This guest post is brought to you by Bench, the online accountants that use your Shoeboxed receipts to build you tax-ready financial statements.
Tax season is fast approaching and many small business owners are facing the same dilemma – what’s the best way to file taxes? While there is no “one size fits all” solution, being equipped with an arsenal of facts may steer you in the right direction.
Option One: DIY
This is ostensibly the cheap and dirty method, but what does filing on your own really cost?
Cost (Not Including Bookkeeping)
Assuming that you pay yourself a wage of $20.00/hour, the cost of filing business taxes on your own adds up very quickly. Based on IRS estimates of time spent filing tax returns, these are the prices you’re actually paying to file yourself:
Form 1040, Schedule C (sole proprietors): $200.00 1
Form 1065 (partnerships): $640.00 2
Form 1120/1120S (corporations): $1,540 3
One of the most important aspects of filing taxes is accuracy – both to ensure that you get the maximum available refund and to avoid the steep penalties charged for filing errors. To put this into sharp perspective, it is estimated that Americans miss $1 billion in available deductions by attempting to file taxes unassisted – that’s $460.00 per person!4 In addition to that, in the event of an error with your tax return, you will be personally liable for any associated penalties and interest charged. Oh, and just because they can, the IRS accrues interest on outstanding payments and penalties daily.
The IRS website? Google? Filing taxes unassisted is just that – unassisted. And if you happen to get audited, you will also have to represent yourself in front of the IRS or pay for professional representation.
Option Two: Invest in Software
As with almost everything else in life, filing taxes is moving into the online realm, with nearly 30% of Americans choosing this method.
Cost (Not Including Bookkeeping)
Like filing unassisted, the real cost to calculate when considering this option is the time you spend using the software, which will vary considerably depending on your familiarity with the program and the complexity of your tax return. The following prices are for TurboTax Federal & State filing, plus a conservative estimate of your time invested.
Form 1040, Schedule C (sole proprietors): $150.00 – $190.00
Form 1065 (partnerships): $300.00 – $500.00
Form 1120/1120S (corporations): $490.00 – $720.00
All tax filing software comes with a “maximum refund guarantee,” which entitles you to a refund on the price of the software if you can get a larger refund using another filing method. Just keep in mind that you would have to actually file your taxes by another method to claim this refund – and absorb the additional cost of doing so. In the event that you are slapped with any filing penalties, you will be reimbursed only if the offending error was caused by a software miscalculation – not a user error.
All software programs have built in support features like live chat and telephone assistance – though you will likely speak to a different person with every issue.
Option Three: Use a Retail Tax Service
If software just isn’t cutting it, but you’re not ready to invest the time and money to find a qualified CPA, you may consider a walk-in service.
Cost (Not Including Bookkeeping)
Retail tax preparers, like H&R Block and Liberty Tax Service, generally charge per form. While the best way to know for sure is to receive a quote, the following are the average prices you’re looking at:
Form 1040, Schedule C (sole proprietors): $200.00 – $250.00
Form 1065 (partnerships): $500.00 – $700.00
Form 1120/1120S (corporations): $750.00 – $850.00
Retail tax preparers are backed by a guarantee policy that covers you for both penalties and missed deductions; however, as with the software guarantee, you would have to catch the missed deduction in order to claim the refund. One other important thing to note about accuracy is that registered tax preparers are not required to have any education in taxation and do not have to pass any competency exams – though the IRS is attempting to change this.
Your tax preparer will be able to answer questions throughout the process of filing your return, but year-round support is limited as the retail tax industry is extremely seasonal and the vast majority of employees are only employed from January – April. In the event of an audit, tax preparers are not licensed to represent you in front of the IRS.
Option Four: Call in the Pros
This option will cost you the most up-front, but it will also save you the most in the long run – much like paying for regular car maintenance to preserve the life of your vehicle.
Most CPAs and EAs charge by the hour, so the easiest way to reduce your tax bill is to ensure that your books are well maintained and that you have all the required documentation ahead of time. The following are the average price ranges for professional tax preparation, though price varies considerably by situation, location, and experience.
Form 1040, Schedule C (sole proprietors): $250.00 – $500.00
Form 1065 (partnerships): $500.00 – $1,000.00
Form 1120/1120S (corporations): $1,000 – $2,500.00
Both CPAs and EAs have significant education and experience in taxation. In addition, they’re required to undertake continuing education to stay up to date on changes to tax law. Not only will a CPA or EA get you the maximum available refund when your taxes are due, they will also work with you to create a customized business plan that minimizes your tax bill over time.
Personalized year-round support is the greatest benefit of using a qualified CPA or EA. While other tax preparation options may be able to provide a comparable tax refund in April, only a CPA or EA can advise you on how to significantly reduce your tax bill over time through calculated tax planning and business structuring. Finally, in the event of an audit, both CPAs and EAs have unlimited ability to represent clients in front of the IRS.
There are a whole host of factors to consider when choosing a method to file taxes, so you really have to take the time to find the option that works best for you.
If there is one thing that holds true for any method, it’s that good bookkeeping and solid preparation are the easiest ways to reduce both time and expense in April (or March for corporate returns)!
To get a head start this year, learn “How to File Your Taxes in 5 Minutes per Day!”
This post is brought to you by Bench. Bench is the modern bookkeeping service that provides audit-proof financial statements from online accountants at an affordable fixed price. Not in the software business or the accounting business, Bench is in the business of solving accounting problems and letting clients spend more time doing what they love.