So you’re thinking about becoming a tax preparer. How much does it cost to file taxes, anyway? How much should you charge? What sort of schooling or credentials do you need to get?
Clients entrust tax preparers with the responsibility of accurately filing their income tax returns. This trust extends to sharing intimate details of their financial lives, including marital status, income, children, and social security numbers. The importance of expertise and sensitivity in handling this information cannot be overstated, but the reward of helping people successfully process their biggest financial documentation of the year can also be deeply rewarding.
Today, let’s look at the business expenses, qualifications, and various pay rates of tax preparers to see if this profession is right for you.
How much does it cost to file taxes if you are a tax preparer?
The cost of running a tax preparation business varies quite a bit depending on how many returns you process, how robust your office is, and how much you want to spend to protect yourself legally when issues arise. Every person who prepares tax returns for a third party is required to have a PTIN number, which costs around $20 per year.
Besides office fees and supplies, which can range from a home office to a standalone building with employees and beyond, you will also need to invest in good tax software. Of course, an internet connection is vital, and an efficient scanner to digitize client records is a necessity for anyone preparing returns on a computer.
Add-on software can significantly reduce your workload as well. These additional services can automatically pull data from scanned documents, provide secure portals for digital file transfers, allow clients to pay you with credit or debit cards, and more. You can explore additional services like these on our Products drop-down menu.
There are also insurance options to cover you in case you make mistakes with client returns. Errors and Omissions insurance, or E&O insurance, serves as a safeguard for business owners facing potential claims related to errors in services, omissions, negligence, misrepresentation, violation of good faith, and inaccurate advice.
Remember that business expenses can earn you a tax write-off on your own tax return, so the money you invest in your tax preparation office does not simply go down the drain.
In short, the expenses associated with being a tax preparer depend greatly on how you want to run your business, your risk appetite, and your budget.
What are the different types of tax preparers?
To kickstart your career as a paid preparer, you need to secure an IRS Preparer Tax Identification Number (PTIN). With that in hand, it’s time to look at different levels of tax preparer rights and accreditation. The rights, education, and expertise of tax preparers vary, so let’s look at the different levels.
One significant distinction among practitioners is their "representation rights" before the IRS. Enrolled agents, CPAs, and attorneys enjoy unlimited representation rights, allowing them to represent clients in audits, payment or collection issues, and appeals. Enrolled agents are licensed by the IRS and must pass a comprehensive three-part Special Enrollment Examination, demonstrating proficiency in federal tax planning, individual and business tax return preparation, and representation. They must also complete 72 hours of continuing education every three years. Certified Public Accountants, or CPAs, are licensed by state boards of accountancy and have passed the Uniform CPA Examination. They have also completed accounting studies at a college or university and fulfilled experience and character requirements. CPAs must adhere to ethical standards and continue their education to maintain an active license. Attorneys, licensed by state courts or their designees, possess law degrees, passed bar exams, and comply with ongoing continuing education and professional character standards.
Some preparers without the above credentials have limited representation rights. Participants in the Annual Filing Season Program, a voluntary initiative encouraging education and readiness, fall into this category. They can only represent clients before specific IRS employees on matters related to returns they prepared. Annual Filing Season Program participants have limited rights to represent clients before the IRS.
PTIN holders with no other accreditation can only prepare tax returns—they lack any authority to represent clients before the IRS (except for returns filed before January 1, 2016). To assist taxpayers in choosing preparers wisely, the IRS maintains a public directory that includes the names, locations, and credentials of attorneys, CPAs, enrolled agents, enrolled retirement plan agents, and enrolled actuaries with valid PTINs. This searchable database also includes recipients of the Annual Filing Season Program Record of Completion for the relevant tax year.
How much do tax preparers charge if they hold limited representation rights?
Tax preparers with no designation who participated in our recent How do Your Tax Prep Fees Stack Up? survey reported that they planned to charge $183 for individual returns on average—excluding returns with itemized deductions or state returns. For more information on pricing tax prep services as a tax preparer with no designation, see our survey results.
How much do EAs charge?
Survey participants who were EAs reported that they planned to charge $231 for individual returns (excluding returns with itemized deductions or state returns) on average. For more information on how many EAs price their services, see our survey results.
How much do CPAs charge?
CPAs who participated in our survey reported that they planned to charge $319 for individual returns with no itemized deductions or state returns. For more information about how much CPAs charge for tax prep, see our survey results.
How much do tax attorneys charge?
Finally, of the attorneys who participated in our survey, they reported on average that they planned to charge $425 for individual returns that don't include itemized deductions or state returns. For more information on pricing tax prep services as an attorney, see our survey results.
How much money do tax preparers make per year?
According to our How do Your Tax Prep Fees Stack Up? survey, most tax preparers expect to file 101-500 Form 1040 tax returns in 2024. By that measure, tax preparers would bring in at least the following income over the course of a year:
· No designation: $18,483 to $91,500
· EA: $23,331 to $115,500
· CPA: $32,219 to $159,500
· Attorney: $42,925 to $212,500
Again, those numbers are the minimum based on what each type of tax preparer said they plan to charge on average, assuming each preparer is only preparing individual returns with no itemized deductions or state returns.
Where do I go to learn how to become a tax preparer?
Ready for a more robust road map? Explore the essential guidelines for aspiring professional tax preparers, focusing on unique steps tailored to meet IRS requirements, on our Become a Tax Preparer page. Whether embarking on a solo tax preparation venture or managing a larger team, the following five crucial steps are presented in a logical sequence to guide you through the process:
1. Get an EFIN for Your Firm
2. Get a PTIN for Each Preparer
3. Get Drake Tax Software
4. Get Training
5. Build and Manage Your Practice
For additional resources and comprehensive insights into establishing your tax preparation business, delve into the materials provided on our Become a Tax Preparer page.
Venturing into tax preparation requires careful consideration of various factors, including business expenses, qualifications, and pricing strategies. The costs associated with running a tax preparation business can vary based on your business model, risk tolerance, and budget. Accreditation and representation rights are crucial considerations, with enrolled agents, CPAs, and attorneys holding distinct levels of expertise and authority before the IRS.
Understanding the diverse pricing strategies employed by tax preparers, whether with limited representation rights or higher credentials, provides valuable insights for those entering the profession. The surveyed data on fees and potential earnings for different types of tax preparers offer a realistic perspective on income expectations within the industry.
In your journey to become a tax preparer, remember that this profession not only involves financial considerations but also demands a high level of trust and responsibility. To further enhance your understanding and readiness, explore additional resources provided on the Become a Tax Preparer page. Whether you're planning to operate independently or manage a larger team, these resources offer valuable support in your pursuit of a career in tax preparation.
Sources: E&O Insurance: Coverage & Costs – Forbes Advisor RPO Preparer Directory – Treasury.gov General Requirements for the AFSP Record of Completion – IRS.gov Understanding Tax Return Preparer Credentials and Qualifications – IRS.gov PTIN Requirements for Tax Return Preparers – IRS.gov