Do you already have experience in preparing tax returns as an employee or temp for a tax agency and wish you had more control over your schedule? Or are you looking to capitalize on your math abilities and attention to detail on your own terms? Either way, you may be wondering how to start a tax preparation business from home and if this decision is right for you and your lifestyle.
With the complexity and ever-changing nature of the U.S. tax code, I don’t believe it’s a stretch to say that demand will always exist for professional tax preparers. They serve an essential need.
Operating an in-home tax preparation business provides an income opportunity that allows you to enjoy the flexibility that comes with being your own boss. Because much of the work is seasonal, it opens the door to the exploration of other revenue-producing activities during other times of the year.
In this article, we’re going to cover many of the considerations and the 13 steps involved in starting a tax preparation business from home. As with any type of business venture, there are legal and accounting details to think about, so reach out to an attorney and accountant for professional guidance on those issues.
Who Can be a Professional Tax Preparer?
Many people mistakenly believe that it requires an accounting degree or another type of educational achievement to become a professional tax preparer. So, you might be surprised to know that the IRS isn’t overly strict. Most adults, as long as they have an IRS Preparer Tax Identification Number, may prepare federal tax returns for clients.
According to the IRS:
Any tax professional with an IRS Preparer Tax Identification Number (PTIN) is authorized to prepare federal tax returns. However, tax professionals have differing levels of skills, education, and expertise.
The primary difference between the different types of tax practitioners is their representation rights before the IRS beyond the preparation of tax forms. Tax professionals either have Unlimited Representation Rights or Limited Representation Rights.
Tax Preparers With Unlimited Representation Rights Before the IRS
- Enrolled agents (individuals who have passed an IRS exam and demonstrated proficiency in federal tax planning, tax return preparation for individuals and businesses, and representation)
- Licensed certified public accountants
- Licensed attorneys
These tax professionals may represent their clients on any tax matters, including audits, appeals, and payment or collection issues.
Tax Preparers With Limited Representation Rights Before the IRS
Preparers without the credentials of enrolled agents, CPAs, or attorneys have limited practice rights. The IRS categorizes these tax professionals as either:
- PTIN Holders (non-credentialed tax preparers – Individuals with an active Preparer Tax Identification Number from the IRS but do not have any professional credentials and do not participate in the IRS’s Annual Filing Season Program. These individuals are authorized only to prepare tax returns.
- Annual Filing Season Program Participants – Preparers who have gone through the IRS’s voluntary program designed to help non-credential tax return preparers to achieve a higher level of professionalism. These individuals may only represent clients whose returns they have prepared and signed.
What is a PTIN?
A Preparer Tax Identification Number (PTIN) must be obtained by all tax professionals who prepare all or substantially all of a federal tax return for compensation. It’s a unique nine-digit number that enables the IRS to identify who the professional preparer is who helped a taxpayer prepare and file their income tax return. The IRS issues PTINs for free. Because PTINs expire on December 31 of the year in which they are obtained, tax preparers must renew them annually.
Generally, individuals must provide their social security number when requesting a PTIN from the IRS. Applicants who apply online can obtain a PTIN in about 15 minutes. The IRS estimates it will take between four to six weeks to obtain a PTIN if submitting Form W-12 (IRS Paid Preparer Tax Identification Number Application and Renewal) by mail.
Do You Need Special Training to be a Professional Tax Preparer?
The IRS doesn’t require specific training or licenses to be a PTIN holder or to provide federal income tax return preparation services for pay. However, it’s important for tax preparers to understand the U.S. tax code and consider enrolling in a course to advance their knowledge if they’re not already an experienced tax preparer.
Consider completing the IRS voluntary Annual Filing Season Program. The program requires a tax preparer to complete 18 hours of tax continuing education, including a six-hour federal tax law refresher course. The IRS issues an Annual Filing Season Program Record of Completion certificate to individuals who complete the program. Another advantage of going through the IRS program is being listed in the agency’s online database of tax preparers, called the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.
Putting in the time and effort to hone your knowledge and skills will help you serve your clients better. Moreover, it will allow you to charge higher rates than someone who doesn’t have any credentials or certifications.
Some resources that provide tax preparation education include:
- Community colleges
- Tax preparation companies (for example, H&R Block and Liberty Tax Service)
- Online universities
- National Association of Tax Professionals
- The Accreditation Council for Accountancy and Taxation (ACAT)
- IRS (IRS Training and Communication Tools for Tax Professionals)
In addition to the IRS training requirements, some states have specific education, training, and registration requirements that tax preparers must comply with.
In California, for instance, aspiring non-credentialed tax professionals must enroll in a 60-hour course by a California Tax Education Education Council (CTEC) approved provider within 18 months of offering services as a tax preparer. They must also purchase a $5,000 tax preparer bond from a surety agent and pay a $33 registration fee to register as a professional tax preparer in the state of California. There are also continuing education requirements and renewal fees annually.
