The 3 Most Misunderstood Parts of Setting up Your Tax Prep Business

By Chuck | July 11, 2019

If you’re doing it right, a lot goes into setting up your own tax preparation business. (Yes, it can be daunting, but that’s why we take you through it step-by-step beyond just learning HOW to become a tax preparer.) 


However, by far, from what we’ve seen at The Income Tax School, the 3 most misunderstood parts of setting up your tax prep business are:

  • How to manage risk in your business from Day 1
  • Establishing what kind of business you want to run
  • How to plan for year-round revenue (AKA getting out of this “tax season” mentality)

These points are important enough that they should be revisited as part of an annual “health check,” even for established tax preparation businesses, since your business is likely to evolve over time. 

They’re especially important as you get started though, since the answers to these questions can color how you do business, what kinds of clients you take, and how successful you are overall.

Managing risk

Nowadays, managing risk is definitely an ongoing process for any business – but particularly for a business that deals with such sensitive personal information as tax preparation does.

Establishing strong security sets a good foundation for your business as you grow. The first thing you want to look at is what kind of business insurance you need. You’ll look at different kinds of insurance, including:

  • Workers compensation
  • General liability
  • Auto
  • Property and casualty
  • Umbrella liability
  • Employee practices liability (to protect you or an employee in case claims of harassment or discrimination come up)
  • Errors and omissions liability (in case you or an employee make an honest mistake in conducting your business)
  • Business interruption (to cover loss of income if your business is unable to operate for some reason)
  • Life 
  • Key person 
  • Disability 
  • Data breach

Every year, it’s good to go through your policies; compare them to the day-to-day reality of your business operations, needs and goals; and then decide what the right mix of insurance is for your business at that time.

You really need a good data breach policy, too, since it’s usually not a matter of “if” but “when” a breach can occur. You need to think about both the practical side of managing and containing the damage when a breach occurs, as well as how to manage the reputational risk – since the damage to your reputation can cost you as much as the breach itself.

When you’re establishing a strong data breach and general cybersecurity policy and procedure, remember to think about:

  • Prevention measures (including constant monitoring, so a breach is detected early)
  • Containment of the breach
  • How you’ll communicate what happened to clients and other stakeholders
  • How you’ll establish cybersecurity protocols across your business for all employees, so everyone is acting consistently and supporting your prevention measures

Finally, make sure you take advantage of the IRS’s many resources about tax identity theft. Identity theft can happen to clients as well as to tax preparers. Make sure you stay on top of the best practices the IRS recommends, as well as alerts they put out about current scams.

Establishing the best business entity and model

At the most basic level, deciding what kind of business you want to run means choosing what business entity you’ll operate as and what kind of office you want.

The four main kinds of business entity you can choose from are:

  • Sole proprietor
  • Limited liability corporation (LLC)
  • C corporation
  • Partnership

Keep in mind that while it might involve a little bit of hassle, you can in fact change what kind of entity you are. Maybe in the beginning, operating as a sole proprietor works for you. But then you take on more clients, meaning you’re taking on more personal risk. Or, maybe you start hiring employees. As you grow, a different business entity may be a better choice for you, both in terms of tax advantages and liability. So, while choosing the right entity is important, you can change your business entity as your needs change.

Either way, your lawyer should be able to help you weigh the pros and cons of each type of business entity, so you can make an informed decision.

Then, what kind of physical office do you want to establish – if you want to establish one at all? With everything moving to the Cloud and the prevalence of the internet and Wi-Fi, virtual offices are very popular. They are a way to reduce overhead without sacrificing customer service, since many customers really like the flexibility that a virtual office provides for them.

On the other hand, you might want to be able to sit down face to face with clients. In that case, will a home office suffice? Or, do you need a brick-and-mortar business? Will your office have a retail storefront or be part of an office building or a suite of offices? Or, will you opt for a coworking space where you work among others in a professional environment with private meeting rooms available?

Think about who your clients are, whom are you trying to attract, and what will make them feel good about working with you. Also, consider overhead costs and what your needs are. Looking at all these variables, you’ll be able to decide on the best office set-up for you.

Planning for year-round revenue and business cycles

So many people, whether they are planning to be a tax preparer or not, forget that tax preparation – when done RIGHT – takes place all year long. Businesses have to pay their taxes quarterly. And both businesses AND individuals can benefit from annual tax planning and “tax health checks,” especially as tax laws continue to change.

When you’re establishing your business (and as you reevaluate your business each year), if you truly want to plan for year-round revenue, look at:

  • Market planning: What’s going on in the market in which you operate? What are the needs of people and businesses in your area? What is your area? (If you have a virtual office, geography doesn’t factor in quite as much, unless you want it to.)
  • Pricing and services: What services do you offer and are they competitively priced – without underselling yourself and your time?
  • Marketing: How are you getting the word out? How does your marketing strategy look? Does it properly balance your website, digital marketing, social media marketing, mass media advertising and client retention strategies?

Setting up your tax preparation business right from the start

These are just tips to get you started and to get you thinking about the foundation you’re going to establish for a long-term, successful tax prep business. Hopefully, these tidbits got you thinking and your creative problem-solving juices flowing. 

These three parts of setting up your tax preparation business are so important, we dedicate several chapters to them in the official book of ITS, Guide to Start and Grow Your Successful Tax Business. We take our time going over these areas in great detail, so you feel like you can make an educated decision about which way to take your own business. It’s a great resource, if you have more questions. 

You can also search the ITS blog archives for more on these topics and many others related to how to run your own tax preparation business.

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