Being self-employed can be challenging. However, if you choose the right type of business, it may also be incredibly rewarding. Starting a tax preparation business may bring you independence, financial freedom, and the ability to work from your home. With that in mind, this guide will show you how to start a tax preparation business.
How to Start a Tax Preparation Business
Step 1: Register Your Business
The first step in this guide on how to start a tax preparation business is to get registered with your state. This can be done in various ways depending on local regulations and requirements.
The most common way to get registered is by filing for a Doing Business As (DBA) name. Conveniently, this type of registration does not require a formal structuring of the company.
Another convenient way to do this is by forming a limited liability company (LLC) for your business. Doing this will automatically register any business with the state.
Step 2: Obtain an Electronic Filing Identification Number
It should also be noted that the IRS requires electronic filing of all tax returns from preparers who handle 11 or more accounts. In order to be able to file these returns electronically, a tax preparation business must apply as an Authorized e-File Provider. At the same time, they must obtain an electronic filing identification number (EFIN).
In order to obtain an Electronic Filing Identification Number, you will have to subject yourself to a suitability check. Basically, this is a revision of your credit, criminal background, tax compliance history, and previous non-compliances with IRS e-File requirements.
A separate EFIN application will be required for each location from which your company will be electronically filing returns. The full process for obtaining an EFIN may take up to 45 days.
Step 3: Obtain a Preparer Tax Identification Number (PTIN)
Often, people who want to know how to start a tax preparation business don’t realize that, apart from registering their business, but they must register themselves as tax preparers. A preparer tax identification number (PTIN) is mandatory for anyone who assists in the preparation of federal tax returns in order to obtain a monetary compensation. To get it, you need to approach the IRS with the documents that validate you as someone who is legally authorized to prepare and defend tax documents.
Step 4: Determine Your Tax Business Model
Without a doubt, one of the most important steps is to determine what your business model will be. This refers to determining how your tax preparation practice will create revenue. There are three main components to determining a tax preparation business model:
- Year-round accounting services: Will you provide year-round accounting services to your clients? Will you provide seasonal tax preparation services?
- Type of tax preparation: This refers to whether you will focus on small business taxes, individual taxes or both.
- Type of clients: If you have decided to cater to businesses, you can specialize in preparing taxes for businesses of a specific size. If you decided to serve individual clients, you could specialize in a certain range of net-worth or a specific line of work.
Step 5: Understand Your Certification Options
Often, people who want to know how to start a tax preparation business wonder about the special credentials they can obtain through education. As a matter of fact, there are various options for obtaining valuable certificates and credential in tax preparation. The most popular are:
- The IRS Annual Filing Season Program: It is a good idea for non-credentialed return preparers who want to become better professionals to begin by taking the Annual Filing Season Program course.
- The Income Tax School: This Income Tax School provides programs that certify students as Chartered Tax professionals, Chartered Tax consultants, and Chartered Tax advisors.
- Enrolled Agents (EAs): Licensed by the Internal Revenue Service, an Enrolled Agent is a professional who has the most extensive licensing benefits that are provided by the IRS. In order to obtain this distinction, a preparer needs to undergo a suitability check, take an extensive test covering individual and business taxes, take a test on representation issues, and undergo 72 hours of additional education every three years.
- Certified Public Accountants (CPAs): A tax preparer must pass the Uniform CPA Examination given by their state in order to be certified as a CPA.
- Tax attorneys: After earning a law degree and passing the bar exam, professionals may be licensed as a tax attorney by their state. In addition to preparing tax documents, tax attorneys can prepare legal defenses for clients that are involved in tax-related court cases.
Step 6: Grow Your Tax Preparation Business
Once all the previous steps have been completed, you are ready to begin growing your tax preparation business. There are various ways to do this, including:
- Building a website: Despite the growing importance of social media, a website is a must-have for any tax preparation business worth the name. Apart from showing professionalism, it provides customers with a clear description of your business model and other important pieces of information. Your website will help potential customers find out more details about your services with just some clicks.
- Advertising on social media: Complementarily to your website, you may create social media profiles that will help you reach a wider audience.
- In-person networking: It is always a good idea to research local tax and accounting associations where you can meet other professionals and potential clients. You can also attend local events that focus on your domain. Network with people there to discover inside tips or even form partnerships.
- Using direct marketing: Traditional forms of marketing such as the production of flyers, brochures, and emails may also be of great help when it’s time to get the word out about your business.
After going through this article, you may have become fully aware of the great advantages of staring your own tax preparation business. If you are interested in starting a new career, this guide on how to start a tax preparation business will be incredibly useful. Let us know what your opinions are in the comments!