Freelancer’s Q & A: Do I need to know taxes too?
Posted by Gabrielle on 21 Jul 2009 at 09:20 am | Department: Articles, Marketing, Q & A, Training
Many freelance bookkeepers also do taxes for their clients. That’s probably why I so often hear the question, “Is it necessary to be a tax preparer in order to run a successful freelance bookkeeping service?”
The answer I usually give is…it depends.
Successful Bookkeepers and Taxes
There are many ways to be successful in the bookkeeping field. While tax preparation services can be a good source of seasonal income, it is NOT necessary of offer this service to do well. In fact, there are situations where NOT offering tax services may even be an advantage, depending on how you position yourself.
For instance, if you don’t have experience with tax preparation and don’t want to offer that service, it may be easier to build complimentary relationships with CPAs. They won’t be worried that you’re a threat to their tax clients, who are often their bread and butter. You can position yourself as a strategic ally by referring clients who need tax services, while they refer clients who need help with their bookkeeping to you. This works as a mutually beneficial relationship, especially at year end.
Taxes and Bookkeeping are Not the Same
Bookkeeping and taxes are two different things entirely. True, the information found in a client’s bookkeeping records is used to prepare the tax returns, but that’s where the similarities end.
If one knows only how to prepare individual tax returns, that does not mean that that person can handle bookkeeping. In fact, I know of a CPA who struggles with this very issue with his staff during the off season. His staff primarily knows tax prep. But when he needs them to work on adjusting a trial balance for his business clients, they are helpless.
The reverse is also true. Just because you understand double-entry bookkeeping does not mean you can breeze through tax return preparation. You need to be adequately educated to offer either service if you want to offer that skill to your clients.
Should You Offer Tax Services?
So my first bit of advice is, if you already have income tax preparation experience, and you enjoy it, then by all means consider adding it to your service offerings. It provides a one-stop-shopping convenience for your existing and future clients who may be in need of professional tax preparation.
However, I do NOT suggest that you attempt to “steal” tax clients away from their current preparer, especially if that person is their CPA. A strategic relationship with your local accountants is far more valuable than the preparation of an annual tax return or two. You always want to be building strategic alliances, not promoting adversarial competition.
If you offer tax services, be sure to keep your knowledge up to date. The tax laws change every year, so this is not a service you should offer if you are not willing to invest in ongoing education. Lack of knowledge in the tax arena can come back to bite you hard. The IRS is actively raising the bar for tax preparers and will continue to do so over the next few years. You’ve been warned.
Tax Laws ALL Bookkeepers Need to Know
Up to this point, we have been talking about income taxes. While including income tax preparation to your service offerings is not a necessity, there are some types of taxes you really do need to know about, at least on a basic level.
Most, if not all of your clients will need your guidance when it comes to payroll taxes, state and local sales and use taxes, and possibly meals and/or lodging taxes.
If you don’t already know the ins and outs of these types of business taxes, then you need to educate yourself so you can handle them responsibly. Usually the information needed can be found directly from the taxing authorities at the federal, state and local levels; checking their websites is the easiest option. I’ve included some of the most common resource links at the end of this article.
Pay Attention to Payroll Taxes
Probably the stickiest of business taxes are for payroll. Penalties and interest on mishandled payroll taxes are very stiff. So don’t fake it when it comes to handling your clients’ payroll services. Get help if you need it.
If you are not comfortable with handling payroll taxes yourself, you may want to insist that your clients hire an outside payroll service. These providers are well worth their fees.
Payroll companies not only prepare payroll checks, but they will also prepare and timely file payroll tax returns, seeing to it that your client’s liability deposits are made when due. That is of key importance.
Personally, despite the fact that I have experience handling payroll, I HATE it. So I insist that my clients use an outside payroll service. This keeps my clients out of hot water with the authorities, and lets me focus on the services I truly enjoy providing.
That being said, if you actually enjoy doing payroll, it is a valuable service that can provide a source of steady revenue, if you aren’t already offering it to your clients. The QuickBooks ProAdvisor program has a nice package at a reasonable price for those who provide payroll services to their clients.
It All Depends on What You Want
As is clear from this discussion, there are lots of choices when it comes to taxes and bookkeeping. In reality, you get to choose which combination of service offering will best support what you envision for yourself and your business. Just realize that there are advantages and disadvantages to each situation.
Make Your Choice and Stick With It
Once you’ve decided which service combo is right for you, keep up to date with the education requirements. Provide the best service possible for your clients. After all, that’s why they hire us – for our expertise.
Top quality service will fetch you the best fees and keep your business growing. Happy clients are your best source of new referrals. That holds true no matter what the economy is doing.
So “should” you offer tax services? That’s entirely up to you. It just all depends on your current (or desired) skill set, how you envision your business, and the services you enjoy providing the most.
Resources
National Association of Tax Professionals
Federal Income Taxes – Tax Professional Resources
Federal Employment Tax Resources
Sales Tax Rates Quick Reference List
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Gabrielle Fontaine, PB is a freelance Professional Bookkeeper and Advanced Certified QuickBooks ProAdvisor. She publishes the free online newsletter, The Freelance Bookkeeper, and is co-author of the new book, “How to Start A Successful Home-Based Freelance Bookkeeping and Tax Preparation Business,” available at Amazon.com
I’ve been included in taxations for lengthier then I care to acknowledge, both on the personal side (all my working life story!!) and from a legal stand since satisfying the bar and following up on tax law. I’ve put up a lot of advice and corrected a lot of wrongs, and I must say that what you’ve put up makes complete sense. Please carry on the good work – the more people know the better they’ll be equipped to handle with the tax man, and that’s what it’s all about.