A Practical Guide to Working with a Tax Preparer: Strategies for Success
Taxes are as complex, tedious, and ever-changing as you think they are. Be intimidated, it’s valid. That’s why it’s important you understand how to leverage your tax professional’s skill set to manage this part of your business. Navigating the complexities of tax preparation can leave you feeling lost, especially for businesses aiming for sustained profitability and cash flow. How does it all work together and what is this tax strategy thing? How does it tie into my profits and what is cash flow?
We’re here to help you understand just that!
Understanding the difference between having your taxes prepared, and having a tax strategy can save you tons in tax dollars.
Understanding Tax Preparation vs. Tax Strategy
What is Tax Preparation?
Imagine the person who brings the boxes of receipts, statements, and other random documents to their tax professional. They walk in, set it on the floor, tell the tax preparer to make their tax bill go away, and walk back out expecting the next phone call to be, “It’s all done, and you owe nothing”.
If you:
Meet with your tax professional only once a year
Have experienced a “surprise” tax bill situation
Aren’t maximizing your tax deductions within your entity
Use pre-determined vouchers to make estimated tax payments
You have room to beef up your tax strategy AND are likely missing out on tax savings.
At its core, tax preparation involves the isolation of a single tax year to file your returns based on your current financial situation. It focuses primarily on compliance—ensuring you meet your legal obligations and minimize your tax liability for that specific year. It does not observe and explore how you can deduct more through your business in a way that benefits you personally and at home.
However, this approach can often lead to missed opportunities for long-term savings.
Find Out Why You Should Not Take Business Advice from Your Tax Preparer
What is Tax Strategy?
When you meet with a tax strategist for the first time, they will ask you questions about your personal financial goals over the next few years. Based on what you tell them, they’ll look at your business entity and tap into strategies that you aren’t already using to help you save tax dollars. It won’t stop here. This will happen at least twice a year so they can stay on top of your growth progress, and your strategy.
What you typically see:
Meets four times a year
Phased tax strategies based on your entity type and growth
Advice on if and when to change your business entity type for tax purposes
Actual calculations for estimated payments, not vouchers based on outdated assumptions
In contrast, tax strategy encompasses a broader view of your financial future. A tax strategist looks at your goals over the next two to three years and considers various factors that may affect your taxes. This could include potential changes in family status, if you’re looking to purchase a home, or if you plan to get a bank loan.
A good tax strategy anticipates your financial trajectory rather than simply assuming based on your past.
Red Flags That You Have No Strategy
Surprise Tax Bills
Taxes are pretty easy to estimate, if you were hit with a surprise that means you were never looking forward. Once you implement a Quarterly Estimated Payment Procedure, this will never happen to you.
Spending Tons of Money In December to Lower the Tax Bill
This is a major red flag. Run, if this advice has been given to you. A proactive strategy does not include last-minute spending on things you don’t necessarily need. All you’re doing is hurting cash flow to save a few tax bucks, you are spending substantially more money than you’re saving.
Paper Vouchers For Estimated Taxes
Paper vouchers assume how much you’ll owe each quarter, and never consult your real-life numbers throughout the year. If anything deviates from that assumption, you’re left giving the IRS an interest-free loan, or, you’ll find yourself with a surprise tax bill (see point #1 above).
Within one week of working with a client we saw one of these red flags. Two weeks later the client realized she needed to fire her tax preparer.
Choosing the Right Tax Preparer
You Get What You Pay For
When selecting a tax preparer, remember the saying: "You get what you pay for." A cheaper option might only provide basic preparation services, while a higher-priced service often includes proactive tax strategies.
If you're paying more than $20,000 in income tax, it’s time to level up to a strategic approach.
Finding Your Right Fit Tax Preparer
Ask the Right Questions
When interviewing potential tax preparers, ensure they ask about your plans for the next three to five years. This level of inquiry is indicative of a professional who is focused on strategy rather than mere compliance.
It's also essential to work with someone who understands tax strategy within your business structure. This includes knowing when to incorporate multiple entity tax strategies.
For instance, if you’re operating as an LLC, there may come a point where transitioning to an S Corporation could provide significant tax benefits.
So, ask these questions:
Are you willing to do a review of my last year’s tax return, and my YTD financials and provide any insight and observations?
How many times per year do we meet and what is our objective during those meetings?
How do you manage estimated tax payments for me?
How familiar are you with grey area tax strategies and how comfortable are you advising me on implementing them ethically?
Download our How to Hire a Tax Preparer Checklists
Leveraging Your Business Structure
Entity-Specific Strategies
If you are operating as an LLC and your taxable profit is around $60,000 to $90,000, it's crucial to have conversations with your tax preparer about the potential benefits of switching to an S Corporation.
However, before making this change, ensure that you have fully utilized the tax advantages available to you as an LLC.
For instance, employing family members can yield significant savings on payroll taxes, and optimizing automobile expenses can further reduce taxable income.
These strategies must be fully explored with a business attorney before transitioning to an S Corporation, where compensation becomes tax-deductible—a substantial benefit.
Consulting with Your Business Attorney
It's also essential to consult your business attorney when considering changes to your business structure.
While your tax preparer will focus on potential savings, your attorney will provide insights into liability and legal implications. This comprehensive approach ensures that you are making informed decisions that benefit your business holistically.
Building a Productive Relationship
Pay extra attention to tax preparers who promise unrealistic outcomes or deliver results that fall short of expectations. Always seek professionals who can provide evidence of their past successes and outline how they plan to help you achieve your goals.
Regular Meetings Are Key
To maximize the effectiveness of your tax strategy, we recommend to meet with your tax preparer at least twice a year. These meetings should occur outside of the busy tax season when professionals are under immense pressure. Instead, schedule your consultations in Q1 and Q2 to allow your preparer to engage with your situation with a clear mind.
Estimated Tax Payments: An Essential Component
The Importance of Timely Payments
Your tax strategy should include a plan for estimated tax payments. This ensures you’re not caught off guard come tax season. Collaborate with your tax preparer to establish estimated tax calculations during Q2 and Q4, allowing for proactive adjustments throughout the year.
I’ve made a blog post all about my strategic approach to maximizing your quarterly estimated taxes.
Dive into our blog for a deeper strategy on Estimated Tax Payments
Checking Your Progress
Regularly check in with your preparer to ensure that you are on track with your tax strategy and can pivot before the year closes out. Tax strategies should be flexible, adapting to any changes in your business or personal circumstances.
Staying on Track with Your Financial Goals
Quarterly Check-ins
In addition to biannual meetings with your preparer, aim for quarterly touchpoints with your Key Financial Players.
These meetings provide a comprehensive view of your financial health and help align your tax strategy with your overall financial goals. This integrated approach will also enhance your ability to pivot and adapt your strategies as your business evolves.
While our role is not in taxes, we specialize in providing up-to-date and accurate financial reports while working seamlessly with your tax preparer.
If you’re looking to break the next glass ceiling in your business, we offer an Executive CFO Masterclass to optimize your financial systems, create stable profitability, and get your money moving in your chosen direction.
Get access to our FREE downloadable tool - A Guide to Hiring a Tax Preparer
