissions or honest mistakes are made on tax returns.
Additionally, insurance can limit liability if you visit a customer’s home to provide services and damage occurs or if a customer visits your office and becomes injured on the premises.
Market Your Business
Once you are all set up, you will need to take steps to get customers in the door. This will require a mix of digital and in-person marketing strategies including social media promotion, creating a website, getting a Google Business listing, joining networking groups, getting business cards printed up and more. 1040 Marketing could do all this for you, click here to learn more.
Maintain Ongoing Compliance
As a tax preparer, you will need to keep up with compliance obligations to avoid fines and penalties by doing the following:
- Doing your own business taxes
- Renewing your PTIN
- Renewing your DBA
- Renewing your licenses and permits
- Filing annual reports
Starting a tax prep business requires its share of hard work but as compared to other types of startups, it’s relatively easy and inexpensive to get off the ground and maintain. And with so many taxpayers out there, there’s sure to be plenty of demand for your services.
So now that you know what’s required, what are you waiting for? Get out there and get started on the next chapter of your career.