The cost of getting an accountant to complete your taxes will depend greatly on how many tax forms you are submitting and how complex your operations happen to be. On average, the cost for submitting a basic Form 1040 with no itemized deductions is $176. This information is taken from a survey completed by the National Society of Accountants (‘NSA’), and the last date of the survey was 2017, but it still remains the most comprehensive data available.
However, in practice, this $176 figure is going to be higher when you go to your accountant/tax professional. Because few have such straightforward tax requirements and there are other factors that go into tax costs.
Table of Contents
- Breaking Down Tax Costs
- Tax Cost Variances by Region
- Tax Cost per Submitted Form
- Hourly Tax Rate by Industry
- The 3 Ways That Accountants Charge for Tax Fulfillment
- The 6 Factors Which Affect the Cost of Taxes
- Taxation Costs as a Percentage
- How to Find the Right Accounting Professional
- What to Do With Itemized Deductions
- Major Accounting Forms
- Completing Tax Returns – What to Look Out For
- Software to File Taxes
- The Bottom Line
Breaking Down Tax Costs
There is no one size fits all philosophy when it comes to tax submissions. And, as difficult as it may be to stomach, you are at the mercy of tax professionals to a large degree. You simply cannot afford to attempt to do taxes on your own. Many have tried, with disastrous results.
The average costs for tax submissions are:
- $173 – Form 1040, no itemized deductions, state return.
- $273 – Form 1040, itemized deductions (Schedule A), state return.
- $457 – Form 1040, Schedule C, itemized deductions, state return.
According to the NSA survey, nearly half (49.8%) of tax and accounting practices increase tax preparation fees annually while 33.7% increase these fees every other year. For accounting fees, 37.4% increase fees annually, while 34.4% increase fees every other year. Surveyed firms expected to increase their accounting service fees by an average of 6.1% in 2017, up from an actual increase of 5.3% in 2016.
Tax Cost Variances by Region
The following is a breakdown of the average cost for the most basic submission, namely the Form 1040 along with the Schedule A and state return.
|New England||CT, ME, MA, NH, RI, VT||$333|
|Middle Atlantic||NJ, NY, PA||$290|
|South Atlantic||DE, DC, FL, GA, MD, NC, SC, VA, WV||$268|
|South East||AL, KY, MS, TN||$210|
|South West||AR, LA, OK, TX||$271|
|North East||IL, IN, MI, OH, WI||$249|
|North West||IA, KS, MN, MO, NE, ND, SD||$214|
|Pacific||AZ, CO, ID, MT, NV, NM, UT, WY||$263|
|Other||AK, CA, HI, OR, WA)||$329|
You might have noticed that this is a little higher than the average quoted in the introduction. This is due to the fact that most people who use a tax professional do not have the standard requirement. There are added complexities even with submitting the basic Form 1040!
Tax Cost per Submitted Form
The average tax cost as per the submitted tax form is outlined below. Again, these are averages and are not to be taken as the ‘ultimate’ truth. However, they can be a good indicator if you have specific forms that you wish to file. The average costs are:
- $273 for a Form 1040 with a Schedule A and state return
- $176 for a Form 1040 (non-itemized) and a state return
- $184 for a Form 1040 Schedule C (business)
- $124 for Schedule D (gains and losses)
- $135 for Schedule E (rental)
- $180 for Schedule F (farm)
- $656 for a Form 1065 (partnership)
- $826 for a Form 1120 (corporation)
- $809 for a Form 1120S (s corporation)
- $482 for a Form 1041 (fiduciary)
- $733 for a Form 990 (tax-exempt)
- $69 for a Form 940 (federal unemployment)
- $1,563 for a Form 706 (estates)
- $413 for a Form 709 (gift tax)
- $242 for a Form 8824 (like-kind exchanges)
- $532 for a Form 5500 (pension/profit-sharing plans)
- $282 for a Form 3115 (application for change in accounting method)
- $59 for a Form 8962 (premium tax credit calculation)
- $53 for a Form 8965 (health coverage exemptions)
- $58 for a Form 1095 – A (health insurance marketplace statement)
- $57 for a Shared Responsibility Payment Calculation
Hourly Tax Rate by Industry
Tax submission costs also vary depending on the nature of services. The hourly fees accountants will charge are:
- Offers in Compromise – $177
- Estate/Financial Planning – $163
- Audit of Financial Statements – $157
- Financial Services – $144
- Tax Services – $145
- Management Advisory Services – $146
- Elder Care Financial Services – $131
- Financial Statement Presentation – $134
- QuickBooks or Bookkeeping Advisory Services – $97
- Write-up Work – $93
- Payroll Services – $83
These hourly services are typically for consultancy services as opposed to basic tax submissions, however. Consultancy services can most certainly save you money in the long run. Just make sure to have questions prepared beforehand, and don’t waste any time – you will be charged for it!
