How to Start a Tax Preparation Business

Americans dread tax season – and for good reason! Tax returns are terribly complicated, which is why many people turn to professionals. The US tax preparation industry is worth more than $14 billion and growing, so starting a tax prep business could be a wise move. 

You’ll need to be certified with the IRS if you’re not already, and you’ll also need some business savvy. Fortunately, this step-by-step guide provides all the entrepreneurial insight you’ll need to launch your tax preparation business and put it on the path to success.

Step 1: Decide if the Business Is Right for You

Pros and cons

Tax preparation industry trends

Industry size and growth

• Industry size and past growth – The U.S. tax preparation industry is worth $14.4 billion in 2023 after growing 3.9% annually the last five years.((https://www.ibisworld.com/industry-statistics/market-size/tax-preparation-services-united-states/))
• Growth forecast – The U.S. tax preparation industry is projected to grow .8% in 2023. 
• Number of businesses – In 2023, 146,788 tax preparation businesses are operating in the U.S.((https://www.ibisworld.com/united-states/market-research-reports/tax-preparation-services-industry/#:~:text=Revenue%20for%20tax%20preparation%20service,%25%20of%20revenue….))
• Number of people employed – In 2023, the U.S. tax preparation services industry employs 296,703 people.((https://www.ibisworld.com/united-states/market-research-reports/tax-preparation-services-industry/#:~:text=Revenue%20for%20tax%20preparation%20service,%25%20of%20revenue….))

Trends and challenges

Trends

• The increasing complexity of tax returns is driving demand for tax prep. 
• Tax planning is a new element of tax prep, adding a new revenue stream.

Challenges

• Ever-changing tax laws mean tax preparers need to continue their education.
• The growing number of quality tax prep software tools mean more competition for tax prep professionals. 

Demand hotspots

• Most popular states – The most popular states for tax preparers are Rhode Island, Nevada, and Delaware((https://www.zippia.com/tax-preparer-jobs/best-states/))
• Least popular states –The least popular states for tax preparers are South Carolina, South Dakota, and Kansas. 

What kind of people work in tax preparation?

• Gender – 72% of tax preparers are female, while 28% are male.((https://www.zippia.com/tax-preparer-jobs/demographics/))
• Average level of education – The average tax preparer has a bachelor’s degree.
• Average age – The average tax preparer in the US is 47 years old.

How much does it cost to start a tax preparation business?

Startup costs for a tax preparation business range from $1,700 to $4,300. Costs include tax preparation software and the required education and certification. Visit the IRS website to learn how to get certified as a tax preparer.

You’ll need a couple of items to successfully launch your tax preparation business: 

• Computer
• Professional tax preparation software

How much can you earn from a tax preparation business?

The average price for tax preparation is $300, but this varies based on how many forms and schedules need to be included. Your profit margin should be about 90%. 

In your first year or two, you could do 200 tax returns, bringing in $60,000 in revenue. This would mean $54,000 in profit, assuming that 90% margin. 

As you gain traction, you might double your sales and do 400 returns. With annual revenue of $120,000, you’d make a tidy profit of $108,000.

What barriers to entry are there?

There are a few barriers to entry for a tax prep business. Your biggest challenges will be:

• Getting your certification
• Competing with software tools and other tax professionals 

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Step 2: Hone Your Idea

Now that you know what’s involved in starting a tax preparation business, it’s a good idea to hone your concept in preparation to enter a competitive market. 

Market research could give you the upper hand even if you’ve got the perfect product. Conducting robust market research is crucial, as it will help you better understand your customers, your competitors, and the broader business landscape.

Analyze your competitors 

Research tax preparation businesses in your area to examine their services, price points, and customer reviews.

• Make a list of tax preparation businesses that offer similar products or services. 
• Review your competitors’ services – their features, pricing, and quality – and marketing strategies
• Check out their online reviews and ratings on Google, Yelp, and Facebook to get an idea of what their customers like and dislike.
• Identify your competitors’ strengths and weaknesses. 

