While some entrepreneurs opt to file their own taxes or use tax software, these alternatives may not be the most secure or efficient option. Hiring a certified public accountant (CPA) to manage your accounting and tax planning might be an investment, but the potential benefits can outweigh the costs. The expertise and guidance a CPA brings to the table can be invaluable to your small business’s growth and financial well-being. If you’re contemplating whether it’s time to hire a CPA, there are several essential factors to consider.
If you can afford to hire a CPA, it’s probably your best option. Trying to educate yourself on changing tax laws, understanding what kinds of deductions you qualify for and staying up to date with filings can take you away from what’s important: running your business. If you don’t have a dedicated in-house finance team, you should seriously consider seeking outside accounting help.
There are also specific situations in which hiring a CPA is an especially wise investment. If you’re behind on your taxes, a tax professional or a tax debt relief service can help you resolve the issue. Working with a tax pro may also help keep your business from being audited by the IRS.
That said, if you’re running a small business with a relatively simple structure, it may be worth it to consider using tax software to do your taxes on your own. If you go this route, however, make sure you’re confident in your ability to handle your company’s finances and taxes.
Before you decide anything, first do a quick assessment of your company’s financial state. You should have complete financial statements and records, including a balance sheet and a profit and loss statement (and knowing your personal income will be helpful, too). You should also consider the legal structure of your business, as sole proprietorships, C-corps and partnerships are each taxed differently.
When it comes to filing your own taxes, the devil is in the details. There are a lot of tax deductions you may (or may not) qualify for, and tax laws are constantly changing. Make sure you have a good understanding of the nature of your business and the tax rules it must meet. If you don’t, you could end up being audited by the IRS or paying steep penalties.
Regardless of how you file, you need to think about your taxes year-round. Don’t wait until tax time to analyze your business’s operations or consider if you qualify for certain deductions. If you are completing your taxes on your own, schedule time each month to analyze what you owe. But if you’ve found you’ve fallen behind on your accounting, it’s best to seek outside assistance.
The more complicated your company’s finances are, the more likely it is that you need a CPA to help you properly deduct expenses. Businesses with a lot of inventory or complex accounts receivable should consider hiring a pro.
You have several options for filing your business taxes, each with pros and cons to consider.
Filing your own taxes can be a complicated process, but it all hinges on the complexity of your business. If you have a long list of depreciating assets or qualify for a lot of deductions, it may be difficult to file your own taxes quickly and efficiently. You should also be aware of estimated taxes and the taxes you’re required to pay throughout the year, like quarterly sales and payroll taxes. [Related article: What Are Assets in Accounting?]
If you’re running a simple operation, completing your own taxes may be within reach. Mark Aselstine, founder of online wine club Uncorked Ventures, switched from using an accountant to doing his taxes himself. Aselstine found that his business’s simple structure allows him to categorize expenses easily and calculate tax totals.
“My [business] is … money in, money out, and we don’t carry a lot of inventory,” he said. “It was going to take me less time to just do it myself rather than have to answer questions about how stuff should be categorized.”
Each month, Aselstine sits down and calculates his expenses so that when it comes time to file his taxes, he has the right information at his disposal. He also tries to stay current with changing tax laws, although he said that based on his business’s structure, it isn’t too difficult to keep up with any changes. Aselstine also said that any business owner considering a switch from a CPA should experiment with bookkeeping for a month or two before they make the transition.
While there are a lot of moving parts to filing a correct tax return each year, it can be done if you have a background in taxes or operate a small business with a simple structure. A tax software application may be a good option for your business, but make sure you assess the vendor, their support options and the usability of their software before you purchase it. You should also check out the best accounting software on the market.
Pros of doing your own taxes with tax software
Cons of doing your own taxes with tax software
Less audit support than professionals can offer
Cannot override system defaults
Suitable for simple business models
May require additional research
Using a third-party tax preparation service is another option. It is less expensive than a CPA but takes the work out of your hands, reducing stress. Popular tax preparation chains used for personal returns, such as H&R Block and Liberty Tax, can do business taxes as well. However, you won’t get the financial analysis that a CPA gives you, and they may not know every way to calculate your return, so you might not get the best filing option.
