If you have a business, can you prepare your tax return yourself? Should you?
The short answer is “yes,” you can do your return yourself. There is no legal or IRS requirement that business owners hire a tax professional to prepare their returns.
That said, most business owners prefer to get tax pros to do their tax returns. Indeed, a majority of all taxpayers hire tax preparers. But this doesn’t mean you have to.
You’ll save money doing your taxes yourself. Tax pros charge at least $500 to prepare a business return. You could have to pay much more depending on your complex your business is.
The fees you pay to prepare your business taxes are a deductible business expense. But this deduction will reduce only part of the entire cost. How much depends on your top tax rate.
By the way, the fees you pay to prepare your personal tax return are not deductible. If you hire a tax pro to do your personal and business taxes, make sure to get a separate invoice for the business portion. You can deduct that amount.
Another benefit of doing your taxes yourself is that it helps you understand the tax law and how it affects your bottom line. You’ll have a better understanding of what expenses are and are not deductible. And you may come up with ideas on how to save on taxes in future years.
One good reason not to prepare your return yourself is that it will take time. Perhaps a lot of time. You might be better off using this time working in your business.
Also, you could make costly mistakes if you do your taxes yourself. You could pay less than you owe and end up in trouble with the IRS.
Just as bad, you could end up paying more than legally necessary. In this event, the IRS likely won’t bother you.
One way to make your life easier is to hire a tax pro to prepare your returns the first year you’re in business. You can then use those returns as a guide to doing your own returns in future years.
You’re a good candidate to prepare your business tax return yourself if, like most self-employed people, you’re a sole proprietor. Meaning you have a one-owner business and have not formed a corporation or other business entity.
If you form a one-owner limited liability company, you’re ordinarily taxed the same as a sole proprietor.
When you’re a sole proprietor, you report the income you earn or losses you incur from your business on your personal tax return (IRS Form 1040). If you make a profit, you add the money to any other income you have—for example, interest income or your spouse’s income if you’re married—and that total gets taxed.
If you prepare your taxes yourself when you’re a sole proprietor, you’ll need to include some additional forms with your individual return. These include:
Schedule C: To show whether you have a profit or loss from your business, you must file IRS Schedule C, Profit or Loss From Business, with your individual tax return. On this form, you list all your business income and deductible expenses.
Schedule C is relatively simple to complete, especially if you have good records of your income and expenses. It includes preprinted categories for the most common deductions.
Form SE: You must file IRS Form SE with your return to calculate and report your self-employment taxes. These are the Social Security and Medicare taxes all self-employed people must pay.
Other forms: Depending on the business deductions you claim, you may have to file additional forms with your return. For example, if you claim the home office deduction, you must submit IRS Form 8829, Expenses for Business Use of Your Home, with your return showing how you calculated the deduction.
You’re not a great candidate to prepare your business return yourself if you’ve formed a corporation, multi-owner LLC, or partnership to own and operate your business. These business entities must file their own tax returns. And these can get complicated.
With multi-member LLCs, partnerships, and S corporations, you must file a separate business tax return and create a statement on Schedule K-1 showing each owner’s share of the profits or losses.
Today, virtually all taxpayers who prepare their returns themselves use tax preparation software. Only about 10 percent of taxpayers prepare paper returns by hand using a pencil and calculator.
There is sophisticated tax preparation software specially designed for business owners available from several companies. The best known are Intuit TurboTax, H&R Block, and Tax Act.
There are versions of such software for sole proprietors. They include TaxAct Sole Proprietor, TurboTax Self-Employed, and H&R Block Self-Employed/Rental.
Using this software, you complete your return by answering a detailed questionnaire. All the necessary forms are automatically generated and checked for accuracy. Online support is also available if you have a question.
However, returns self-prepared with software are not necessarily correct. The maxim “garbage in, garbage out” always applies.
No doubt, the cost of business tax preparation software is much less than hiring a tax pro. And the expense is tax deductible.
The IRS always knows when you prepare your return yourself. This is evident because when you hire a tax pro, he or she must sign the return you send the IRS.
Showing who prepared the tax form is true not only for your individual IRS Form 1040, but for business tax returns such as Form 1065 filed by most multi-owner LLCs and partnerships, and Form 1120 filed by corporations.
Some tax experts believe that self-prepared returns are more likely to get audited by the IRS than those prepared by tax pros. Their reasoning is that the IRS knows that it is much easier for taxpayers to cheat when they prepare their returns themselves.
Respectable tax pros won’t knowingly allow taxpayers to cheat on the tax returns they prepare. But, when you prepare your return yourself, you can claim anything.
However, it may be that self-prepared returns get audited more often simply because they contain more mistakes than returns prepared by tax pros.