For anyone who runs a business, including a small business owner, you should learn about tax preparation as it is one of the significant aspects. Aside from being known to be important for compliance with both local and federal regulations, it also plays a role in maintaining financial health and planning for the future.
Talking about tax preparation, as someone who runs a small business, you may want to know the average cost of tax preparation for small business. So, how much should you spend for tax preparation for small businesses?
Also Read: How is IRS Tax Return Tracking Work?
Definition of Tax Preparation
Tax preparation is defined as the process of preparing tax returns, usually income tax returns, for anyone except the taxpayer. Individuals, businesses, or organizations can get help from tax preparers to navigate the complex process of reporting their financial information to tax authorities.
Average Cost of Tax Preparation for Small Business
For anyone who is wondering about the average cost of tax preparation for small business, there is no exact answer because it depends on some factors that will be explained below. There are a lot of business owners who prefer to hire a tax professional to help them file and prepare their taxes. If you also want to hire one, the first thing that you have to pay is to hire a tax professional, which can be one of the followings:
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- Registered Tax Return Preparers or RTRPs
- Enrolled Agents or EAs
- Certified Public Accountants or CPAs
- Attorneys
If you are wondering how much does it cost to hire one of them, it also varies because they usually structure their service pricing differently. For CPA, they can cost between $68 to $800, according to the National Society of Accountants. Everything depends on a few things, including the forms that are needed to be filled, how detailed they are, and how hard it is to collect the appropriate information from your books. A survey done by the National Society of Accountants also informs that the average cost to hire one of these tax professionals to complete an itemized IRS Form 1040 in 2014 was $273. It was a decade ago so surely the fee will be more expensive. Apart from that, every business owner should remember that that was the price to file IRS Form 1040 only. It means they will need to pay more because they may be needed to fire other forms, such as:
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- Form 1040-ES
- Business partnership forms: You may have to file specific business partnership forms such as Form 1065, Return of Partnership Income if other owners are included in a partnership of your small business.
- Sole partnership forms: If you are the only owner of your small business, go to the following link to find out which extra forms that you have to file: Sole proprietorships | Internal Revenue Service (irs.gov).
- Form 1040 Schedule C: Apparently, Form 1040 has different versions. If you are wondering which version is for you, it depends on your income and your tax credits.
- Form 8829: It may be possible for you to cut the expenses if your small business is located at your home. However, there are rules that can make a small business considered as the one that its expenses can be deducted. You will not meet the criteria if you only rarely use a room in our home. If you use your home exclusively for your business, you may be able to get the expenses deducted by filling out Form 8829.
- Form 1099: It will be needed for you to issue a 1099 to your temporary employee or contractor if they have made at least $600 in services. Plus, you should also file one for your business.
- For W-2: It is a must for you to issue and file a W-2 for every employee that you have if they have made $600 or more over the last tax year. From this form, the IRS will know how much you as the employer pay your employees and how much they are paid as a taxpayer.
- Form 940: Anyone who is liable for federal unemployment tax will have to file IRS Form 940 for their small business.
- Form 941 or 944: Is your business liable for Social Security and Medicare taxes withheld from employee income? If the answer to the question is yes, you should file Form 941 or 944.
If you are curious about the fees of the other forms other than Form 1040, they are as follows:
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- $174: This one is for Form 1040 Schedule C (business)
- $634: This one is for a Form 1065 (partnership)
- $817: This one is for a Form 1120 (corporation)
- $778: This one is for a Form 1120S (S corporation)
- $457: This one is for a Form 1041 (fiduciary)
- $688: This one is for a Form 990 (tax exempt)
- $68: This one is for a Form 940 (Federal unemployment)
- $115: This one is for Schedule D (gains and losses)
It is worth noting that the fees are average, meaning it may vary, depending on some factors. It is better for you to talk to your tax professional to help you determine which IRS forms apply to your small business.
Factors that Affect the Cost of Tax Preparation
The cost of tax preparation is affected by a few factors, such as:
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- Business structure: The more complex the structure of the business the higher the price of tax preparation. If a business is pretty complex, for example it is a partnership, S-corporation, or C-corporation, the tax preparation will be more expensive compared to the one with a sole owner because it usually involves more complex forms and extra requirements.
- Geographical location: In general, the businesses that are located in urban areas or regions tend to be more expensive compared to the ones in rural areas because the cost of living is considered high.
- Size and complexity of the business: If you have a business that has multiple revenue streams, large inventories, or significant assets, get ready to face higher preparation costs.
- Type of tax services required: Your business may need certain services, such as filing federal and state taxes, sales tax returns, payroll tax returns, or handling IRS audits, affecting the tax preparation cost.
- Experience of the tax profession: The more experience the tax preparer has, the higher the cost of tax preparation. Basically, you will have to pay more money if you prefer to hire the likes of certified Public Accountants or CPAs, Enrolled Agents or EAs or tax attorneys who have specialized knowledge compared if you hire general tax preparers or bookkeeping services.
Also Read: Where to Mail the IRS Tax Return
Tips for Managing Tax Preparation Costs
If you want to manage tax preparation costs and try to reduce them, below are several strategies to consider by those with small business:
1. Maintain organized financial records
If you are the type of person who likes to keep your financial records well-organized throughout the year, there is a chance for you to reduce the tax preparation cost because your action will help your tax preparer and will reduce the time.
2. Use accounting software
It is possible for you to simplify your bookkeeping processes if you invest in reliable accounting software. By using this kind of software, you will be able to generate accurate financial statements. Apart from that, it is also a good thing for your tax preparer as their job will be lighter.
3. Schedule early
Keep in mind that the earlier you schedule your tax preparation services the better. By doing so, you will be able to avoid rush fees that will be usually higher compared to the standard fees. Besides, preparing in advance of tax deadlines is also useful for your preparer because they will have more time to do their work.
4. Bundle services
Discounts usually offered by some tax professionals if you bundle tax preparation with other services such as payroll, financial planning, or bookkeeping.
5. Consider a CPA
While it is true that hiring a Certified Public Accountant or CPA is expensive, it is worth it. By hiring one, you will be able to find out how to deduce the tax and credits thanks to their expertise, resulting in you saving your business money in the long run.
Bottom Line
In conclusion, the average cost of tax preparation for small businesses may be different, depending on a few factors such as location, complexity, and structure of the business. It is important for you to understand these factors to simplify your tax preparation process, making it possible for you to manage costs effectively.
AUTHOR BIO
On my daily job, I am a software engineer, programmer & computer technician. My passion is assembling PC hardware, studying Operating System and all things related to computers technology. I also love to make short films for YouTube as a producer. More at about me…