What Will You Need to Work at Home?
Designate a dedicated workspace in your home where you can work on your clients’ tax returns without distractions.
Some of the items you’ll need to start your tax preparation business at home include:
- A reliable computer with excellent anti-virus and anti-malware software
- Other office equipment (e.g., printer, copier, scanner, and fax machine)
- Internet service
- Professional tax preparation software
- IRS forms
- Business cards
- Office supplies (paper, stapler, pens, binders, highlighters, notebooks, etc.)
- Space and filing system to keep tax records (The IRS requires that tax records be kept for at least three years—longer under some circumstances.)
What are the Steps for Starting a Home-Based Tax Preparation Business?
1. Obtain your PTIN
The IRS makes it easy to apply online for a PTIN. Tax preparers must renew their PTIN annually. Note that PTINs are unique to the individual. So, if you grow your business and hire other people to prepare tax returns for clients, they must obtain their own PTINs.
2. Get the Necessary Education and Training
Consider the information and options that I shared earlier in this article within the “Do You Need Training to be a Professional Tax Preparer?” section.
3. Decide on Your Business Name
Think about what you would like to call your business. Then, check to make sure the name hasn’t already been taken by another company that provides the same or similar services in your state. You can do a free corporate name search through the CorpNet website. If your business name is available, but you’re not ready to launch your business yet, we can order a business name reservation for you. Note that most states will hold the name for between 30 and 90 days.
4. Register Your New Business in Your State
Think carefully about the business entity type you choose for your tax preparation operation. Selecting a Limited Liability Company or C Corporation for your business requires filing registration paperwork with the state. And opting to be taxed as an S Corporation involves filing a special tax election form with the IRS (possibly with the state, too). Establishing those business structures comes with some costs and paperwork, but they offer some advantages over operating as a Sole Proprietorship or General Partnership. I’ve written extensively on the topic and encourage you to talk to a legal and accounting professional when weighing the pros and cons of your options.
If a tax preparer operates as an LLC or a C Corporation, it will need to designate a registered agent in the state(s) where it conducts business. As a registered agent in all 50 states, CorpNet can fulfill that requirement for you no matter where your home business resides in the United States.
Note that although sole proprietorships and general partnerships (in most states) do not have to register their businesses, they may have to file a DBA (doing business as). A DBA (also known as a fictitious name) must be filed if the business owner wishes to use a name other than one that contains their first and last names in its title. For example, Lara Gonzalez would need to file a DBA if she wants to run her tax preparation business under the name “G-Force Tax Preparation Services” instead of “Lara Gonzalez Tax Preparation Services.”
5. Obtain an EIN
Often, banks will not open a business bank account unless a business owner or company has an Employer Identification Number (EIN). Also, the IRS requires businesses that hire employees or that operate as a corporation or partnership to obtain an EIN. It’s simple to order EINs online, and they’re free from the IRS.
CorpNet makes the process even easier by handling the EIN online application on behalf of business owners.
6. Open a Business Bank Account
Doing this is essential for keeping your business and personal financial and tax records separate. And, if a business is structured as an LLC or corporation (which are separate legal entities from their owners), they must have a dedicated business bank account. Otherwise, they risk “piercing the corporate veil” that protects their personal assets from the debts of the business.
7. Apply for Local Business Licenses and Permits
Some locations do require licenses and registrations that non-credentialed tax preparers must have to perform their work in states that have set requirements for tax professionals. Tax preparers must research what they need to do.
To save business owners valuable time, CorpNet offers Business License Service Packages. We can identify the required licenses and permits, and we can prepare and file the application forms to receive the necessary licenses.
8. Obtain an Electronic Filing Identification Number (EFIN)
Tax preparers who will file 11 or more tax returns, must submit them electronically. This requires becoming an Authorized e-file Provider and obtaining an Electronic Filing Identification Number (EFIN).
Three steps are involved in the process:
- Create an IRS e-services account.
- Submit an application.
- Pass a suitability check.
After the IRS approves a tax preparation firm as an Authorized e-file Provider, it sends an acceptance letter with the EFIN it has assigned to the company.
Note that the IRS says the process can take up to 45 days. Also, some states may require that a tax preparer complete a separate application for state income tax return e-Filings.
9. Acquire Tax Preparation Software
Which software solution will be ideal for an in-home tax preparation business? That will depend on the types of tax returns the tax preparer will handle, the volume of returns, and budget constraints. Price points and approaches to pricing vary, with most companies offering several options.
