Taxes are an unavoidable reality for small businesses. How you choose to handle and prepare your taxes, however, can vary based on your business's structure, size, and needs. Hiring tax professionals to handle your accounting and tax planning can be costly, but the alternatives – using tax software like TurboTax or filing your taxes on your own, for example – can be a risky endeavor. Every business has a different approach to filing taxes based on their needs. If you're considering changing your tax strategy, there are some important things to keep in mind.
Before you decide anything, first, do a quick assessment of your company's financial hygiene. You should have complete financial statements and records, including a balance sheet, and a profit and loss statement (and providing your personal income will be helpful, too). You should also consider the legal structure of your business – sole proprietorships, C-corps and partnerships are all taxed differently.
When it comes to filing your own taxes, the devil is in the details – there are a lot of deductions you may (or may not) qualify for, and tax laws are constantly changing. Make sure you have a good understanding of the nature of your business and the tax rules it must meet. If you don't, you could end up being audited by the IRS or be required to pay harsh penalties.
Regardless of how you file your taxes, keeping up with tax structures and your business's expenses is a year-round process. Don't wait until tax time to analyze your business's operations or consider if you qualify for certain deductions. If you are completing taxes on your own, schedule time each month to analyze what you owe – maybe, if you're lucky, you'll qualify for a tax refund.
Doing your own taxes
Filing your own taxes can be a complicated process, but it all hinges on the complexity of your business. If you have a long list of depreciating assets or qualify for a lot of deductions, it may be difficult to file your own taxes quickly and efficiently. You should also be aware of estimated taxes and taxes that you're required to pay throughout the year, like quarterly sales taxes.
If you're running a simple operation, completing your own taxes may be within reach. Mark Aselstine is the founder of Uncorked Ventures, an online wine club that delivers wine selections from the Pacific Northwest to club members. Mark switched from using an accountant and says that his business's simple structure allows him to easily categorize expenses and calculate tax totals.
"My [business] is … money in, money out, and we don't carry a lot of inventory," he said. "It was going to take me less time to just do it myself rather than have to answer questions about how stuff should be categorized."
Each month, Aselstine sits down and calculates his expenses so that when it comes time to file his taxes, he has the right information at his disposal. He also tries to stay current with changing tax laws, although he said that based on his business's structure, it isn't too difficult to keep up with any changes. Aselstine also said that any business owner considering a switch from a CPA should experiment with bookkeeping for a month or two before they make the switch.
While there are a lot of moving parts to filing a correct tax return each year, it can be done if you have a background in taxes or operate a small business with a simple structure.
Using a third-party tax service
Using tax software can act as a hybrid between using a CPA and completing your taxes by yourself. The software is designed to walk you through the tax process, so you get some guidance, and can stay up to date on your tax liability, tax law changes and other deductions.
Some users have complained about bugs and support issues with certain tax and accounting software. If you're looking to do your own taxes but still need a little hand-holding, tax software may be a good option for you. Be prepared to deal with software issues if they arise and know that using tax software is not the same as hiring a CPA or tax professional. The software is updated and can help you, but it may not be accurate.
Michael Dinich is a retirement and tax advisor for Your Money Matters, a financial planning company. He said that some of his clients have used tax software in the past.
"I have several clients a year that use some of the standard offerings," he said. "They ask for help because of errors in the software ... When multiple methods of calculations are available, some of the usual software will default to one option without a way to override it."
A tax software application may be a good option for your business, but make sure you assess the company, their support options and the usability of their software before you purchase it. [For help choosing an online tax software program for your business, check out this buyer's guide on our sister site, Business News Daily.]
Hiring a tax professional
If you're running a complex business, have used third-party software in the past, or are looking for peace of mind, then you should let a tax professional handle your tax needs. While technically you could still be subject to an IRS audit, trusting a certified public accountant (CPA) who has been educated on all the latest tax laws means that chance falls dramatically.
"I use a CPA to do my taxes and wouldn't consider doing it on my own," said John Kinskey, founder of Access Direct, a small business phone system company. "The brain damage from trying to keep up with all the shifting changes in tax laws, and just the sheer amount of detail required to file state and federal tax returns, is well worth paying a professional."
Hiring a tax accountant or accounting firm means guaranteeing yourself a few advantages: You can spend less time worrying about your tax situation and more time handling your business, you can potentially end up saving money by taking advantage of deductions, and you can ensure that all your finances are up-to-date and that you're in good standing with the IRS. Hiring an accounting firm is an obvious choice for any complex business that can afford to bring a certified tax professional on board. Besides, small businesses should decrease any risk of being audited. [Read this related story on our sister site, Business News Daily: How Will the New Tax Law Impact Small Business?]
"I have seen small businesses get audited and win with the IRS, and they still end up losing because of the amount of money they had to pay CPAs and tax attorneys," Dinich said. "Not only can an audit be costly in fees, but it can also monopolize your time and jeopardize your small business."
How much does a CPA charge per hour?
A junior staff member at a firm of CPAs may charge as little as $60 per hour. A CPA who owns a firm may charge as much as $250 per hour. In some areas with especially high demand and large client bases, the most sought-after, best-regarded CPAs may charge as much as $500 per hour.
How do I hire a CPA?
Hiring a CPA is theoretically as simple as reaching out to a CPA for a consultation. Even before taking that step, though, you'll want to do more work. Be sure that the CPA you hire has familiarity working with other businesses in your industry. Determine whether you need a CPA solely for tax-filing purposes or for larger tasks such as creating budgets and financial statements. Make sure your CPA works well with others, especially if you run a large business. A CPA hired to file taxes for your large business may need to contact your employees or clients.
What qualifications should you look for when choosing a CPA?
Experience in your industry is the most important qualification you should look for when choosing a CPA, but it's not the only factor to keep in mind. You'll want to find a CPA firm that's of an appropriate size to tend to your needs, and you'll want to be sure that the firm has ample services (and staff) to get the job done. Choose a CPA who will respond to your inquiries in a timely manner, offer the services your business needs and gladly provide references from other clients.
What's the difference between a CPA and an accountant?
The difference between a CPA and an accountant is simply a legal distinction. A CPA is an accountant licensed in their state of operation. Only a CPA can offer attestation services, act as a fiduciary to you and serve as a tax attorney if you face an IRS audit.
When should I hire an accountant?
If your tax situation is at all complicated, you should hire an accountant. You may also want to hire an accountant if you worry that you won't have enough time to do your taxes on your own. In general, it may be smart to hire an accountant, unless your business is a sole proprietorship with minimal overhead, costs or expenses.
How much does it cost to hire an accountant?
An accountant who is not a CPA may charge less per hour than a CPA. Some accountants may only bill at $20 per hour, though most will charge closer to $30 per hour.
How long does it take an accountant to do a tax return?
An accountant may be able to complete an individual tax return quickly, but the amount of work involved in filing a tax return depends on the number of forms that you're required to report to the IRS. If you're a sole proprietor with just a few 1099-MISC forms, your accountant should need less time to complete your tax return, but if you run a large business, you may need to wait a while. Regardless of your situation, even the busiest of accounts can relieve the time burden involved in filing your taxes yourself, which can take as much as 16 hours.
Hiring a CPA
If you can afford to hire a CPA, it's probably your best option. Trying to educate yourself on changing tax laws, understanding what kinds of deductions you qualify for and staying up to date with filings can take you away from what's important: your business.
If you're running a small business with a relatively simple structure, it may be worth it to consider tax software or try and file your taxes on your own. If you go this route, make sure you're confident in your ability to handle your company's finances and taxes.