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Step-by-step guide to starting a tax prep business

Starting a tax prep business: man signing tax documents

Key takeaways

  • You must register your tax prep business with your state and have the necessary tax identification numbers and certifications to operate legally
  • Becoming an enrolled agent or certified public accountant can set you apart from competitors
  • Your pre-existing network, family and friends, and a Yelp Business Page can help get your business off the ground 

Each year, millions of people scramble to get organized and file their tax returns before time runs out. The process can be confusing and complicated, especially for self-employed individuals, business owners, and those with itemized tax returns. As such, starting a tax prep business can be a profitable business venture.

The Internal Revenue Service (IRS) allows certified professionals to file taxes on behalf of other individuals and businesses, giving you an opportunity to flex your skills, provide expert guidance, and turn a profit.

Use this step-by-step guide to launch your own tax preparation business and start growing your clientele. From writing a business plan and becoming certified to finding your first clients, you’ll learn the ins and outs of starting a tax prep business. The process might be easier than you think, is relatively affordable, and offers huge potential for new entrepreneurs.

Write a tax prep business plan

The key to a successful tax prep business lies in a sound business plan. Crafting a detailed business plan helps you define the goals of your business, how it will function, and will determine if your business idea is a profitable one worth pursuing.

The Small Business Administration recommends structuring your business plan with the following categories:

  • Executive summary: Briefly summarize your entire business plan, including your mission statement, how you’ll bring in revenue, and why your company will succeed.
  • Company description: Go into further detail about what makes your company unique, who your customers are, and what problems your business solves.
  • Market analysis: Examine the current state of the tax market to uncover any trends as well as the strengths and weaknesses of your competitors.
  • Organization and management: Tell the reader what type of business entity you’re forming (e.g., LLC, sole proprietorship) and how your company will be managed in an organizational chart.
  • Service or product line: Highlight the tax preparation services you’ll provide and describe how often clients will need your services.
  • Marketing and sales: Talk about how you’ll attract and retain customers and how you plan to close sales.
  • Financial projections: Be realistic with financial projections and try to project how much revenue you’ll bring in for at least one year.
  • Funding request: This section only applies if you’re seeking outside funding. If so, explain how much funding you’ll need and how you plan to use any money invested in your company.

Once you have organized your business plan, you can determine if your idea is worth pursuing. You can then move on to creating your business and becoming a certified tax return preparer.

Register your tax prep business

Before taking any clients, you’ll need to form a legitimate business. This includes registering your business in your state and obtaining a Federal Employer Identification Number. A limited liability company (LLC) is one example of an appropriate business structure for a newly opened tax preparation business.

LLCs protect your personal assets in case of financial hardship or legal action from outside parties. This means that the business’ assets are separate from your own, and if your company experiences losses or a customer takes legal action against your company, your personal assets are protected.

LLCs also allow for pass-through taxation. Your earnings will only be taxed once on your income tax return rather than twice—once on your business tax return and again on your personal tax return—which is the case for other business entities, like a corporation.

Running an LLC also means you’ll need a Federal Employer Identification Number (EIN). EINs are required for any business that files taxes or employs other people. You can apply for an EIN online with the IRS.

Ensure you have the appropriate education

There are three different education levels of tax preparers that range from entry-level to highly educated tax professionals. Here’s a quick rundown of each to help you determine where you want to fit in.

Non-credentialed tax preparer

This is the easiest way to break into the tax business, as you only need a GED or high school diploma with some additional training. However, your services will be limited to individual tax returns, and you cannot perform complex business tax returns. A non-credentialed tax preparer is an entry-level position, so it’s necessary to pursue additional education and licenses if you want to build trust and grow your business.

Enrolled agent

An enrolled agent is a federal tax preparer officially licensed through the IRS. You only need to have a GED or diploma, but you will have to pass a comprehensive tax examination administered by the IRS. The course enrollment fee is relatively inexpensive at $67 (other additional fees may apply). You can find more information about the course on the IRS website. You should aim to at least become an Enrolled Agent when starting a tax prep business.

Certified public accountant (CPA)

Becoming a CPA is the top qualification for a professional tax preparer. Licensed CPAs can perform all levels of tax preparation, including representing individuals, businesses, and corporations. To become a CPA licensed in your state, you must obtain an accounting degree from an accredited university and pass a CPA exam. 