The 3 Ways That Accountants Charge for Tax Fulfillment
There are many different ways that accountants can charge for services. The average of these services has been given above, but the most common will be tax per each form submitted as opposed to the others.
#1 – Per Tax Form
Most accounting firms will charge per tax form. This is probably the most straightforward approach. However, there could easily be a number of associated fees for late submission, consultations, and tax complexities. It cannot be reiterated often enough that sloppy organization when it comes to taxes will cost you a lot of money in the long term. Robust software and/or a good filing system is a necessity.
#2 – Flat Fee
Some firms will charge a flat fee for tax submissions. This occurs when you meet your tax professional and present him or her with your total tax requirements. They will gauge your total tax requirements and give you a bundled estimate. With all tax/accounting professionals, there is the potential for this to be larger than the initial figure.
#3 – Hourly
Charging an hourly rate is common among many professional services. In fact, you are likely to stumble across a hybrid approach. Your accounting firm/professional may have a flat rate for forms, and also charge an hourly rate for additional services. Or, they might simply charge for however long it takes, with a quote at the beginning to give you an estimate. In this manner, if your tax returns are sloppy, they get paid for the extra time they need to dedicate to fixing them.
The 6 Factors Which Affect the Cost of Taxes
There are 5 factors affecting the cost of your tax return. These costs are:
#1 – Qualifications/Experience of Accountant
The more qualifications and expertise that the tax professional has, the greater the cost will be. Legal and financial professionals charge by the hour – if it takes them more time, you will pay more. The good news is the easier you make your tax submissions, the lower they will be. A CFA is going to charge you a lot more than a graduate accounting professional.
#2 – Complexity of Taxes
Do you run a side or part-time business on top of your regular job? Then your tax returns just got a whole lot more complicated. A plain vanilla submission is easy. But when you have itemized deductions, things can get very messy. Claiming tax deductions for necessary business expenses is a great idea until you actually have to file them. You also need to have an excellent system of receipt management.
#3 – The Volume of Taxes
If you are running their separate businesses, then you are going to have to file an awful lot of tax returns for each. All this volume adds up, as the accountant has more forms to run through. Again, the best way to counter this is to have a great organizational system for the storage of tax receipts and payroll related documents.
#4 – Area of Filing
In some areas, the cost of filing taxes is more than others. This likely has to do with socioeconomic conditions. You could potentially reduce this figure by using software that tends to cut across state barriers. Of course, this is not going to reduce your tax burden, which is completely different. Your state of domicile dictates your tax range.
#5 – Extra Fees and Charges
70% of accountants will charge a fee for messy or disorganized taxes. And this is only fair, as it increases their workload. About 20% will charge extra for failing to submit documentation to them on time. About 20% also charge a fee for clients wishing expedited returns.
#6 – Entity Type
The cost of filing taxes is largely dependent on the type of legal entity structure. Sole Proprietorships and freelancers have a relatively easy time. But the costs shoot up in terms of Corporations and LLCs. The average cost to file for a Corporation is far higher than a Sole Proprietorship. Most probably, however, this is due to the fact that the corporation will frequently deal with higher-priced accountants and be willing to pay extra.