Ultimately, you are working with people who are trained to use tax preparation software and properly file taxes. But their software might use default settings to make calculations, whereas a CPA has the option to use alternative calculation methods. While most people have a good experience with third-party tax services, you’ll want to inquire about how many business returns they do each year to make sure they are proficient with scenarios like yours. It’s vital to look for a company and specialist with experience doing business tax returns.
Pros of using a third-party tax service
Cons of using a third-party tax service
Limited knowledge base
May not be able to override systems for more favorable calculation methods
Good for simple business models
Limited audit support
If you’re running a complex business, have unsuccessfully used software or a third-party service in the past, or are just looking for peace of mind, then you should let a bona fide tax professional handle your tax needs. While you could still technically be subject to an IRS audit, trusting a CPA who has been educated on all the latest tax laws means that chance falls dramatically.
“I use a CPA to do my taxes and wouldn’t consider doing it on my own,” said John Kinskey, president of AccessDirect, a small business phone system company. “The ‘brain damage’ from trying to keep up with all the shifting changes in tax laws – and just the sheer amount of detail required to file state and federal tax returns – is well worth paying a professional.”
Hiring a tax accountant or accounting firm means guaranteeing yourself a few advantages: You can spend less time worrying about your tax situation and more time handling business operations, you can potentially end up saving money by taking advantage of deductions you wouldn’t know about on your own, and you can ensure all your finances are up to date and that you’re in good standing with the IRS. Hiring an accounting firm is an obvious choice for any complex business that can afford to bring a certified tax professional on board. Besides, small businesses should decrease any risk of being audited, and hiring a CPA is a great way to do that.
Pros of hiring a CPA
Cons of hiring a CPA
Deep knowledge base
Additional financial modeling support
Still requires adequate bookkeeping
Doing your own taxes with tax software
Using a third-party service
Hiring a CPA
By appointment only
By appointment only
Taxes done for you
Help with business modeling
Here are some of the most common questions asked about hiring a CPA for a small business.
A junior staff member at a firm of CPAs may charge as little as $60 per hour, according to AdvisoryHQ. A CPA who owns a firm may charge as much as $250 per hour. In some areas with especially high demand and large client bases, the most sought-after, best-regarded CPAs may charge as much as $500 per hour.
Hiring a CPA is theoretically as simple as reaching out to one for a consultation. Before taking that step, though, you’ll want to do some research. Be sure that the CPA you’re considering has worked with other businesses in your industry. Determine whether you need a CPA solely for tax-filing purposes or for larger tasks such as creating budgets and financial statements. Make sure your CPA works well with others, especially if you run a large business; you may be able to find this out by reading online reviews. A CPA hired to file taxes for your large business may need to contact your employees or clients, so you’ll want to be sure they communicate well.
Experience in your industry is the most important qualification you should look for when choosing a CPA, but it’s not the only factor to keep in mind. You’ll want to find a CPA firm that’s of an appropriate size to tend to your needs, and you’ll want to be sure the firm has ample services (and staff) to get the job done. Choose a CPA who will respond to your inquiries in a timely manner, offer the services your business needs and gladly provide references from other clients.
What’s the difference between a CPA and an accountant?
The difference between a CPA and an accountant is simply a legal distinction. A CPA is an accountant licensed in their state of operation. Only a CPA can offer attestation services, act as a fiduciary to you and serve as a tax attorney if you face an IRS audit.
If your tax situation is at all complicated, you could opt to hire an accountant. You may also want to hire an accountant if you worry that you won’t have enough time to do your taxes on your own. In general, it may be smart to hire an accountant unless your business is a sole proprietorship with minimal overhead, costs or expenses.
An accountant who is not a CPA may charge less per hour than a CPA. Some accountants may have a bill rate of only $30 or $40 per hour, though others will cost more, according to Ageras. [Learn how much a CPA costs compared to payroll companies.]
An accountant may be able to complete an individual tax return quickly, but the amount of work involved in filing a return depends on the number of forms you’re required to report to the IRS. If you’re a sole proprietor with just a few 1099-MISC forms, your accountant should need less time to complete your tax return, but if you run a large business, you may need to wait a while. Regardless of your situation, even the busiest of accountants can relieve the time burden involved with filing your taxes yourself.
Kimberlee Leonard and Matt D’Angelo contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.