Some of the pricing methodologies used by software providers include:
- One-time fee plus a fee per tax return
- Annual fee for unlimited tax returns
- Annual fee for a certain number of tax returns
- No annual fee and a volume-based fee per tax return
When choosing a professional tax preparation software solution, consider:
- The types of clients you will serve (individuals, businesses, only certain business entity types?)
- The volume of clients you expect to serve
- Which forms you’ll be using
- Which states you’ll do filings in
A great resource to help you evaluate such software is Capterra’s Tax Practice Management Software directory.
10. Take Measures to Protect Customer Data
Tax preparers handle sensitive information. Your customers will expect you to have measures in place to protect that data. Moreover, the IRS expects professional tax preparers to have a written security plan to protect their clients’ data. According to the IRS, “In fact, the law requires them to make this plan. Creating a data security plan is one part of the new Taxes-Security-Together Checklist.”
11. Purchase Business Insurance
Business owners can limit their personal liability for the debts of their business by forming an LLC or incorporating their company. Another way to minimize liability risks is through obtaining insurance policies that will protect business and personal assets.
No matter how skilled or experienced a tax preparer is, the potential for errors exists. A tax preparer professional liability insurance policy can help protect them if clients would bring suit against them for errors, omissions, or honest mistakes.
Also, a general liability insurance policy can offer peace of mind. That type of policy protects tax preparers who go to clients’ homes for appointments against claims of property damage. It also protects tax preparers who bring clients to their homes against legal action if clients get injured on the tax preparer’s property. Even though slips, falls, and other accidents happen rarely, they do occur!
Speak with a trusted insurance agent who can help you assess your risks and identify the protection you’ll need.
12. Market Your New Business
No business should rely on the “build it and they will come” approach to acquiring customers. This applies to tax preparation businesses from home, too. Consider these marketing and advertising assets and tactics for spreading the word about your business:
- Obtain business cards – You can hand them out virtually wherever you go—social events, church, at your kids’ sports events, etc. Canva.com will allow you to quickly design and print your new cards.
- Create a professional website – It wouldn’t have to be big or complex. A simple one-page site can establish an online presence and give potential customers a way to learn more about your capabilities. WordPress.org or Wix.com will be great options for creating a quick DIY website.
- Set up social media business accounts – Social media accounts give potential customers another way to find and connect with you online. LinkedIn, being a professional-focused platform, may be especially beneficial. A Facebook page (not a personal profile) will also be incredibly helpful.
- Set up Google Business Profile – A Google Business Profile feeds both Google local search and Google map results, so it is incredibly important for local searches.
- Join a networking group – Active memberships in the local Chamber of Commerce, Rotary Club, etc. will help get the word out about you and your new business.
13. Establish a Means for Maintaining Business Compliance
Tax preparation businesses must follow through with some ongoing compliance obligations. The exact responsibilities will depend on the business structure and business location.
Some of the possible requirements include:
- Filing the business’s own tax returns and paying taxes
- Renewing the PTIN
- Renewing a DBA
- Renewing licenses and permits
- Maintaining a registered agent
- Holding member or shareholder meetings
- Recording company changes via Articles of Amendment
- Filing annual reports
Fines, penalties, and even suspension or administrative dissolution (forced closing of the business by the state) could happen if a company ignores its compliance duties. CorpNet’s free Compliance Portal provides a way to track business compliance requirements. Also, ask your attorney and accountant to verify what you must do and when deadlines occur.
Additional Resources to Help You Get Started
Below, I’ve listed several resources that have information to help you understand what you must do when starting your business. Some are specific to tax preparation businesses, and others are suitable for all types of companies.
- Understanding Tax Return Preparer Credentials and Qualifications
- IRS Annual Filing Season Program
- IRS FAQ: Do I Need a PTIN?
- IRS Instructions for Form W-12 (to obtain or renew a PTIN)
- IRS Tax Professional PTIN System
- Tax Security 2.0: The Taxes-Security-Together Checklist
- Basic Tools for Tax Professionals (information from the IRS)
- IRS Training and Communication Tools for Tax Professionals
- SCORE – SCORE has a nationwide network of chapters run by dedicated volunteers that offer free business mentoring for new and existing business owners.
- U.S. Small Business Administration – The SBA is a federal agency dedicated to helping small businesses via counseling, access to capital, and contracting expertise.
Make Your Dream Happen!
Now that you have a lot of food for thought in front of you, contact my team at CorpNet as you take your next steps towards starting a tax preparation business from home. Our business filings specialists can save you time and ensure accuracy in your business’s formation filings, license applications, sales tax registration, registered agent designation, and more.
CorpNet’s Partner Program Can Help Grow Your New Tax Preparation Business
CorpNet Partner Program will give you a way to earn additional income for your business by referring clients to us or reselling our formation and compliance filing services. It helps create ancillary services that will fit nicely into your service offering.