Taxation Costs as a Percentage
Most small businesses can expect to pay flat and reasonable fees for submissions. But corporations and large businesses will have to take a different approach to how much they are paying. This is because their tax requirements are not as linear. It is not a matter of simply filling once a year, but entails a detailed investigation on how to keep taxation costs low, documents organized, and in compliance with various legal mechanisms.
Yes, taxation costs will depend largely on the industry that you are in. However, there is a corporate benchmark shown by numerous studies. And this benchmark number is 4%. If you are paying more than 4% on accountancy related services (as a figure of overall sales), then you need to cut back. This 4% figure should encompass all accountancy related services, including tax filings.
Even as a corporate outfit, or large business (more than 200 employees), there is little need for a full-time accountant to file taxes. All that you need is a good taxation firm to turn to when it comes nearer to the IRS deadline. In the meantime, you will need to ensure that you have an excellent system for payroll and tax recording. This can be done with high-quality software that places many taxations and payroll-related functions on autopilot.
How to Find the Right Accounting Professional
Depending on what you are looking for, there is a myriad of accounting professionals. Narrowing down your search can save you a lot of money. The 4 primary kinds of accounting professionals are:
- Attorney – a professional licensed to practice law and to speak in court.
- Certified Public Accountant (‘CPA’) – An accounting professional with vast experience in multiple aspects of law and finance. Must pass a difficult examination to gain the license.
- Chartered Financial Analyst (‘CFA’) – A financial professional familiar with many aspects of business and finance. Must pass a difficult examination to gain the license.
- Enrolled Agent – Has passed what is known as a ‘Special Enrollment Examination’ to qualify for tax submissions.
The benefit of having any of these people file your taxes is limited liability. While ignorance of the law is no excuse, if you have the accounting professional and the correct document then the liability lies with them for incorrect filing. If you self-file, the liability lies with you, and you alone.
Other classes of people who can file on your behalf include PTIN holders and participants in the Annual Filing Season Program. Both of these have representation rights (albeit limited) in front of the IRS.
When you are choosing somebody to prepare your taxes, then you will need to investigate their credentials beforehand. Always ask for a quote before commencing work with any given tax preparer. In the event of misconduct, you can file a complaint. You can search for qualified tax professionals through the IRS database.
What to Do With Itemized Deductions
For those looking to understand tax returns, one of the most important considerations is that of itemized deductions. Basically, itemized deductions are used to reduce your overall tax burden, typically by a large margin. You can (legally) claim back taxes based on these itemized deductions, which include:
- Educators Expenses Deduction – You can deduct up to $250 on office supplies if you are an educator
- Home Office Deduction – You can write off rent, utilities, and office-related expenses if you work out of your home office.
- Self Employment Deduction – If you work for yourself, there are many different kinds of expenses you can deduct.
- Mortgage Interest Deduction – This makes homeownership more affordable. The mortgage interest deduction reduces the federal income tax that qualifying homeowners pay by decreasing the taxable income by the total mortgage interest paid.
- Medical Expenses Deduction – You can deduct medical expenses that amount to more than 7.5% of your annual net earnings.
These are just some examples of itemized deductions, which seem like a no-brainer, but there really is no such thing as free money. For every single itemized deduction, you need to have an associated form – so there are many forms, which will increase your tax burden a little. But it will also take a lot of time to record and store these forms.
You have a choice between taking a standard deduction or filing itemized deductions, which is a longer list. Unless itemized deductions are significantly more, then take the standard deduction to save time. Basically, run the figures for both scenarios to see which is cheaper. Itemized deductions are often far cheaper, but you need to substantiate them with documents and take the time to get everything organized.
Whether or not you are filing itemized deductions will have a large effect on the cost of hiring an accountant to do your taxes.
Major Accounting Forms
In order to understand the universe of tax accounting and the associated costs, you need to familiarize yourself with all of the relevant forms. The most relevant forms include:
- Form 1040 – This is the most relevant tax return, documenting your yearly income, deductions, and credits. Other documents are attached to this core tax return as an addendum.
