ARTICLE TABLE OF CONTENTS
What is Tax Accounting?
As with lawyers, there are multiple types of accounting professionals. Some accountants work for corporations, some accountants perform in-depth financial audits, some accountants advise individuals on estate and inheritance matters, and still other accountants focus primarily on issues of taxation. Tax accounting encompasses every type of accounting that involves taxes: federal taxes, state taxes, local taxes, payroll taxes, and more.
For businesses, tax accountants are exceptionally important. Many businesses have a large volume of taxes that they need to track and if they don’t track these correctly, they could face significant fines and penalties. For professionals and entrepreneurs, tax accountants can be likewise necessary; they need to be able to figure out their income taxes, sometimes at the end of the year, sometimes quarterly, and sometimes even monthly. And even regular individuals who need to file their taxes every year might engage with a tax accountant.
A tax accountant doesn’t just figure out what someone owes per their taxes. A tax accountant also helps an individual plan for taxes, with recent tax benefits or tax credits. A tax accountant, for instance, might tell a business what the best way to incorporate is to save money or might tell an individual what credits or deductions are coming up that could affect their spending for the coming year. In short, tax accountants help businesses and individuals save money on taxes as well as helping them file their tax returns and pay their tax debts.
Taxes are many and varied. When you say “tax accountant,” most people think of income taxes. But there are more taxes than just that.
A tax accountant may cover:
• Payroll taxes.
• Local taxes.
• Sales taxes.
• Alcohol or tobacco taxes.
• General excise taxes.
There are quite a few taxes. A company that operates internationally, as an example, will need to deal with local taxes as well as import fees. A tax accountant’s job is often to help a business cover all the taxes necessary.
How Does Tax Accounting Work?
A tax accountant will often be furnished the books of a business or an individual and then will calculate out the amount of taxes owed. The tax accountant will then file the appropriate paperwork and pay off the debts, to ensure that the business remains current on its taxes. If there are any issues with the taxes, the tax accountant can audit the forms and books, or work with the tax-collecting agency on the organization’s behalf.
In some cases, the accountant is not furnished the books but rather takes care of the organization’s books themselves. They may be given bank statements and credit card statements to work from and will then determine how much the organization owes based on the statements that they themselves prepare. In this case, the accountant will also need to determine whether the books are going to be kept on a cash or accrual basis.
What Are Accrual vs. Cash Methods of Accounting?
One of the first things a business owner needs to determine when starting their bookkeeping is whether their business is going to be based on cash or accrual. Under the cash method, expenses are recorded when paid and income is recorded when collected. Under the accrual method, expenses are recorded when the invoice is received and income is recorded when invoices are sent. In essence, it’s a difference of whether things are booked when money actually changes hands or when the contract has been agreed upon.
Accrual is more difficult but often more accurate, while cash accounting is simpler and more direct. With accrual accounting, you can see your income in terms of invoices even if you haven’t collected on all those invoices–it’s a more accurate picture of what you have agreed to have brought in, but it doesn’t govern the cash that’s actually in the bank. So, a cash accounting can feel more accurate, but it also doesn’t account for deals that have already been made but not paid.
It’s difficult for an organization to shift from cash to accrual or vice versa, so the decision should be made early on and stuck to.
Additionally, a business will need to determine when its fiscal year is to begin. Most businesses operate on the calendar year, but this isn’t true for all.
Do Businesses Need a Tax Accountant?
While many businesses have internal accounting departments or at least a specialist, tax is different. Taxes change regularly and require expertise to plan well. Most businesses are going to, at minimum, have an accountant look over their federal and state income taxes at the end of the year.
But it can be beneficial to have an outside accountant deal with things like sales tax, alcohol tax, payroll tax, and other tax payments. Tax payments are fairly critical; it’s important that they be done properly and on time. Not every business owner has the time to comb through tax law and learn more about taxes, so it’s far better for them to have a professional who can do it themselves and make sure that it’s been done right.
Furthermore, the cost of a tax accountant is often negligible, as the tax accountant can help the organization avoid fines and penalties, while also ensuring that the organization has done everything correctly.
Do Sole Proprietors Need Tax Accountants?
Many individuals actually hire tax accountants without even realizing it; they go into a tax office every year and have their taxes prepared for them. Not every tax preparer is a tax accountant, but tax accountants are often the ones that will be able to provide in-depth information about how an individual can file their taxes, what they can do to improve their taxes (reducing their bills or increasing their refunds), and the decisions they can make moving forward.
Those who file just a 1040-EZ form don’t need a tax accountant, but those who have more complex matters — who run their own business or own significant property — would do better off with a tax accountant. An individual who owns their own business or works from home is considered to be a Schedule C Sole Proprietor. Even though their business hasn’t been incorporated as an LLC or a CORP, they are still a small business owner.
