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Starting a Tax Preparation Business from Home – A Complete Guide

Are you interested in starting a tax preparation business from home? If YES, here is a complete guide to starting an online tax preparation business with NO money and no experience.

Okay, so we have provided you an in-depth sample tax preparation business plan template. We also took it further by analyzing and drafting a sample tax preparation service marketing plan backed up by actionable guerrilla marketing ideas for tax preparation businesses. In this article, we will be considering all the requirements for starting a tax preparation business. So put on your entrepreneurial hat and let’s proceed.

Firms in this industry provide tax return preparation services to individuals but do not offer accounting, bookkeeping, and billing or payroll process services. Although the offices of CPAs are excluded from this industry, basic knowledge of tax law and filing requirements is required.

Contrary to popular belief, tax preparation businesses are in operation and have year-round clients as businesses must file their taxes on a quarterly basis. If you want to start a tax preparation business, it helps to have a background in accounting, but is not necessary. You’ll have to decide if you will cater to individual taxpayers, businesses or both.

Starting a Tax Preparation Business from Home – A Complete Guide

  • Industry Overview

Tax preparation is BIG business – there were 300,000 people employed at 109,000 firms in 2012 – generating $9 billion in revenue in 2012. The industry grew over 2% from 2010-2015, and is expected to speed up the pace of growth.

  • Interesting Statistics About the Tax Preparation Industry

Revenues of $11 billion are forecast for 2018. Tax preparation is unusual in that it provides a service to assist with a process that legally every American is required to do: submit an income tax return. Because it is required, tax preparation tends to be recession resistant.

The vast majority of tax preparers are small businesses – 37% are run by a single person, while 53% employ less than ten people. There were plenty of tax returns to go around – the IRS estimates that there will be over 250 million filed by 2018.

One of the most notable aspects of the tax preparation industry is how seasonal it is – the industry only comes into being for essentially the four months before April 15, the day on which income tax returns are due for individuals. Because of this reality, those interested in a tax preparation franchise such as Liberty Tax Service or Opportunity Tax Service should be those looking for a part-time opportunity. It will not provide year round business, and this can be a unique benefit for those looking for extra work for a couple of months, but a detriment to those looking for more of a full time franchise.

One approach some tax preparation businesses take to avoid the stark seasonality of the business is to diversify into other related fields. Others, like Siempre Tax+ are focused on specific markets, like the Hispanic population. RALs, or refund anticipation loans, have been a recent controversial issue in the tax preparation business. These loans, which have been around since the 1980s, give a short-term loan to consumers secured by their eventual tax refund.

Generally this is done through the tax preparer, and the bank who issues the loan and hosts the account in which the loan is deposited charges a fee. These are high interest, low risk loans which are geared toward poor people, and there have been several lawsuits brought by government entities charging tax preparer firms with predatory lending practices.

To address this, the IRS in 2011 decided to stop providing tax preparers with the information they needed to issue these loans, at least temporarily ending RALs, and putting some smaller tax preparation firms, which relied on RALs for much of their revenue, out of business.

Despite politicians occasionally clamouring for a flat tax, income taxes remain as complicated as ever. It is very likely there will always be a demand for tax preparers, even as tax prep computer software becomes more users friendly and accessible. The industry, including other accounting services, is expected to grow by 4 percent per year through at least 2018.

Starting a Tax Preparation Business – Market Feasibility Research

  • Demographics and Psychographics

Households in all socioeconomic groups across the United States use the services of tax preparers. Consequently, industry establishments and revenue are distributed in line with regional population. Many people use the tax preparation firm nearest to them, out of convenience. When an area is underserved, more firms move into that area to stake a claim in the market. Similarly, firms tend to move locations when competition is too high and profit margins begin to suffer

  • List of Niche ideas in the Tax Preparation Business

Many tax preparers started their own firms ready to help local business owners and individual tax payers, but perhaps haven’t thought about how to narrow their approach so that they can develop an area of concentration and position themselves as an expert at something which generates higher fees and higher profit margins.

Some areas of specialization include;

  • Mobile tax office
  • IRA Problem Resolution
  • Bookkeeping
  • Insurance
  • Expert consultancy on Tax Services
  • Forensic/Business Valuation
  • Level of Competition in the Tax Preparation Industry

The biggest change in recent years for tax preparers has been that familiar harbinger of death for many industries: technological change. PC-based tax preparation software such as Intuit’s (INTU) TurboTax, combined with electronic filing options from the IRS, has begun really hurting traditional preparers – and this trend is accelerating. Returns filed electronically have grown at a compounded 18% annually over the past 6 years. Last year, over 31 million returns were filed in this manner, 24% of the total.