- Schedule A – This form is attached to your Form 1040 if you are intent on itemizing deductions or using a number of other tax deductions. You use Schedule A to reduce your overall tax burden.
- Schedule B – This form calculates all of the interest (and dividends) earned over $1,500 in a given year. With this form, you want a lower total. A lower total means that less of your interest is taxed.
- Schedule C – This is common for freelancers and independent contractors. You can use Schedule C to deduct expenses related to freelancing projects and/or contract work.
- Schedule D – This is for those with investments in stocks or bonds. Capital gains for the year are illustrated on Schedule D.
- Form W2 – This form is for employees, and not business owners. This shows how much an employee was paid and how much contributions were made. This form is filled out by the business owner and given to the IRS and the employee.
- Form 1098 – This is for mortgage owners. It shows the interest paid on a home loan over the course of the year.
- Form 1099 – There are many variants of Form 1099. It is essentially used to illustrate all income received other than from an employer. Like the W2, this is for workers, and not business owners. But it is filled out by the business owner and a copy is sent to the IRS and to the employee.
Completing Tax Returns – What to Look Out For
There are many instances where you need to consult a tax professional. As your business gets bigger, you are going to need more specialized advice. There comes a point where you cannot cut any more corners. If you are in doubt, then bite the bullet and pay for specialized services. Tax specialists can save you a tonne of money if you use them the right way and take advantage of their expertise.
When you are a small business, the use of specialized knowledge is not as extensive, and you can use lower-priced services or even software to get the job done. A major pitfall is letting the idea of taxes sit on your mind for prolonged periods. It is not a task that anybody enjoys. For peace of mind, perhaps it is a better idea to pay the extra price for a professional and get on with your life and running the business.
Tax software, a great way to file taxes. The best tax filing software includes TurboTax (owned by Intuit), TaxSlayer, and TurboTax. For most of these, you will need to purchase paid versions to get what you are looking for, but it will still work out cheaper than hiring a professional.
Software to File Taxes
Not so long ago, business people and tax professionals would have to sit at a desk, surrounded by hundreds of sheets, and attempt to organize their taxes. Thankfully, that age has passed. Taxes are submitted electronically using software designed to make it as easy as possible. While it is still possible to send physical statements, this is becoming more and more archaic.
Tax software makes it simple to file taxes, as everything is compartmentalized. You can simply select your business type and a list of related forms will pop up, along with the other relevant criteria. You will not have to worry about selecting the right forms, as this happens automatically once you answer the appropriate questions.
You still have to decide on itemized deductions and other criteria. But, all in all, tax sites make it easier to avoid IRS penalties by clearly explaining the topics at hand, along with the risks. The official IRS guidelines are generated in complex legalese, and business people are left to figure it out by themselves.
Tools such as TurboTax have made it so much easier to file taxes without taking undue risk. But business owners will also need to have streamlined accounting tools for the generation of financial documents. You also want to look into payroll processing tools to easily log worker hours for tax purposes and deductions. The best payroll processing software includes Gusto, OnPay, and Patriot Software.
Hiring an accountant is really not all that expensive, ranging from $173 to $273 for basic submissions. Tax software can limit this amount even further, having streamlined the entire tax submission industry to a large degree.
The biggest question is that of itemized deductions. Spend a day figuring out whether or not the savings are worth the headache. Once done, go to the nearest professional and pay the requisite amount so you don’t have to worry about it for another year.
There is a tradeoff between saving money and saving time – finding the right balance is what business is all about.
Should I Hire an Accountant to Do My Taxes?
Definitely. The IRS estimates that it will take the average person 16 hours to complete their own taxes, and this is if they already have an idea of what they are doing. This is when completing Form 1040, used by nearly 70% of US taxpayers.
And you also run the risk of filing taxes in the wrong way, meaning you pay more anyway. If you have extremely basic tax requirements, then it might be a viable option. But the basic version of accounting software can do this for you, for less than $100. It’s a definite time-saver to get software or an accounting professional to complete this task. The more complex your taxes, the more urgent is the need for a professional.
