Do Your Own Taxes or Seek A Professional?

As the tax season kicks off, a fundamental question comes to mind – Should you do your own taxes or seek a professional?

Well, the answer depends on a variety of factors including:

  • How comfortable you are preparing your own tax returns?

  • How familiar you are with your tax situation and history?

  • How complex your tax situation is?

Generally, if you are comfortable preparing your own tax returns, are familiar with your tax situation and you don’t have a complex tax situation (ex: you only have income from W-2 wages, interest income from interest-bearing accounts, you don’t itemize your deductions or only itemize state & local taxes & charitable contributions), you should be able to prepare your own tax returns using either an online or desktop version of tax preparation software from companies like Intuit (TurboTax), H&R Block and TaxAct, just to name a few.

These companies have been developing tax preparation software for many years and have many customers who successfully use these products to prepare and file their tax returns annually. That said, you do need to have patience, be organized and dedicate a reasonable amount of time to go through the process. While the software will walk you through the process step-by-step, you do need to understand what information the tax preparation software is asking for then input the proper and correct information for your tax returns to be accurate. Keep in mind . . . Garbage in, Garbage out!

Even though these companies work to ensure their tax preparation software is accurate and apply computations and calculations based on the applicable tax laws, having a general understanding of your tax situation and history is extremely helpful so that you can raise a red flag if you notice that the tax preparation software is showing you too high of a tax refund or too much in taxes owed. Errors can occur due to incorrect user input or a software glitch.

If you are not at all comfortable preparing your own tax returns or have a more complex tax situation, consider seeking a professional tax preparer, Accountant or CPA firm. They should have a thorough understanding of the applicable tax laws and, provided you bring them all the necessary paperwork and documentation required, they should be able to properly and correctly prepare your tax returns, as well as identify and apply all applicable and available tax deductions to get you the optimal refund or try to minimize your tax bill/taxes owed. When looking for a professional tax preparer, Accountant or CPA firm, be sure to do your research, read reviews, get recommendations and compare service fees/rates.

In the case where you run/own a business, the tax situation can get even more complicated. There are different requirements on the federal, state and local level depending on the type of legal business entity you have created (ex: LLC: Single-member LLC, Partnership, LLC taxed as a sub-chapter S, Corporation: C-Corp or S-Corp) and the state in which your entity was established.

On the business side, you’ll probably want to have a tax professional, Accountant or CPA firm that you use on an ongoing basis. Except for the single-member LLC, all other entities are required to file a business tax return (separate from the personal return) even if the entities themselves do not pay income taxes (ex: pass-through entities). You also don’t want to reinvent the wheel dealing with a different tax professional, Accountant or CPA firm every year.

On the personal side, again, it depends on your comfort level and the complexity of the situation. For an individual with a single-member LLC, MAYBE you’ll consider doing your own tax return; but generally, it’s not a bad idea to consider hiring a tax professional, Accountant or CPA firm if you run/own a business especially as a member of a LLC Partnership, LLC taxed as a sub-chapter S, or you’re a shareholder of a corporation (C-Corp or S-Corp). There are a lot of requirements (not only income tax returns) that you may or may not be aware of at the federal, state and local level (ex: estimated quarterly tax payments) so having access to a good tax professional, Accountant or CPA firm can save you major headaches down the road. Yes, a good tax professional, Accountant or CPA firm will cost a bit more, but in the end, it will be well worth it!

Considerations When Starting A Business: Seeking Professional Counsel

As you get started with your new business, there may come a time when you will need to seek professional counsel from a good business law firm and/or CPA firm. Even if your circumstances may not warrant professional counsel at the onset of your new business, you may eventually need to seek counsel as your business grows. Speaking with a good business law firm and/or CPA firm can help you stay on the straight and narrow and in compliance of the constantly changing local, state and federal regulations, requirements and laws.

Legal Counsel

A good business law firm can provide an array of vital services to your business. They can provide key legal counsel during the initial setup and establishment of your new business, helping you to better understand what the legal implications of your new business venture will be. They can offer important insight to help you operate your business legally and avoid unnecessary risks. They can also serve as a critical line of defense between you, your business and potential third-party litigation.

Business law firms can help you figure out the best legal entity for your business (ex: LLC, Corporation - C-Corp or sub-chapter S), assist with filing the necessary paperwork with the appropriate federal, state and local agencies (ex: Department of State, IRS) to setup the legal entity, prepare Operating or Shareholder agreements specifically customized for your business and act as a designated agent for legal notices. They can help prepare and review contracts/agreements (ex: client contracts, NDAs, merger agreements, employment contracts) and they can step in to provide legal aid/counsel in the event of legal action for or against your business.

CPA Firms

A good CPA firm can provide your business with an array of vital Accounting services. They can provide guidance on the different types of legal entities best suited for your business (ex: LLC, Corporation - C-Corp or sub-chapter S). They can provide insight on the potential tax liabilities and obligations you, as a business owner, should be aware of and can expect. CPA firms can handle a variety of required tax reporting and filings for federal, state and local jurisdictions. They should stay current on all the latest changes to the tax laws and requirements to keep you (and the rest of their clients) compliant and up-to-date on the potential impacts those changes will have on you and your business.

For instance, if your business is a single-member LLC treated as a disregarded entity for tax purposes or a multi-member LLC taxed as a Partnership, the owners or LLC members typically do not take a salary through payroll. An owner of a single-member LLC will take a draw and members of a multi-member LLC taxed as a Partnership will receive what are called Guaranteed Payments in lieu of salary via payroll. In either case, unlike salaries via payroll, payroll taxes are not withheld on the income. As such, owners/LLC members are responsible for making quarterly tax payments to the appropriate federal, state and local tax agencies on the applicable earnings. Failure to make the appropriate payments may result in a huge tax bill and tax penalty at tax time.

