Are Tax Preparation Fees Deductible?
Wondering, are tax preparation fees deductible? Read this for a definitive guide on tax prep fee deductions, who can deduct them, how to do it, and more.
Tax preparation fees add up. Many people wonder, are tax preparation fees deductible?
This is particularly true for self-employed individuals that pay quarterly taxes.
As a result, many freelancers and independent contractors wonder, can I deduct tax preparation fees?
In this article, we provide a definitive guide about tax preparation fees.
- What are tax preparation fees?
- How much should you pay for tax preparation?
- Who can deduct tax preparation fees?
- How to deduct tax preparation fees?
- and more.
What are tax preparation fees?
Tax preparation fees are the fees you pay to a tax preparer to prepare your tax return.
Hiring a tax preparer is a great way for self-employed to outsource the time and effort required to prepare their tax returns.
What are some examples of a tax preparer?
Tax preparers come in a variety of forms. Some are human, and others are virtual (i.e. accounting software). Here are a few examples of a tax preparer:
- An accountant
- Tax prep service company, like H&R Block.
- Tax preparation software like TaxAct
How much should I pay for someone to prepare my taxes?
The cost to prepare a small business or self-employed individuals’ taxes can vary greatly depending on the complexity and each unique situation. However, there are some averages.
The average cost of tax preparation in 2015 was $273 according to a survey by the National Association of Accountants. This was a 4.6 percent increase from 2014, the previous year. This is likely the price of hiring a person to prepare taxes for you.
$273 might be a lot for some people. In that case, there are great online tax preparation software options that are a fraction of the cost, such as:
Also, you might be able to use your financial accounting software, such as QuickBooks or Xero Accounting.
What are the benefits of paying someone to prepare your taxes?
Proper tax preparers typically have specialized training in doing taxes. They often have licenses and certifications. This means that your taxes will be prepared by someone that likely knows more about how to properly prepare a tax return than you do.
For some freelancers and independent contractors, their taxes are complicated. In this case, the expertise of a tax preparer comes in handy.
For other freelancers and self-employed, their tax preparation requirements are straightforward. In this case, resources such as Falcon Expenses Blog can be a great place to get started doing your taxes yourself.
Your Time is Valuable
Many gig workers and freelancers charge a high hourly rate for their services. In this case, it might cost you less to outsource your tax preparation work if the value of your time is worth more than the cost of the service.
For example, let’s say you normally bill your clients $100 per hour and the cost of a local tax preparer where you live is $50 an hour. Also, let’s say it takes two hours of your time to prepare your taxes. This means that your time is worth $100 more than the tax preparers. Therefore, you save $100 by outsourcing your tax preparation.
Let’s do the math
The cost of your time to do your taxes yourself:
$100 x 2 hours = $200 to prepare your taxes yourself.
The cost of a tax preparers time:
$50 x 2 hours = $100 to outsource your tax preparation.
This doesn’t even take into consideration the opportunity cost of your time lost by doing it yourself even in the case it costs less.
Who can deduct tax preparation fees?
Sole proprietor or independent contractor who files a Schedule C.
A farmer who files a Schedule F.
A landlord that earns income from rental properties who files a Schedule E.
An individual that earns income from royalties files a Schedule E.
If I’m an employee can I deduct my tax preparation fees?
Employees can’t deduct their tax preparation fees.
How do I know if I’m an employee or an independent contractor?
Check out this article to learn how to classify your employment: Self Employed vs Employee
2017 Jobs Cut Note
The Tax Cuts and Jobs Act that passed in 2017 resulted in most itemized tax breaks being eliminated. This means that if you’re an employee, and you receive a W-2 to prepare your taxes you can no longer deduct your tax preparation fees.
As a result of the Tax Cuts and Jobs Act, itemized deductions were eliminated such as medical costs deductions, moving expenses, unreimbursed work expenses, losses from theft in addition to tax prep fees. However, there was an increase in the standard deduction amount so most people made it out ahead.
Can statutory employees deduct tax preparation fees?
Statutory employees are allowed to deduct work-related expenses. Word-related expenses include tax preparation fees. However, the same rules apply to self-employed for the deduction of tax prep fees. That would mean that only the percentage of the tax prep fee that was used for the preparation of the business taxes portion of a statutory employee is deductible.
What is a Statutory Employee?
A statutory employee is an independent contractor who’s considered an employee for tax withholding purposes.
For a definitive guide about Statutory Employees, and how to determine if you’re one or not, check out this article, What does Statutory Employee mean?
Can W2 employees deduct tax preparation fees?
No. This is the same as asking, can employees deduct tax prep fees.
How much of my tax preparation fees can I deduct?
There are some cases where you might not be able to deduct the full amount of your tax preparation fees.
For example, only the portion of the fee that was used to prepare the business portion of your taxes is deductible.
Can you deduct quarterly taxes tax preparation fees?
You can deduct your tax preparation fees whether you pay to prepare your taxes once a year, or pay quarterly taxes.
The only thing required is that you fall in one of the categories of workers that qualify for the tax preparation fee deduction.
Review the section of this article named, Who can deduct tax preparation fees, to see if you qualify.
How to claim a tax preparation fee deduction?
The IRS allows you to deduct tax preparation fees during the year you incur them.
When you first read the sentence above it sounds straightforward. However, it’s a little more complicated than it seems.
Let us explain
Typically you prepare your taxes after the tax year that you’re preparing them for has ended. This is because you have to wait until the year 2020 is over to know your total income for 2020.
For example, on your 2021 tax return, you deduct the fees you paid to prepare your 2020 taxes.
However, the big question is, how do you write off your tax preparation fees?
The cost of your tax preparation fees is deducted like a business expense deduction. This means you add it to your Schedule C.
So there you have it.
Tax preparation fees are deductible if you fall into one of the categories that qualify to deduct tax preparation fees. This would include self-employed, freelancers, independent contractors (like delivery drivers), etc. We think you get the picture.
While tax preparation fees are tax-deductible for certain taxpayer classifications there are still a few caveats. Therefore, we recommend that you keep this article handy (bookmark it) so that when it’s time to prepare your taxes you have the information at your fingertips.
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