How Much Should an Accountant Charge for a Tax Return?
This will depend on the type of tax return you are filing. The information given above should serve as a good reference to what an accountant should charge for a tax return. Generally, the most basic filing will cost between $173 and $273, depending on whether you are filing itemized deductions or not. However, if you are filing a Form 706 (which deals with estates), it can cost upwards of $1563. It really depends on the complexity, organization, and volume of your tax returns.
What Do Accountants Charge per Hour?
There is no real set fee that accountants can charge. If your accountant is CFA accredited or also happens to be an attorney, the hourly fee can shoot way up. But, in many instances, this degree of specialization is only necessary if you have a very specific need for a certain type of knowledge. For the basic tax return, you can find a freelance accountant for as low as $25 per hour, but average costs might be a little higher than this figure. Accountants can often gauge what the filing will cost, but you will need to pay the extra hours for consultations as required. For professional accountants, you can expect to pay between $75 and $150 per hour.
When Should I Hire an Accountant?
People often complain about the cost of accountancy services in terms of tax filing – but this is largely unwarranted, given that it is a once-off fee! The time to hire an accountant is before the tax deadline, the sooner the better. The tax deadline is around April 15th each year (can vary a little). But returns are accepted sooner than this date, as early as January. This year (2020) is a special year and the tax return deadline has been extended due to the COVID-19 pandemic.
How Do I Find the Right Tax Accountant?
You simply need to find someone with the relevant credentials to file your tax returns. Basic tax returns are not really that complicated. So once you find a qualified tax professional, you are good to go. The issue can get a lot more complicated if you have a need for an expert, and the charges will match. But for basic filing, nearly any accountant will do. You are paying them to file your taxes, and if they cannot do the job, they can get fined.
How Long Does It Take an Accountant to Do Your Taxes?
The time varies greatly depending on the complexity of your taxes, the volume of your taxes, and how busy the person is. It can typically take between 2 – 4 hours if you have submitted all of the relevant documentation. For software applications such as TurboTax, it takes between 4 – 6 hours, but remember that this is your time. It takes the average person 16 hours according to the IRS, but this includes gathering all of the documentation and trying to figure out the answer to various tax-related questions. The good news is that the accountant is always going to have your returns submitted by the deadline in Mid-April, and it is not your fault once your documents have been submitted.
What Software Do Accountants Use?
Accountants will use a variety of software depending on their preferences and areas of expertise. However, generally, Intuit Quickbooks seems to be one of the most popular applications right now, used by a variety of business owners and professional accounting firms. Xero, Sage, and Waves are also viable options. It’s worth noting the difference between accounting software (Intuit Quickbooks, Sage) and tax software (TurboTax, TaxSlayer). Accounting software is for accounting activities that have a wide variety of functionality. Tax software is specifically for people and business people looking to complete their taxes. But accounting professionals can submit returns without using direct tax software. Once the forms are sent (correctly) to the IRS, electronically or physically, the project is completed.
How Do I File My Own Taxes if I Own My Own Business?
Technically, anybody can file their own taxes. The problem is that there are many nuances and it can get especially complex when dealing with deductions. For the purpose of filing taxes, a lot depends on your legal entity type. If you own a Sole Proprietorship, you need to file a Schedule C attachment along with your personal income return. For an LLC, you can file just Schedule C, as long as you are the sole owner. Remember to have all records at hand when filing taxes. You are going to need them.
How Do I File Taxes if I Live Abroad?
You can file taxes no matter where you live and have a few means of doing it. You can even hire a US-based professional and send them all the documents by secure email. Technology has limited all barriers. If you live outside the US, however, you are advised to use the IRS Freefile service. This is a brand name tax service. In order to be eligible, you must earn below $58,000. In addition, you will need to file a different form, namely the form 116 foreign tax credit. Your accountant should be able to run through all of the details. But the Freefile software can also run you through the relevant questions. You can get your tax refunds in less than 10 days, as long as you have a US bank account.