This should identify areas where you can strengthen your business and gain a competitive edge to make better business decisions.

Why? Identify an opportunity

You’re looking for a market gap to fill. For instance, maybe the local market is missing a tax service that handles state and local returns as well as federal taxes.

You might consider targeting a niche, such as small business tax preparation.

This could jumpstart your word-of-mouth marketing and attract clients right away. 

What? Determine your products or services

In addition to preparing federal tax returns, you could prepare state and local tax returns, as well as quarterly returns. You could also offer tax planning services.

How much should you charge for tax preparation?

The average price to prepare a tax return is $300 with additional costs for additional schedules and services. Your profit margin after marketing and software costs should be about 90%. 

Once you know your costs, use this Step By Step profit margin calculator to determine your mark-up and final price points. Remember, the prices you use at launch should be subject to change if warranted by the market.

Who? Identify your target market

Your target market will be broad, so you should include Instagram and Facebook in your marketing strategy. If you’re going to do business tax returns, add LinkedIn to the mix. 

Where? Choose your business premises

In the early stages, you may want to run your business from home to keep costs low. But as your business grows, you’ll likely need to hire workers for various roles and may need to rent out an office. You can find commercial space to rent in your area on sites such as Craigslist, Crexi, and Instant Offices.

When choosing a commercial space, you may want to follow these rules of thumb:

• Central location accessible via public transport
• Ventilated and spacious, with good natural light
• Flexible lease that can be extended as your business grows
• Ready-to-use space with no major renovations or repairs needed

Step 3: Brainstorm a Tax Preparation Business Name

Your business name is your business identity, so choose one that encapsulates your objectives, services, and mission in just a few words. You probably want a name that’s short and easy to remember, since much of your business, and your initial business in particular, will come from word-of-mouth referrals.

Here are some ideas for brainstorming your business name:

• Short, unique, and catchy names tend to stand out
• Names that are easy to say and spell tend to do better 
• Name should be relevant to your product or service offerings
• Ask around — family, friends, colleagues, social media — for suggestions
• Including keywords, such as “tax preparation” or “tax services”, boosts SEO
• Name should allow for expansion, for ex: “Universal Tax Solutions” over “Deduction Destination”
• Avoid location-based names that might hinder future expansion
• Use online tools like the Step by Step Business Name Generator. Just type in a few keywords and hit “generate” and you’ll have dozens of suggestions at your fingertips.

Once you’ve got a list of potential names, visit the website of the US Patent and Trademark Office to make sure they are available for registration and check the availability of related domain names using our Domain Name Search tool. Using “.com” or “.org” sharply increases credibility, so it’s best to focus on these. 

Finally, make your choice among the names that pass this screening and go ahead and reserve your business name with your state, start the trademark registration process, and complete your domain registration and social media account creation. 

Your business name is one of the key differentiators that sets your business apart. Once you pick a name, reserve it and start with the branding, it’s hard to switch to a new name. So be sure to carefully consider your choice before moving forward. 

Step 4: Create a Tax Preparation Business Plan

Every business needs a plan. This will function as a guidebook to take your startup through the launch process and maintain focus on your key goals. A business plan also enables potential partners and investors to better understand your company and its vision:

• Executive Summary: Provide a concise summary of your tax preparation business plan, including its objectives, target market, and competitive advantage.
• Business Overview: Describe your tax preparation business, its location, the range of tax services offered, and any specializations, such as individual or corporate tax preparation.
• Product and Services: Explain the specific tax services your business provides, such as tax filing, tax planning, audit support, or other related financial services.
• Market Analysis: Analyze the tax preparation market, including demand for tax services, seasonal trends, and the demographics of potential clients.
• Competitive Analysis: Identify competitors in the tax preparation industry and highlight what makes your business stand out in terms of expertise, pricing, or customer service.
• Sales and Marketing: Outline your strategies for attracting clients, including marketing channels, pricing structures, and networking efforts within the community.
• Management Team: Introduce key team members involved in your tax preparation business, emphasizing their qualifications and experience in tax-related fields.
• Operations Plan: Describe how your tax preparation business will operate, including the process of tax preparation, document management, and software/tools used.
• Financial Plan: Present financial projections, including startup costs, revenue forecasts, and profit margins for your tax preparation business, along with funding requirements.
• Appendix: Include any additional materials, such as sample tax forms, client testimonials, or certifications, to support your tax preparation business plan.

