Starting a tax prep business is a bit different from starting other types of businesses. The incorporation or setup process will be similar, of course, but the various steps involved are much more specific and detailed, including registering with the state and obtaining all necessary tax ID numbers and statuses. In this guide, we cover everything that you need to know to start a tax preparation business so that you can establish yourself as an independent professional.
Check the Requirements
The IRS has its own guidelines in place, as do state and local laws. You will need to register your business with your state in the business model or format that works for your needs. You can also find a lot of useful resources from your state and local governments, which are encouraging people to provide professional tax preparation services so that more people are likely to file accurate, properly prepared taxes.
Rather than actually incorporating, you could choose to create an LLC, or limited liability company. It might also be a good idea to set up a DBA, or “doing business as” designation, that allows you to operate professionally.
Get Your PTIN and EFIN
If you are going to charge a fee for your tax prep services, you will be required to obtain and use a PTIN, or Preparer Tax Identification Number, that will allow you to perform this work on an individual basis. Note that we said individual, which means if you hire anyone else, they’ll have to get their own PTIN to work for you. This also has to be renewed each year, but you can register, apply, and renew online.
The EFIN is your Electronic Filing Identification Number. This number is required for anyone who intends to file more than 11 tax returns. They must be filed electronically, as stated by the IRS, and doing so requires obtaining an EFIN. You will need to submit an application to become an e-file provider and then go through the rest of the suitability checks, including a criminal background check, credit check, tax compliance check, and even a check for prior non-compliance issues with the IRS.
Set Up Your Tax Preparation Business
Next, you will have to choose the right tax preparation tools and software to help you run your business effectively. With dozens of products and platforms on the market today, it shouldn’t be hard to find tools to get you started. You could have a custom platform built if you want, but that’s almost a wasted expense with the solutions available today.
The top tax software solutions for businesses include:
- TaxAct Professional Edition
- Ultimate Tax
- Drake Tax Software
- Intuit ProSeries
Of course, you can find dozens of platforms and software programs for use by professional tax preparers that you can choose from when building your business. These are just the most popular tools chosen by those working independently or starting a small tax preparation business.
If you’re low on personal funds, you might be eligible for an online business loan to get your venture off the ground.
Protect Your Tax Preparation Business
You will also want to take the time to invest in insurance and other protection for your tax preparation business. You may be held liable for issues that arise or incorrect preparations that may result in fines and errors. It doesn’t matter how good you are because accidents happen and even in situations where it may not be your fault, it will be easy for people to place blame.
Even if you’re working from your home office and consulting on a handful of clients and tax situations, you still want to purchase professional liability insurance to avoid any major issues. Ask your insurance agent if you should consider any other types of insurance for your new tax prep business, as well.
Market Your Tax Preparation Services
No matter how well you do at setting up your new tax preparation business, it’s not going to market itself. That old adage of “if you build it, they will come” no longer stands relevant. We live in a world of oversaturation and people who are often too busy to pay attention. Therefore, even if you build it, they may never find your business. You have to market your brand and get your name out there for people to know what you have to offer.
As a professional tax preparer, it’s always a good idea to start with friends and family. While some people think they don’t want to mix relationships with money, having a trusted source to handle your taxes can actually be a relief for many. Not only that, but it gives you a chance to test out your business on people you know so that if there are any hiccups, you’re not making a bad impression on strangers.
Make sure that you’re taking advantage of social media marketing, local community resources, and other places where you can advertise your tax prep business. You can check with your state’s branch of the CPA society to get more insight and assistance in marketing, and even check out the Small Business Administration’s resources at www.sba.gov to get help growing your new tax preparation business.
It’s Work, But Worth It
There is a lot that goes into setting up a business for tax preparation. However, if you do it well and follow the guidelines set out here, you’ll be on your way to providing high-quality tax prep services and enjoy being your own boss and owning a business doing something that you enjoy. Remember to check local laws and regulations, as well as to follow all IRS guidelines for working as a tax preparer professionally.
In some cases, it might be in your best interests to hire an attorney who is familiar with tax laws and the backend logistics of setting up a tax preparation business so that you can ensure that everything is in order. It isn’t mandatory, but it’s definitely going to work to your advantage and takes a lot of the hassle off of your plate, and improves your chances of success.