From a client’s point of view, this is the most trusted form of a tax preparer, and your qualifications will set you apart from your competition. The only drawback is that it will take around four years to complete the necessary education, and you’ll also need to pay tuition from an accredited college or university.

Become a certified tax preparer

Starting a tax prep business also means getting the appropriate tax numbers and certifications, including a PTIN, EFIN, and additional state licenses, if necessary.

Preparer tax identification number (PTIN)

Anyone who prepares taxes on behalf of others or for compensation needs a PTIN. A PTIN shows that you’re an “unenrolled preparer” and legally allows you to file up to 11 tax returns per year for other people or businesses.

You can obtain your PTIN directly from the IRS online. You must provide the following information when applying:

  • Identification that proves you’re at least 18 years old
  • Social Security number
  • Address
  • Explanation of felony convictions, if any
  • Explanation of owed money to the IRS, if applicable

Obtaining your PTIN is typically an easy process, although a felony conviction or money owed to the IRS can delay this process. If you plan on having employees, each person within your company will need their own PTIN. These numbers expire annually, so you’ll need to renew your PTIN once per year. It costs $21 to apply for your PTIN and $21 to renew every year.

Electronic filing identification number (EFIN)

An electronic filing identification number (EFIN) is another unique number that allows you to file taxes on behalf of others.

An EFIN is required if you plan to file more than 11 tax returns per year, which is ideal if you’re starting your own tax prep business. You can also be an authorized e-file provider with an EFIN, which allows you to file tax returns electronically through the IRS e-file tax portal.

You can obtain your EFIN through the IRS website. The process is slightly more complex than obtaining a PTIN and requires you to do the following:

  • Create an IRS e-service account online
  • Complete an online e-file application with the IRS
  • Pass a suitability check

You’ll need to obtain your PTIN before you can apply for an EFIN. You may also need to complete a credit check and criminal background check. If you have employees who aren’t certified and licensed CPAs or enrolled agents, they’ll also need to be fingerprinted to officially receive their EFIN.

State certifications and licenses

Some states require additional certifications and licenses to legally prepare taxes, and requirements will vary from state to state. You can find your state’s tax preparation requirements at their respective tax department website.

Find your first clients

An effective way to find your first clients is by reaching out to your pre-existing network, friends, family, and professional connections. You can offer these potential clients a reduced price on their first tax filing to drum up business or even give referral incentives for sending new clients your way.

You can also set up online profiles for your business to tap into customers through the web via platforms like Yelp and LinkedIn.

A Yelp Business Page gives online customers a means to research your business before hiring you. They can read through reviews from your previous customers and determine if you’re the right fit. A Yelp Business Page also lets you respond to previous client reviews and gives potential customers a glimpse of the top-notch customer service you provide.

You can also leverage Yelp Ads to grab the attention of potential customers who are searching for a tax preparer. The ads are flexible and easy to use, allowing you to choose your ad content, targeting criteria, and daily budget.

Your LinkedIn business profile is another channel you can use to find new business. Not only can you make connections with other professionals and business owners, but you can post content that shows you’re a thought leader in your space. For example, you could create posts that show tips to save money or the different small business tax deductions that aren’t commonly known.

See more ways to attract customers to your business.

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Manage tax clients

Once you build a solid client base, you’ll need to provide great customer service and maintain positive relationships. You’ll have a higher probability of winning repeat business from customers if you can build trust and stay top of mind throughout the year—even when it’s not tax season.

One way to forge lasting relationships with clients is by building an email marketing program. Ask your clients if they’d like to be added to your email list and send them useful tax information throughout the year.

For example, you can keep taxpayers informed of any new tax law or tax code changes that may impact their tax returns and keep them up to date with the most recent tax forms. You could also give periodic reminders to track certain expenses that could be written off when tax season rolls around.

Starting a tax prep business could be in your future

Before jumping straight into your new tax practice, create a sound business plan to determine if your idea is worth pursuing. After that, you’ll need to register your business and obtain the necessary tax identification numbers and certifications to legally operate your business.

You can then move your focus to finding your first clients, uncovering additional ways to promote your business locally, and grow your business into a profitable venture.

The information above is provided for educational and informational purposes only. It is not intended to be a substitute for professional advice and may not be suitable for your circumstances. Unless stated otherwise, references to third-party links, services, or products do not constitute endorsement by Yelp.