Small business tax filing is a tedious but necessary task. We’ll show you how using software or an adviser can make it easier. We’ll walk you through:
- Tax help options for small business organizations
- How to efficiently use tax software
- Selecting the right type of tax software
- Pros and cons of using tax software
- How to work with a professional accountant or tax adviser
- Pros and cons of using professional help
- How to decide whether to do it yourself with tax software or seek professional assistance
Small Business Tax Help Options
Small business owners take a variety of approaches to tax preparation. They range from manual methods to using automated tools to hiring professional advisers.
This represents one of the most basic and most common but least efficient approaches to tax preparation. It is illustrated by the taxpayer who stuffs all their receipts and financial paperwork in a shoebox without filing it into categories, letting their paperwork pile up over the course of the year. They then drag their shoebox of paperwork out just before tax time to sort through it themselves or hand it off to an accountant or tax adviser.
This method makes it easy to lose important paperwork and hard to find the information you need, increasing your risk of making mistakes or missing out on important tax breaks. Unfortunately, many small business owners resort to this method by default because it offers the path of least resistance for those seeking to avoid the perceived chore of systematic bookkeeping.
Spreadsheet accounting offers a technological step up from shoebox accounting. Here, the business owner manually enters financial data into a spreadsheet program, such as Excel. The program helps them organize their data into rows, columns and categories and automatically calculate totals needed for tax filing.
Spreadsheets keep data more organized than shoebox accounting, and they can save time adding and subtracting numbers. However, manually entering data and mathematical formulas into a spreadsheet program can be tedious, time-consuming and error-prone. Additionally, spreadsheets fail to take advantage of the latest innovations in accounting and tax preparation software.
Using Specialized Accounting and Tax Software
Software designed specifically for accounting and tax preparation purposes provides a technologically more efficient approach than spreadsheets. Accounting software includes built-in features to help you automatically capture your financial data, categorize it, tally it and use it to generate reports containing the information you need for tax purposes. Tax preparation software takes your accounting data and automates the process of organizing it into the format you need to file your taxes. You can enter data directly into tax preparation software or import it from an accounting software program.
Accounting and tax preparation software come in desktop, online and cloud-based forms. Cloud-based apps make it easier to import financial data automatically from other software programs, as well as to export data for use in other programs or for file sharing.
Hiring an Accountant or Tax Adviser
While some business owners prefer to do their own tax preparations, others hire a professional accountant or tax adviser. A professional has the expertise to do your tax preparation for you, saving you labor and time and helping you avoid costly mistakes. Larger businesses may hire a full-time accountant or tax specialist, while smaller companies could outsource tax preparation to a consultant.
Hiring an accountant or tax adviser doesn’t necessarily exclude the other options outlined above. Many business owners assemble their own tax data in a shoebox, spreadsheet or software program and then hand their paper or electronic files off to a professional.
Using Tax Software
The specifics of using tax software can vary somewhat from one program to another, but in general, the process involves a series of straightforward steps:
- Provide preliminary information to determine your filing status and which tax forms you should be using
- Enter basic data identifying you and your business and selecting your accounting method
- Enter information about your business income
- Enter information about your business inventory
- Enter information about your business expenses
- Enter information about your business assets
- Review and file your information
More recent and sophisticated programs use wizard tools powered by artificial intelligence to simplify the process of completing these steps.
Types of Small Business Tax Software
Tax preparation software comes in a variety of forms designed to serve users over a wide range of budgetary resources, levels of tax expertise and technology platforms. Some of the main distinctions characterizing different programs include:
- Freeware vs. premium price points
- Taxpayer-oriented vs. professional-oriented tax expertise
- Desktop, online and cloud-based platforms
- Standalone programs vs. integrated solutions
Freeware vs. Premium
Tax preparation software price points range from free versions to premium products. Leading tax software providers often offer both free and premium products.
As a general rule, free programs tend to support a minimal range of features designed for specific common tax forms, while premium programs provide a wider range of features suitable for more general tax preparation purposes. Programs designed for filing federal taxes often cost more than those designed for filing state taxes.
Taxpayer-Oriented vs. Professional
Different tax software programs are designed for users with varying levels of expertise in tax preparation. Simpler programs typically serve the needs of do-it-yourself tax filers who only have to deal with standard filings and don’t need to worry about more complex tax issues or audits. Programs designed for tax professionals include a fuller range of features.