As noted, a tax accountant doesn’t just file and prepare taxes. A proper tax accountant is going to be able to recommend actions an individual can take to save money, even if it’s information regarding things such as health bills and deductibles or marketplace coverage.
What’s the Difference Between a Tax Accountant and a Tax Preparer?
A tax accountant is a trained accountant who specializes in taxation. Often, they are Certified Public Accountants or work for a CPA; they have extensive training and have passed certification exams. A tax preparer, on the other hand, is any individual who has been trained in tax preparation. A tax preparer isn’t necessarily any less experienced or professional, but they may not have in-depth knowledge of other areas of accounting.
In many cases, a tax preparer may not be an accountant by trade but may simply be an individual who is up to date on the current tax codes and current tax recommendations. Tax preparers do an excellent job helping individuals with their tax returns but may not be knowledgeable about other types of taxes, such as sales taxes. They may also not be able to help in more complex situations, such as with Schedule C income.
When in doubt, you usually need to work with a tax accountant. A tax accountant can tell you whether your records and data are simple enough that a tax preparer could help or complex enough that you need individualized, custom help.
How Much Does Tax Accounting Cost?
For most small businesses, tax accounting is actually quite affordable. Tax accountants have expertise and experience and are therefore able to finish tax returns and other tax forms quickly, so it doesn’t cost as much one might think. For things like payroll taxes, many of the systems are largely automated, and therefore can be offered at a very low cost.
While many business owners shy away from additional expenses, tax accounting itself is deductible; tax-related expenses are considered to be a deductible expense. Further, tax accounting does save an organization money, both by advising business owners on the right tax strategies and by avoiding fines and penalties related to late or incorrect filing. A tax accountant will be able to tell you the best ways to save money on your taxes moving forward.
As with many professional services, tax accounting does vary depending on the size of the business and the size of its books. Tax accounting will be more expensive if an organization needs its books done first, and it will be more expensive if the organization has large volumes of transactions, multiple bank accounts, and incomplete record-keeping. Tax accounting will be less expensive for simpler businesses.
What Are the Most Common Types of Tax Accounting?
The most common type of tax accounting is likely income tax. Most businesses do not file their own federal or state income taxes; they rely upon their tax accountant to do so. But the second most common type of tax accounting is actually payroll taxes.
Payroll taxes can be quite complicated and they change frequently. Many companies actually outsource their payroll even if they don’t outsource any other part of their accounting, because the calculations that need to be made are complex, and because it’s difficult for the company to keep up with it while paying employees on time. Further, it requires a number of payments to be made to a variety of different tax entities, and this alone can take a lot of time to do and keep track of. Payroll tax companies are able to manage the payroll for an organization as well as paying off the taxes.
Finally, other tax accounting types include sales tax (which needs to be paid when organizations are selling merchandise), alcohol and tobacco taxes (which are taxes for those who make these types of sales), and general excise tax (which can be found in some locations and is essentially a sales tax). Companies may also have a variety of other local taxes that they need to pay; these depend on the location of the business.
What Are Other Forms of Tax Accounting?
Another, less common, form of tax accounting includes inheritance tax accounting. An estate accountant may deal with an organization that has concerns regarding its succession planning; something that is common in family-owned businesses. For individuals, a tax accountant may also be able to tell them whether their beneficiaries could be taxed after their passing, or what they should do to avoid any additional taxation once they have passed on.
Since taxes are relative to where a business or individual is, there are other forms of ta accounting that may be more niche. But the same premises still applies; tax accounting is about the preparation and payment of any type of taxes.
How Do You Find a Tax Accountant?
Finding a tax accountant also depends on the type of accountant that’s needed. Within tax accountants, there are specialists as well; some specialize in corporate taxes, others in non-profit taxes, and still others in taxes for individuals. It’s best to find a tax accountant that specializes in your organization’s tax needs.
Some prefer a tax accountant who is local to the area, as they can walk in and discuss their tax needs face-to-face. But others hire tax accountants who are fully remote, as this can be the easier way to connect, and can lead to more affordable services. Ultimately, a business needs to be able to find an accountant that’s easy to work with.
Tax accountants are incredibly important, expert specialists that many businesses and even individuals may need to engage with at some point. A tax accountant is an expert in tax law; often a specific tax, but sometimes broad varieties of taxes. Through a tax accountant, you can make sure that your taxes are paid correctly and on time.
Disclaimer: Please keep in mind that the content of this post is not intended as tax, accounting or legal advice. The information presented here is for informational and educational purposes only. Before engaging in any transaction, be sure to discuss these matters with a trained, licensed professional.