Starting a Tax Business is an entrepreneurial leap that many self-motivating individuals are finding more and more appealing. With the Tax Code becoming more complex every year, the portion of the population of taxpayers who seek out professionals to assist in their tax preparation and filing is growing steadily, making the industry a competitive one.

  • List of Well Known Brands in the Tax Preparation Industry

There will always be well known brands that are scattered in different business sectors. Ione of these sectors is the tax preparation business. Here are some well-known brands in this trade;

  • TaxSlayer
  • Jackson Hewitt tax
  • Liberty tax service
  • Boston tax services
  • TaxACT
  • H&R Block at Home (formerly TaxCut)
  • Intuit ProSeries

Economic analysis

The Tax Preparation Services industry experienced a slight downturn during the recession due to falling national employment and a decrease in disposable income. However, the industry rebounded in 2011 as the national unemployment rate fell, and revenue increased as more Americans were required to file tax returns.

Still, the industry landscape has begun to change, with consumer preferences increasingly trending toward operators that provide online filing options. Although improving economic conditions are expected to support industry revenue growth over the next five years, some operators’ performance will be stunted, as online providers threaten traditional brick-and-mortar establishments.

Is a Tax Preparation Business Worth Starting from the Scratch or Buying a Franchise Better?

For the sake of this article, starting a Tax preparation business from the scratch is far better than buying a franchise. Here are just some of the reasons why starting your own tax preparation business makes better sense than buying into a tax business franchise. Having your own tax business means:

  • avoiding costly start up fees
  • avoiding royalty payments
  • avoiding issues with financing assistance
  • avoiding geographic restrictions
  • avoiding issues with franchisor legal recourse should something go wrong
  • creative control – you get to do things your way
  • No contract requirements–do you know what you’ll be doing years from now?
  • No problems with insufficient support from the franchisor
  • reasonable costs for supplies—no franchisor mark-ups
  • freedom for non-compete provisions should you want out of the franchise
  • avoid advertising fees that may not help your franchise
  • avoid losing your business due to unreasonable termination of your franchise

Possible Threats and Challenges of Starting a Tax Preparation Business

People who start a business do so for many different reasons. They may be looking for freedom, new challenges or financial return. A tax preparation business can fulfill many of those goals as well as provide many new rewards. Here are some challenges to starting a tax preparation business:

  • Getting an education in tax preparation.
  • Obtaining experience as a tax preparer
  • Choosing a tax preparation software
  • Registering your tax preparation business with the state.
  • Finding office space.

Starting a Tax Preparation Business from Home – Legal Aspect

  • Best legal entity for a tax preparation business

The legal structure of most businesses is based on the size and scale of the business. Since the tax preparation business is all about the income and property of your clients, the LLC is the best legal entity for your business; be it small, medium or large.

The benefits of creating an LLC typically outweigh any perceived disadvantages and are typically unavailable to sole proprietorships and general partnerships.

  • Protected assets

LLCs provide limited liability protection to their owners (members), who are typically not personally responsible for the business debts and liabilities of the LLC. Creditors cannot pursue the personal assets (house, savings accounts, etc.) of the owners to pay business debts. LLCs typically do not pay taxes at the business level. Any business income or loss is “passed-through” to owners and reported on their personal income tax returns. Any tax due is paid at the individual level.

  • Heightened credibility

Forming an LLC may help your new tax preparation business establish credibility with potential customers, employees, vendors and partners because they see you have made a formal commitment to your business.

  • Limited compliance requirements 

LLCs face fewer state-imposed annual requirements and ongoing formalities than S corporations and C corporations.

  • Flexible management structure

LLCs are free to establish any organizational structure agreed upon by the company owners. LLCs can be managed by the owners (members) or by managers, unlike corporations which have a board of directors who oversee the major business decisions of the company and officers who manage the day-to-day affairs.

  • Few restrictions

There are few restrictions on who can be an LLC owner or how many owners an LLC may have (unlike S corporations).

Catchy Business Name ideas for a Tax Preparation Business

Choosing the right name for your tax preparation business is a daunting task for many new entrepreneurs because there is so much at stake. Your business name should show strength and reliability, a name your customers could trust to safe guard their money.

  • Frontline tax service
  • Presesion tax network
  • Payless taxes
  • A-Z tax company
  • Tax Rangers Inc.
  • Tax pro services
  • Firstchoice tax services
  • Diamond tax
  • Skye tax network
  • Access tax Inc.