If you’ve never created a business plan, it can be an intimidating task. You might consider hiring a business plan specialist to create a top-notch business plan for you.

Step 5: Register Your Business

Plus, registration is exciting because it makes the entire process official. Once it’s complete, you’ll have your own business! 

Choose where to register your company

Your business location is important because it can affect taxes, legal requirements, and revenue. Most people will register their business in the state where they live, but if you are planning to expand, you might consider looking elsewhere, as some states could offer real advantages when it comes to tax preparation businesses. 

If you’re willing to move, you could really maximize your business! Keep in mind, it’s relatively easy to transfer your business to another state. 

Choose your business structure

Business entities come in several varieties, each with its pros and cons. The legal structure you choose for your tax preparation business will shape your taxes, personal liability, and business registration requirements, so choose wisely. 

Here are the main options:

• Sole Proprietorship – The most common structure for small businesses makes no legal distinction between company and owner. All income goes to the owner, who’s also liable for any debts, losses, or liabilities incurred by the business. The owner pays taxes on business income on his or her personal tax return.
• General Partnership – Similar to a sole proprietorship, but for two or more people. Again, owners keep the profits and are liable for losses. The partners pay taxes on their share of business income on their personal tax returns.
• Limited Liability Company (LLC) – Combines the characteristics of corporations with those of sole proprietorships or partnerships. Again, the owners are not personally liable for debts. Here’s how to form an LLC.
• C Corp – Under this structure, the business is a distinct legal entity and the owner or owners are not personally liable for its debts. Owners take profits through shareholder dividends, rather than directly. The corporation pays taxes, and owners pay taxes on their dividends, which is sometimes referred to as double taxation. Read how to start a corporation here.
• S Corp – An S-Corporation refers to the tax classification of the business but is not a business entity. An S-Corp can be either a corporation or an LLC, which just need to elect to be an S-Corp for tax status. In an S-Corp, income is passed through directly to shareholders, who pay taxes on their share of business income on their personal tax returns.

We recommend that new business owners choose LLC as it offers liability protection and pass-through taxation while being simpler to form than a corporation. You can form an LLC in as little as five minutes using an online LLC formation service. They will check that your business name is available before filing, submit your articles of organization, and answer any questions you might have. 

Form Your LLC

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Step 6: Register for Taxes

The final step before you’re able to pay taxes is getting an Employer Identification Number, or EIN. You can file for your EIN online or by mail or fax: visit the IRS website to learn more. Keep in mind, if you’ve chosen to be a sole proprietorship you can simply use your social security number as your EIN. 

Once you have your EIN, you’ll need to choose your tax year. Financially speaking, your business will operate in a calendar year (January–December) or a fiscal year, a 12-month period that can start in any month. This will determine your tax cycle, while your business structure will determine which taxes you’ll pay.

The IRS website also offers a tax-payers checklist, and taxes can be filed online.

It is important to consult an accountant or other professional to help you with your taxes to ensure you are completing them correctly.

Step 7: Fund your Business

Securing financing is your next step and there are plenty of ways to raise capital:

• Bank loans: This is the most common method but getting approved requires a rock-solid business plan and strong credit history.
• SBA-guaranteed loans: The Small Business Administration can act as guarantor, helping gain that elusive bank approval via an SBA-guaranteed loan.
• Government grants: A handful of financial assistance programs help fund entrepreneurs. Visit Grants.gov to learn which might work for you.
• Friends and Family: Reach out to friends and family to provide a business loan or investment in your concept. It’s a good idea to have legal advice when doing so because SEC regulations apply.
• Crowdfunding: Websites like Kickstarter and Indiegogo offer an increasingly popular low-risk option, in which donors fund your vision. Entrepreneurial crowdfunding sites like Fundable and WeFunder enable multiple investors to fund your business.
• Personal: Self-fund your business via your savings or the sale of property or other assets.

