How Many Tax Returns Do You Need to Do to Make It “Worth It” to Become a Tax Preparer?
We received an interesting report yesterday from our partner bank, Refund Advantage. The report showed how many tax returns were e-filed in the 90745 Carson, California zip code during the 2011 tax season. We were happy to see that our Carson team with Kent Frye and Joel Earnest and Sonia Lugo e-filed more tax returns in 2011 than any other tax preparation company in Carson, California. That was gratifying to see all the hard work that Kent, Joel, and Sonia put into serving clients pay off by having the most clients in the 90745 zip code.
But what was a bit troubling was our realization, by looking at this report, that many tax preparers are not doing barely any tax returns per year. This is unfortunate, is somethikng that we’d like to help our Pronto Tax Class Students avoid, and brings us to the question: How many tax returns do YOU need to do this tax season to pull a decent profit as a first-year tax preparer?
It is crucial for new tax preparers to do the math on what it will take this tax season to make a profit.
We are not encouraging people to become tax preparers so that they can do zero or under 20 tax returns. Too many tax preparers face this ignominious fate. Instead, think ahead of time about how many tax returns you need to do to make it truly worth it to become a tax preparer.
Obviously this math of how many tax returns you need to do to make it worth becoming a tax preparer will depend on a number of factors. Whether you are employed working at a tax preparation company, whether you are working on commission or hourly, what kind of end-of-tax-season bonus you can expect, etc.
How Much Can You Make as a First-Year Self-Employed Tax Preparer
In this blog post, we are only going to address self-employed tax preparers because most other first year tax preparers can expect the standard $9-$11 hourly range as they learn the business; this makes the math easier because it all depends on how many hours you get on payroll and working just on hourly pay is really no way to live as a tax preparer, long-term, maybe at first but not long-term.
Here is a short version of the kind of math a self-employed tax preparer will want to contemplate before you start your new tax season:
Average tax preparation price at the major chains was around $200 per tax return in recent years.
So let’s say that you aimed to average, between all your clients, a fee of $100. If you can get some itemized deduction long forms and charge like $120-$150 for certain returns, it’s not out of the question that you can achieve this average fee, even in your first year.
Or you know what, let’s keep it very conservative and say you get $80 per client. This is still not bad for a first year. After all you are only getting started and people will want you to work for cheap at first, it is just a fact of life until you prove your worth. Plus at $80 you are habitually undercutting the major chains by $100, and people like to save $100 these days so this can be a selling point.
Now let’s look at your costs to become a tax preparer:
$127 Pronto Tax Class
$64.25 Get PTIN from IRS
$50 Tax Preparer Bond for 3 Years
So this puts you at $266.25 of investment so far.
How Much Does Tax Preparation Software Cost
Now you have to get a tax software solution. The cheaper ones are in the $250-$500 range, but many of the ones more in the $1,000 area have more features and may therefore be attractive to you. (Keep an eye out for our tax software reviews, “Like” us on Facebook to receive exclusive access to tax software reviews and also job leads we obtain exclusively for our Pronto Tax Class Students.)
Anyways, so let’s say you spend $1,000 on software.
Let’s further stipulate that you spend $300 on a computer, and $150 on a printer.
Then you have your Internet and phone cost for 4 months, let’s say that’s $400 total at $100 per month.
Then $100 for business cards and maybe $300 on other miscellaneous marketing materials and expense.
You use a home office so as to avoid office rent expense.
That’s about all you need to start an income tax office.
Tallying Up the Final Resuts for Your First Tax Season
The total math on that (and please check us on this!) is $2,416 investment in your tax business.
This means that, at an average fee of $80, you should hope to do about 100 tax returns in your first year. 100 tax returns in your first year, at $80 a head, would give you $8,000 of revenue against $2,416 of expense, for a profit of $5,584.
This may not be a humongous profit at first glance, but you should ask other people who have started a business what their first year Profit and Loss Statements looked like–it is extremely rare to be able to pull any profit in the first year of a business.
In the tax preparation business, though, a first year profit is not at all unheard of.
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