Choosing the Best Insurance Policy Needed for a Tax Preparation Business

As a tax preparer, you have to master the complicated tax laws of this country and save your clients the stress of having to do the legwork on their own. Your clients often turn to you when their taxes become too complex to complete on their own or when they’re looking to get the most out of their tax return.

But do you know as much about your insurance plan as you do about taxes? As a tax professional, you might not work in the most hazardous of environments, but business risk still exists. Here are basic Insurances needed for your tax preparation business:

  • General liability insurance
  • Property insurance
  • Errors & omissions insurance
  • Business owner’s policy
  • Workers’ compensation insurance
  • Cyber liability insurance
  • Umbrella liability insurance
  • Commercial auto / hired & non-owned auto insurance

Intellectual Property Protection in the Tax Preparation Business

Your tax preparation business competitive edge and its future value may depend on the way you protect assets such as trademarks, patents, copyright and industrial designs. By understanding the rules about trademarks, patents and copyright you can protect your firm’s works and innovation and safeguard from potential legal difficulties.

Intellectual property (IP) rights play an important role in monetizing innovation—if you make it easy for competitors to copy ideas, you can ultimately destroy the firm’s success. Have you ever considered how many people have access to your IP during the tax preparation, review and audit process?

In order to protect your ideas in the tax preparation business you need to do the following

  • Use a non-disclosure agreement liberally
  • Be proactive in protecting your IP
  • Invest in universal IP protection, where possible
  • Discover your business advantage

Is Professional Certification Needed for a Tax Preparation Business?

Tax preparers calculate, file and sign income tax returns on behalf of individuals and businesses. They can also represent taxpayers during IRS examinations of tax returns. Having some professional certifications surely improves your reputation in the business and in turn assures your prospective customers of your versatility in the field.

Professional certification for a tax preparer may include

  • Accredited tax preparer – ATP
  • Accreditation Council for Accountancy and Taxation certification – ACAT
  • National Association of Tax Professionals – NATP
  • Certified Tax preparer – CTP
  • Tax preparer certification – TPC
  • California Tax Education council Registered Tax preparers – CTEC

Legal Documents Needed for a Tax Preparation business

Many state and local governments have laws about what sorts of businesses need to be regulated by the government. Check with your local laws to determine if you will be required to get a license for your tax preparation business before you begin.

Listed below are common documents needed for your tax preparation business

  • Business license
  • Insurance
  • Policies
  • Preparer Tax Identification Number (PTIN)

Writing a Business plan for a Tax Preparation Business

A well-thought-out business plan is a valuable tool for a new business or one seeking financing. It can also provide milestones to gauge your success. Indeed, the very process of developing a business plan will help you think through some important issues that you may not have considered yet.

Before getting down to the actual preparation of your business plan, take the time up front to explore and evaluate your business (and personal) goals. Then use this information to build a comprehensive and effective business plan that will help you reach these goals.

A business plan formalizes the analysis of a prospective business by forcing you to put your ideas and the answers to some critical questions in writing. A business plan sets forth the mission or purpose of the business venture, describes the services to be provided, which presents an analysis of the market state, the goals that the business has, and how it intends to achieve those goals and last, but not least, has a formal financial plan.

Your business plan should include your introduction/mission, Products/Services and Markets, financial management, operations, and concluding statement.

Detailed Cost Analysis for Starting a Tax Preparation Business

A tax preparation business involves helping people to prepare and file their tax returns professionally. While many people prepare their taxes without professional help, there are still a lot of people who lack the expertise, time and energy to handle their tax filings by themselves. As a tax professional, you also act as a consultant to individuals and business owners and show them how to reduce their tax liability.

Tax preparation business is a very good business that involves low start-up costs and little running expenses however, it is not suitable as a full-time business because you would be idle for better part of the year due to the seasonal nature of the business.

Here is a detailed cost analysis of starting a small scale tax preparation business

  • Comprehensive Tax Course with Business Start-up Package – $497
  • IRS registration to become a Tax Preparer – $50
  • Voluntary IRS Annual Filing Season Program – around $100 or less
  • Professional tax preparation software – (lower cost options are available) $500
  • Tax preparation Marketing and Tax Office Supplies – $500
  • Lease or space rent- $700
  • Miscellaneous – $1000

From our detailed analysis, it is envisaged that you will need $3,347 to start a small-scale tax preparation business (excluding home tax preparation business). For a medium scale tax preparation business $12,000 and $49,000 for a large scale tax preparation business.

