Small business owners are used to juggling several roles at once. But financial experts say doing their own business taxes should not be one of them.
Do-it-yourself software such as TaxAct and TurboTax has simplified the paperwork and process of tax time for many Americans. The programs are good at walking taxpayers through the forms with plain language and checking for omissions.
But bookkeeping and taxes are time-consuming. And business owners who do their own taxes aren’t saving a tremendous amount of money. In fact, they might do just the opposite by chipping away at time spent on growing the business, or even triggering an audit because of mistakes, says small business tax expert Barbara Weltman.
“The thing with software is that it does take time, and many business owners don’t have the time,” says Weltman, author of J.K. Lasser’s Small Business Taxes. “Those people probably are better advised to use a professional just to get it done.”
Turning it over to the pros
The cost of tax preparation for business owners varies by the number and complexity of the forms they must file. According to the National Society of Accountants, these are the current national averages their members charge to file business-related tax forms:
- $273 for an itemized Form 1040, with Schedule A and a state tax return
- $174 for a Form 1040 Schedule C (business)
- $634 for a Form 1065 (partnership)
- $817 for a Form 1120 (corporation)
- $778 for a Form 1120S (S corporation)
Compared to tax software that costs less than $100 and can be done on an iPad, the price can seem steep. So what do you get in return for using a professional?
For Brian Schutt, owner of Homesense Heating and Cooling in Indianapolis, it’s confidence that the job has been done right.
“While my partner had a finance degree, he wasn’t necessarily a tax professional,” Schutt says. “From day one we tried to recognize our blind spots and find strategic partners to help.”
When they launched Homesense in 2009, Schutt and his partner handled a number of tasks themselves to keep overhead low. But they didn’t want to risk making financial mistakes. So they hired a full-time bookkeeper, then added an outsourced CFO and tax accountant.
Being as accurate as possible when it comes to taxes takes priority, Schutt says. “You don’t have to be at 100 percent as a receptionist to be able to wear that hat for a while,” he says. “But you can’t get your taxes 80 percent right and expect it to be all right with the IRS.”
A DIY approach
Some small business owners prefer the control of doing their own taxes. Bryce Avery works out of his Denver-area home writing questions for quiz bowls and standardized tests, writing patents, and doing technical writing. Avery Enterprises, which he set up as an S Corporation, employs a handful of contractors; the only other employees are Avery’s children.
Avery has always done his own home and business taxes; recently he has used the fillable forms on the IRS website. He says his math and engineering skills are sufficient, and he kind of enjoys doing his taxes. “I hate to pay people to put numbers in boxes because I can do it myself,” he says.
Avery doesn’t have much overhead. He reports the same salary every year. And his business makes less than $100,000 a year, so doing his own taxes is easier than a business with a lot of inventory to track or equipment to depreciate. Still, he has made at least one major error. A mortgage broker was the first to notice that he hadn’t entered his S Corp income correctly on one year’s return.
That could have triggered and audit, which can be expensive. Accountants charge an average of $144 an hour to handle the audit, according to the National Society of Accountants. And that’s on top of additional taxes owed or penalties.
Get a second opinion
There is a middle ground that Weltman says appeals to a growing number of business owners. They like to enter their own data into their choice of tax software, but then turn to a tax professional for a review before filing.
This strategy can give you insights to adjust your tax situation or spending through the year to come, she says.
“You will be more engaged with your year-round spending by going through your taxes yourself,” Weltman says. “It brings home what you paid for things throughout the year. When someone else does it, you may just sign it without going through it line by line.”
Weltman, who is also a tax and business attorney, does do her own taxes. But she adds that she probably stays on top of tax law changes more than the average business owner in order to serve her own clients.
Get tax advice all year long
Financial advisor Robert Palidora believes that developing a good relationship with an accountant or tax preparer gives you an advisor for all seasons, not just at tax time.
Palidora, a Pennsylvania-based financial consultant with AXA Advisors, owned a small retail business for 25 years before changing careers. He notes that even the most detailed software is only as good as the records you keep and the data you enter. An accountant can help a business set up bookkeeping software such as QuickBooks correctly to categorize expenses and income.
Good recordkeeping is especially important once you have employees, Palidora says. “The minute you have the responsibility of payroll and people working for you, it’s kind of a disservice to yourself and everyone else to think that you can handle this work over the Internet,” Palidora says.
Business owner Schutt says he likes having multiple layers of oversight on his finances. If only one person is watching the books, there’s a greater risk not only of mistakes but misappropriation. Plus, using an outside tax preparer helps shift liability away from yourself.
“Having that trust gives us the peace of mind to operate in our areas of greatest strength,” Schutt says. “When you’re a lean startup, that’s essential.”