Are you a whiz when it comes to doing your taxes? Do you even enjoy helping your friends and family members do their yearly income taxes? If yes, then you should consider becoming a tax return preparer and earning money by preparing tax returns for others.
Tax return preparation is a rather lucrative business; according to the Bureau of Labor Statistics, tax preparers earn an average of $20.84/hour or a mean salary of $43,350. This isn’t bad considering that tax preparation is seasonal work and typically spans just four months out of the year.
Before you go off and start charging people for looking over their W-2’s and 1099’s, understand that you will need to take certain steps in order to be viewed as legitimate and qualified. Likewise, you will need to protect yourself from claims and even lawsuits. So, without further ado, here are the basic steps you should take if you wish to earn money as a tax preparer.
1. Get yourself educated.
Find out if you really like dealing with other people’s taxes by working for a tax preparation agency such as H&R Block or Jackson Hewitt. Such tax preparation agencies train their agents for several weeks before letting them deal with clients. In the process, you actually get paid to learn about tax law.
If you’d rather just learn about taxes in the comfort of your own home, the IRS offers Link and Learn Taxes, a Web-based learning program for individuals who want to know more about accurately filing their taxes or helping others do so.
2. Get a PTIN.
The IRS states that all tax return preparers who are compensated for preparing a U.S. tax return that is then submitted to the IRS must obtain a Preparer Tax Identification Number (PTIN). Failure to obtain a PTIN could lead to “the imposition of Internal Revenue Code section 6695 penalties, injunction, and/or disciplinary action by the IRS Office of Professional Responsibility.”
In other words, don’t mess with the IRS.
A new PTIN costs $64.25, while a renewed PTIN runs $63. Because you will most likely be e-filing IRS tax returns for your clients, you should also obtain an Electronic Filing Identification Number (EFIN) from the IRS. The EFIN is free.
3. Consider becoming an enrolled agent.
An enrolled agent (EA) is qualified to represent taxpayers before the IRS. More importantly, however, having the EA status makes you look informed (i.e., legit) to your potential clients and will help drum up business. Furthermore, in terms of education, nothing beats going directly to the IRS and having the actual government agency teach you about doing taxes.
EAs must pass the IRS Special Enrollment Exam (SEE), which consists of three parts: Individuals, Businesses and Representation, Practices and Procedures. The Business part of the SEE seems the most difficult to pass. The SEE costs $105.
Once you get through with the SEE, you must pass a tax compliance check. In other words, you must show that you are fulfilling your own personal tax obligations before being allowed to step in and represent other taxpayers in front of the IRS.
4. Check your state’s certification requirements.
Certain states post their own unique requirements for tax preparers, regardless of whether those preparers are dealing only with federal or both federal and state taxes. Not registering with your state can result in fines.
For example, California’s Tax Education Council requires that its tax return preparers take a 60-hour Qualifying Education course. New York requires that paid tax return preparers register with the state and pay a $100 fee if they are preparing over 10 commercial tax returns in a single calendar year.
5. Assure your clients with a bond.
As you embark on your new tax return preparation career, you are likely to make some accounting omissions and/or errors. In order to address these costly mistakes, you should purchase a tax preparer bond. Some states, such as California, even require that their tax preparers purchase a minimum $5,000 bond.
The tax preparer bond is, in essence, a surety bond. This does not mean that you are buying yourself insurance. A surety bond contracts you with your bond owner and assures your clients that you will not attempt to defraud or otherwise hurt them financially. Should you make an omission or error on a tax form, your clients will then go to your bond agent to recuperate their financial losses. You, however, are then responsible for paying back the money paid out from your bond.
But, on a positive note, in what other (legal) side gig can you actually say that you are “out on bond”?
6. Form an LLC.
It’s one thing to put up a bond to assure your clients that you will pay for small damages. But what happens if you get into a real scrape and cost your clients thousands or even millions of dollars?
By forming an LLC, you protect yourself and your personal assets from being seized in the event that you make a major tax boo-boo. Forming an LLC is very easy, by the way. Also, having those letters stand behind your business name helps vouch for your credibility as a professional tax preparer.
Are you already a earning extra money as a professional tax preparer? Please comment on your experiences. Thanks!