Choosing a Suitable Location a Tax Preparation Business

As a prospective tax preparer, you probably are familiar with the national chain tax businesses in your area. They are easy to spot. The three big players are H&R, Jackson Hewitt, and Liberty. It is tough to come across a strip mall that does not have one of these guys already in it, but you should ask yourself: why do they choose these locations? You can rest assured they have done their homework.

The reason they choose their locations typically are due to population density, average adjusted gross income (AGI) in that surrounding area, and proximity to their target market. You should use the same factors when considering locations for your tax business.

If you are familiar with the specific area you are considering you probably have a pretty good idea how many people have access to that location, what income level they belong to, and you can do a survey of competitors by driving around. There are specific demographical and socioeconomic reports that provide specific detail relating to these topics. But you should be thinking about all of these factors before signing on lease for your tax service.

Starting a Tax Preparation Business – Technical & Manpower

You don’t necessarily need tax preparation software but to save you a lot of time and reduce errors and also make your work look professional to your clients, it is better to purchase tax preparation software. You must however ensure that the software conforms to the generally accepted taxation principles and the rules governing taxation in your state or country.

Your choice of tax software is probably one of the most important decisions you’ll make in starting your new tax preparation business. Everybody has different things they like about various commercial tax packages, and all software has its pros and cons.

Other Equipment You Need for a Tax Preparation Business includes, A computer( Laptop or Desktop),Printer, Photocopier, Scanner, Internet Service, Fax machine, Professional business cards, Tax filing forms, A business website, Social media and E-mail accounts.

  • The Service Process of a Tax Preparation Business

A tax preparation business involves helping people to prepare and file their tax returns professionally. While many people prepare their taxes without professional help, there are still a lot of people who lack the expertise, time and energy to handle their tax filings by themselves. As a tax professional, you also act as a consultant to individuals and business owners and show them how to reduce their tax liability.

Tax preparation business is a very good business that involves low start-up costs and little running expenses however, it is not suitable as a full-time business because you would be idle for better part of the year due to the seasonal nature of the business.

A tax preparation business only boom in the beginning of the year when people pay their taxes (January-April). After this period, there is really nothing left to do if you are solely into Tax preparation business. The business is suitable for people seeking for part-time jobs that would allow them to spend sufficient time with their family and take vacations during the year.

Tax preparation is the kind of business that’s simple to start but requires specialized knowledge. It’s important to understand complex tax issues, and to know where to find answers quickly when you don’t have them. Being a tax preparer doesn’t require a degree, but it’s helpful to have experience in bookkeeping or accounting as well as a desire to work with numbers and forms.

Starting a Tax Preparation Business – The Marketing plan

  • Marketing strategies for a tax preparation business

When you’re running a tax preparation business, your top concerns include hiring qualified preparers, staying consistent with new tax rules and assuring that you have the latest tax software. But one issue that you should prioritize if you want a successful operation is how to market your tax preparation business with all of the competition that arises at tax time.

Remember what many customers are looking for from a tax preparer when forming your marketing plan—capability, professionalism and assurance that the preparer will produce the best result possible. Some of the steps to be employed include;

  • Hire a professional graphic designer to create your marketing materials and a website.
  • Create a brand for your tax business to help differentiate it from the other tax preparers nearby. That includes an attractive logo, design and a colour scheme that you use consistently throughout all of your marketing materials as well as your office signs and website.
  • Create a short motto for your tax preparation business that assures customers of your professionalism and ability to provide them with the maximum refund or minimum amount due possible. Use the motto in your flyers, ads and other marketing materials also.
  • Hire a flyer team of about five to 10 people to distribute information about your company to the people in your community. Provide a separate code on each flyer to represent each flyer person so that you can pay him a commission for each sale he brings in plus a modest hourly rate for the foot work.
  • Consider promoting your tax preparation business online through social networking websites, message boards where permitted and classified ads websites, such as Craigslist.
  • Offer a special discount for new customers to bring more business to your tax preparation business. For example, you can offer a half-off special. Consider the true value of the offer from a long-term viewpoint instead of focusing on the short-term loss of money. If the new customer likes your preparation services, he’ll come back year after year at the full rate.
  • Prepare your tax preparers with customer service training, including sales techniques, tips and proven methods to keep customers happy well before the start of your tax season.

Choosing the Best Service Pricing for your Tax Preparation Business

Tax preparers earn the bulk of their annual income during the first quarter of the year, between January 1 and April 30. And like teachers, many tax preparers are able to a significant amount take time off during the summer and fall, sometimes as much as three months.