In addition, single-member LLCs, multi-member LLCs taxed as Partnerships and corporations taxed as a sub-chapter S (including LLCs that elect to be taxed as a sub-chapter S) are treated as pass through entities for tax purposes whereby the business entities themselves are not taxed. Taxes on income/profit are passed down to the individual owners (usually reported on a Schedule K-1) and reported on their individual tax returns. While LLCs taxed as Partnerships and corporations taxed as a sub-chapter S (including LLCs that elect to be taxed as a sub-chapter S) are not taxed at the entity level, they are still required to file the proper annual Partnership or Corporation tax returns for the applicable tax year.

This is just a scratch on the surface, but you can see how complex the tax obligations and implications can be if you don’t understand how the tax laws affect you and your business and/or have appropriate guidance from a tax professional like a good CPA firm. You and your business can easily fall into a tax maze. A good CPA firm should be an active partner in helping you and your business remain compliant with all applicable tax laws and requirements.

There will be times where it may be necessary for your business law firm and CPA firm to collaborate and work together. For instance, when deciding what type of business entity to form for your business (ex: LLC, Corporation - C-Corp or sub-chapter S), it’s a good idea to get insight from both a legal and an Accounting perspective as different types of business entities will have different requirements and implications. While your law firm and CPA firm won’t necessarily tell you which type of entity to form, they should advise you, make recommendations and offer pros and cons. You’ll want to gain as much insight from their counsel to make a well-informed decision.

It should go without saying that both business law firms and CPA firms can be quite expensive so it’s important to know how and when to properly use these professional resources to avoid unnecessary costs. Far too often, business owners use professional counsel prematurely, fail to use counsel until situations get out of hand, don’t know the right questions to ask and/or how to lead, manage and streamline the conversations. Before you speak with a business law firm or CPA firm, take some time to gather your thoughts and put together an overview of what you want to discuss and the questions you want to ask. Try to keep the conversations on point and focused. Don’t be afraid to ask questions if you are unsure about something being discussed. At the end of any conversation with a business law firm or CPA firm, you should feel comfortable that you have gotten the answers that you needed to get from the conversation.

Considerations When Starting A Business: Putting Together A Game Plan

Now that you’re ready and committed to starting a business, you need to put together a game plan. There are a lot of moving parts when it comes to starting a business so it’s important to be organized, detail-oriented and have all your ducks lined up. You’ll first want to take a “view from 10,000 feet” and then drill-down into the specific details.

During the process, gather information and be prepared to answer a series of questions related to your business venture. This information will be extremely helpful during the setup of the legal entity and establishing business operating parameters as you begin operations. In addition, if you need to consult with professionals (ex: business law firm, CPA firm), this information will help to streamline the conversation. You’ll learn quickly that streamlining conversations and meetings are crucial when dealing with law firms and CPA firms, especially if you don’t want to rack up enormous legal and accounting bills.

Below is a list of questions that you should seek answers to. This list is not intended to be a complete list of questions but serves as a starting point in putting together your game plan.

  • What type of business do you plan on starting?

  • Will you be the sole owner or will there be other owners?

  • Do you or any of the other owners have non-compete agreements (or similar) that would prevent or prohibit you and/or the other owners from joining or participating in this business venture? Are there any potential conflicts of interest?

  • Are you or any of the other owners currently participating in or are a part of another business venture, whether in the same industry or a different industry?

  • Will the business be owned by individuals, another business entity or a combination of individuals and business entities?

  • What will be the name of your business?

  • Is the business name unregistered and available to register with your state’s Department of State?

  • Are there any other individuals, companies or organizations using this business name or names similar that may cause confusion for clients/customers and/or pose legal issues (ex: trademark)?

  • Is the corresponding Internet domain name available for your business name?

  • Are the corresponding social media handles available for your business name?

  • What type of legal business entity is best for your business (ex: LLC – single-member LLC, multi-member LLC taxed as a Partnership, LLC taxed as a sub-chapter S, Corporation – C-Corp or sub-chapter S)?

  • What will be the designated role (ex: job function or area of responsibility) of each owner?

  • What does each owner bring to the table of the business venture?

  • How will the business be managed (by the owners, by designated managers, by owners and designated managers)?

  • How much starting capital do you and your partners have to invest in the business?

  • How much capital will you and your partners need to invest in the business to cover startup costs and at least the first three to six months of business operating expenses?

  • If you and your partners don’t have the necessary capital, how will you and your partners secure the necessary capital (ex: bank loans)?

  • Do you and your partners have a solid credit history and a good/excellent credit rating? Do you and your partners have collateral, if necessary?

  • When do you expect to officially begin business operations?

  • Will the business operate in a single state or multiple states?

  • Where will the principal office for the business be located? Will there be a single office location or multiple office locations?

  • Will you require commercial space for your business?

  • Will you be hiring employees?

  • Will you be using independent contractors or external personnel?

  • What resources will you require to operate your business (ex: supplies, equipment, software)?

  • Do you currently have or are you working with existing clients?

  • Who are your target clients or customers?

  • What’s your business plan or strategy for acquiring new clients or customers?

  • If your business requires inventory, how do you plan on acquiring, storing and securing inventory?

  • Will your business be required to collect sales tax?

  • Does your business operate within an industry that has industry-specific or governmental requirements (ex: certifications, memberships, licenses, permits, insurance)?