Desktop vs. Online vs. Cloud-Based
The first tax preparation software programs were desktop-based, and some programs that were originally designed for the desktop remain popular even though they now have online and cloud-based versions. For instance, Intuit’s TurboTax was originally designed for the desktop and continues to remain available in this form via CD, but it is also now available as an online download or as an app. In contrast, Intuit ProConnect Tax Online is designed for web-based use. Similarly, H&R Block made its name as a brick-and-mortar business, but now offers mobile tax preparation apps.
In general, desktop tools offer more features than online tools. Pricing also tends to differ between desktop and online tools.
Standalone Programs vs. Integrated Software
Some tax preparation software is designed to work in isolation from other software. Other programs integrate with accounting software or other relevant financial software such as payroll or inventory software. If you’re concerned about importing data from another program into your tax preparation software, check if your program supports the integration you need.
Pros and Cons
Filing your own taxes with software can save you the cost of hiring an accountant or tax adviser. If your taxes aren’t very complicated, it can be the simplest way to file your taxes. It might also be faster in some cases.
On the other hand, if you’re not a trained tax professional and you’re not familiar with tax preparation software, you may find using software to file your taxes time-consuming. You may also miss opportunities for deductions or make costly mistakes, offsetting the savings you hoped to make by not hiring a professional.
Using a Tax Adviser or Accountant for Business Taxes
While some small business owners choose to handle their own taxes with software, many elect to hire a professional accountant or tax adviser, either instead of using software or to assist them with correctly applying software. A professional combines expert knowledge of tax law with an understanding of how to use tax software at an advanced level. Tax advisers fall into several main categories:
- Enrolled agents, who are licensed by the federal government and qualified to represent clients before the Internal Revenue Service (IRS)
- Certified public accountants (CPAs), who are licensed by their respective states
- Licensed tax attorneys, who are lawyers with training in tax preparation and planning
Some tax advisers will simply help you complete and file your tax form. Others will offer you insights into how to reduce your tax liabilities. Some tax advisers have specialized experience with certain tax issues or certain industries. Not all tax advisers have the same skill set, so you should do due diligence when choosing an adviser.
Tax advisers may charge by billing you a set fee per service, by tax return completed or by the hour. Make sure you understand your adviser’s billing procedure before agreeing to hire them.
Pros and Cons of Using Tax Help Accounting and Business Services
While doing your own taxes with software might seem appealing, hiring a professional accountant or tax adviser to help you also offers some advantages:
- A tax adviser can save you the labor and time you would take figuring out your own taxes.
- A tax professional can help you navigate complex tax issues that would be difficult to handle on your own.
- A professional tax adviser already knows how to use tax software, saving you the trouble of learning it.
- A professional can save you money by recommending tax strategies and by avoiding mistakes that could cost you penalties or an audit.
The main downside of hiring a tax adviser is the cost. Additionally, if your tax situation only involves routine paperwork, and if you feel comfortable working with tax software, you might be able to more quickly complete your taxes on your own.
For businesses that cannot afford to hire a tax adviser, there are alternatives. IRS business tax help resources include free tax assistance options. The IRS provides a special telephone number to help businesses that need information or help regarding their returns. Free business tax help resources also include the Volunteer Income Tax Assistance (VITA) program, a network of volunteers offering free tax help to individuals, including business owners, who earn less than $56,000, have disabilities or have limited knowledge of English. The Tax Counseling for the Elderly (TCE) program offers similar assistance for taxpayers aged 60 and older.
Which Is Better for Your Business?
Whether tax software, a tax adviser or a combination of the two is best for you depends on several factors. These include your budget, your available time, the complexity of your tax situation and your technical comfort level.
If you have a tight budget, if you’re not too pressed for time, if your tax situation is simple or if you feel comfortable with computers, you may save money by doing your own taxes using software. But if you can afford it, if you’re extremely busy, if your tax situation is complicated or if you don’t like technology, hiring a tax adviser could be a better solution.
If you fall somewhere between these categories, a happy medium might be doing your own taxes with a combination of software plus limited input from free or paid advisers on the parts of your return you find most challenging. Also, even if you plan to file your taxes yourself using software, you may find it beneficial to run your plans past an adviser first to see if they can suggest cost-saving strategies or catch mistakes you might have missed.