In other to get the right pricing and make money in this field, you need to choose a good, affordable, and reliable tax software program with which to prepare taxes.  Buying the wrong software and equipment can derail your plans for having a big tax season before you even hop on the train. You need to work hard to complete enough tax returns in a day to be able to set yourself up for success.

Possible Competitive Strategies for Winning your Competitors in the Tax Preparation Business

Before sorting for ways to outshine your competitors, you must first understand who they are and what they lack. Understanding your competitors and where you stand would indeed help you to win them.

  • Position strengths to weaknesses

Even if your competitor has a better service to render and is willing to do it at a lower price, you can still win. Every competing company has weak points — places where your brand can outperform. Things like domestic customer service or extended guarantees on a service can go a long way if done right.

Your job is to find these points and exploit them in your marketing and presentations. Let your prospective customers know why these selling points are important and why it makes your brand a better choice.

  • Stay lean

This is about maximizing value and minimizing waste. Value refers to features a customer wants to pay for while waste essentially is everything else. This means you must be in constant contact with your clients and understand why they’re patronizing your firm. Ask them how you can enhance it. Any additional features your firm offers — no matter how attractive — should be dropped if your clients don’t want them.

  • Go after large clients

Larger clients can often result in more business and increased revenues, which mean more resources for marketing and hiring new employees. But large clients can also be easier to service than smaller companies.

  • Know your numbers

It is surprising that most entrepreneurs don’t know the critical numbers that can either make or break their business. Here are a few of the basics that every start up should be tracking:

  • ACV (Average Customer Value)-: This refers to how much money the average customer spends with you over a given period of time.
  • CPA (cost per acquisition)-: This is your cost every time you acquire a new client.
  • ROI (return on investment) on marketing campaigns
  • Break even-: This is the volume of sales you need to cover the cost of making sales.

Possible Ways to Increase Client Retention in the Tax Preparation Business

On the surface, many businesses appear the same, offering similar products or services at comparable prices. So, what really drives customers to one business over another? The customer experience plays a big part in that decision. In fact, 55% of American business owners believe that customer service plays an increasingly important role in differentiating one business from another.

So to retain your customers in the tax preparation business, you need to

  • Acknowledge customers by name
  • Keep it simple
  • Create a customer service culture
  • Stay connected after the returns

Strategies to Boost Brand Awareness and Create a Corporate identity in your Tax Preparation Business

Having a brand alone is not enough. To win over customers you need to make sure you shout about your brand and get your name in front of as many eyeballs as possible.

  • Create an identifiable brand
  • Optimize your website
  • Create a social media presence
  • Personalization
  • Referrals
  • Win Competition
  • Biddable media

Creating a Supplier/Distribution Network of a Tax Preparation Business

It’s amazing how many people think that tax preparation is all about the numbers, but that’s not all. Tax preparation is actually a people business. So, if you enjoy working with people, you could do very well in the tax business. It’s about building relationships and trust.

Yes, it is extremely important that you have the knowledge to prepare taxes accurately. But the experience that your clients have during the tax preparation process and after is just as important. When you are dealing with a client’s financial information it becomes very personal. Your client trusts you to take good care of him/her and hopes you have their best interests in mind.

Your client is looking for guidance and has come to you because they see you as an expert in the tax industry. You could prepare a client’s tax return perfectly but if you don’t provide personal service, they may not be back. Relationships are paramount

Tips for Running a Tax Preparation Business Successfully

As the trusted tax advisor to your tax clients, you are in the position to provide them with the additional financial services they need. By obtaining the required licenses, you can provide financial services and products such as IRAs, retirement plans, insurance, etc. You can choose from several reputable broker-dealers that specialize in helping tax professionals to meet their clients’ financial service’s needs.

You can also provide bookkeeping and payroll services for your small business tax clients to produce additional year-round revenue. Thousands of small businesses are started every day and the trend is accelerating due to the large number of displaced workers turning to self-employment and don’t forget the small stuff Petty cash purchases, magazine subscriptions, educational classes and more. These “small” expenses can add up quickly. Make sure you track all your expenses and check with your tax advisor about what you can and can’t deduct.

Your accountant can ensure you don’t overdo or exaggerate your deductions – something that can raise the possibility of an IRS audit. For example, many small business owners mistakenly assume that they can deduct 100% of meal costs while travelling or client gifts.

They are actually only partly deductible. Likewise, if your expenses are a lot higher this year than last or not considered typical for your industry or business type, the IRS may get inquisitive. Other tips include; separate personal and business, avoid payroll mistakes and keep your records up-to-date.

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