Bank and SBA loans are probably the best option, other than friends and family, for funding a tax preparation business. 

Step 8: Apply for Tax Preparation Business Licenses and Permits

Starting a tax preparation business requires obtaining a number of licenses and permits from local, state, and federal governments.

Federal regulations, licenses, and permits associated with starting your business include doing business as (DBA), health licenses and permits from the Occupational Safety and Health Administration (OSHA), trademarks, copyrights, patents, and other intellectual properties, as well as industry-specific licenses and permits. 

Visit the IRS website to learn how to become a certified tax preparer. 

You may also need state-level and local county or city-based licenses and permits. The license requirements and how to obtain them vary, so check the websites of your state, city, and county governments or contact the appropriate person to learn more. 

You could also check this SBA guide for your state’s requirements, but we recommend using MyCorporation’s Business License Compliance Package. They will research the exact forms you need for your business and state and provide them to ensure you’re fully compliant.

If you feel overwhelmed by this step or don’t know how to begin, it might be a good idea to hire a professional to help you check all the legal boxes.

Step 9: Open a Business Bank Account

Before you start making money, you’ll need a place to keep it, and that requires opening a bank account.

Keeping your business finances separate from your personal account makes it easy to file taxes and track your company’s income, so it’s worth doing even if you’re running your tax preparation business as a sole proprietorship. Opening a business bank account is quite simple, and similar to opening a personal one. Most major banks offer accounts tailored for businesses — just inquire at your preferred bank to learn about their rates and features.

Banks vary in terms of offerings, so it’s a good idea to examine your options and select the best plan for you. Once you choose your bank, bring in your EIN (or Social Security Number if you decide on a sole proprietorship), articles of incorporation, and other legal documents and open your new account. 

Step 10: Get Business Insurance

Business insurance is an area that often gets overlooked yet it can be vital to your success as an entrepreneur. Insurance protects you from unexpected events that can have a devastating impact on your business.

Here are some types of insurance to consider:

• General liability: The most comprehensive type of insurance, acting as a catch-all for many business elements that require coverage. If you get just one kind of insurance, this is it. It even protects against bodily injury and property damage.
• Business Property: Provides coverage for your equipment and supplies.
• Equipment Breakdown Insurance: Covers the cost of replacing or repairing equipment that has broken due to mechanical issues.
• Worker’s compensation: Provides compensation to employees injured on the job.
• Property: Covers your physical space, whether it is a cart, storefront, or office.
• Commercial auto: Protection for your company-owned vehicle.
• Professional liability: Protects against claims from a client who says they suffered a loss due to an error or omission in your work.
• Business owner’s policy (BOP): This is an insurance plan that acts as an all-in-one insurance policy, a combination of the above insurance types.

Step 11: Prepare to Launch

As opening day nears, prepare for launch by reviewing and improving some key elements of your business. 

Essential software and tools

Being an entrepreneur often means wearing many hats, from marketing to sales to accounting, which can be overwhelming. Fortunately, many websites and digital tools are available to help simplify many business tasks.  

You may want to use industry-specific software, such as Karbon, or Canopy, to manage your work flows, clients, billing, and communication. 

Accounting

• Popular web-based accounting programs for smaller businesses include Quickbooks, Freshbooks, and Xero. 
• If you’re unfamiliar with basic accounting, you may want to hire a professional, especially as you begin. The consequences for filing incorrect tax documents can be harsh, so accuracy is crucial.

Create a website

Website development is crucial because your site is your online presence and needs to convince prospective clients of your expertise and professionalism. You can create your own website using services like WordPress, Wix, or Squarespace. This route is very affordable, but figuring out how to build a website can be time-consuming. If you lack tech-savvy, you can hire a web designer or developer to create a custom website for your business.

Your customers are unlikely to find your website, however, unless you follow Search Engine Optimization (SEO) practices. SEO will help your website appear closer to the top in relevant search results, a crucial element for increasing sales. 

Make sure that you optimize calls to action on your website. Experiment with text, color, size, and position of calls to action such as “Schedule Now”. This can sharply increase purchases. 

Marketing

Here are some powerful marketing strategies for your future business:

1. Partner with Local Businesses: Collaborate with local businesses like small retailers or real estate agencies to offer bundled services, providing their clients with tax preparation discounts.
2. Host Educational Workshops: Conduct workshops on tax planning and changes in tax laws to position your business as a trusted source of expertise in the community.
3. Referral Programs: Incentivize existing clients to refer your services by offering discounts or a small commission on successful referrals, turning satisfied clients into advocates.
4. Social Media Advertising: Utilize targeted social media ads, focusing on platforms like Facebook and Instagram, to reach potential clients with tailored messages about your tax preparation services.
5. Community Sponsorship: Sponsor local events, sports teams, or community programs to increase brand visibility and foster a positive image in the community.
6. Loyalty Programs: Implement a loyalty program where clients receive discounts or exclusive benefits for returning to your tax preparation services year after year.
7. Mobile Tax Services: Offer on-site or mobile tax preparation services, providing convenience to clients who may have difficulty visiting a physical office.
8. SEO Optimization: Optimize your online content for search engines to ensure that your business appears prominently when individuals search for tax preparation services in your locality.
9. Customer Testimonials: Showcase positive client testimonials on your marketing materials and online platforms to build trust and credibility with potential clients.
10. Email Marketing Campaigns: Develop targeted email campaigns to keep clients informed about tax deadlines, policy changes, and exclusive offers throughout the year.

Focus on USPs

Unique selling propositions, or USPs, are the characteristics of a product or service that sets it apart from the competition. Customers today are inundated with buying options, so you’ll have a real advantage if they are able to quickly grasp how your tax preparation business meets their needs or wishes. It’s wise to do all you can to ensure your USPs stand out on your website and in your marketing and promotional materials, stimulating buyer desire. 

Global pizza chain Domino’s is renowned for its USP: “Hot pizza in 30 minutes or less, guaranteed.” Signature USPs for your tax preparation business could be:

• Taxes done fast and done right, guaranteed
• Tax planning to eliminate surprises
• Tax preparation with full audit support

Networking

You may not like to network or use personal connections for business gain. But your personal and professional networks likely offer considerable untapped business potential. Maybe that Facebook friend you met in college is now running a tax preparation business, or a LinkedIn contact of yours is connected to dozens of potential clients. Maybe your cousin or neighbor has been working in tax preparation for years and can offer invaluable insight and industry connections. 

The possibilities are endless, so it’s a good idea to review your personal and professional networks and reach out to those with possible links to or interest in tax preparation services. You’ll probably generate new customers or find companies with which you could establish a partnership. 

Step 12: Build Your Team

If you’re starting out small from a home office, you may not need any employees. But as your business grows, you will likely need workers to fill various roles. Potential positions for a tax preparation business include:

• Tax Preparers – assist with clients
• General Manager – scheduling, accounting
• Receptionist – greet clients, take calls, make appointments

At some point, you may need to hire all of these positions or simply a few, depending on the size and needs of your business. You might also hire multiple workers for a single role or a single worker for multiple roles, again depending on need. 

Free-of-charge methods to recruit employees include posting ads on popular platforms such as LinkedIn, Facebook, or Jobs.com. You might also consider a premium recruitment option, such as advertising on Indeed, Glassdoor, or ZipRecruiter. Further, if you have the resources, you could consider hiring a recruitment agency to help you find talent. 

Step 13: Start Making Money!

If you’re among the few people who enjoy doing taxes, a tax prep business could be just the thing for you. You can help people deal with a major hassle and make good money at the same time. Maybe you’ll even growinto the next H&R Block!

You’ve got the business basics down now, so it’s time to get certified and prepare to become a tax preparation entrepreneur.