What is Tax Accounting? Everything You Need to Know
For United States citizens earning income, tax accounting is unavoidable. But what is it?
Running your own accounting firm or tax preparation service is a stable and rewarding career. People will always need help managing their finances, so there’s never a shortage of clients, and depending on the season and the services you offer, it could turn into quite a lucrative career.
The trouble is, sooner or later, your accounting service may see a spike in demand that you can’t keep up with. For example, during tax season, as businesses and individuals try desperately to get their taxes finished in time, your firm may not have the staff or resources necessary to meet all their needs. Or, during a period of intense growth, you may find yourself with more prospective clients than you can feasibly manage simultaneously.
In these cases, your best bet is to use an accounting outsourcing service.
Accounting outsourcing works the way it sounds. Essentially, you’ll partner with a third party, usually a firm, an agency, or even a team of freelancers, so they can handle some of your excess work. In some cases, you’ll forward the work to them and they’ll handle it on your behalf in exchange for a fixed fee. In others, you may have a more collaborative arrangement.
In any case, there are several benefits to utilizing accounting outsourcing services:
More experienced experts.
You might already have a talented internal team, but they can only get you so far. Some clients might have needs that exceed your current capabilities; for example, they might have a complicated corporation that’s a bit too challenging for your inexperienced employees, or they might be in demand of a tight turnaround time that your firm can’t currently manage. Having an accounting outsourcing partner can give you access to the experts you need to meet these demands, giving you access to a wider range of potential clients.
Time management benefits.
Some people are perfectly happy working more than 60 hours a week, but for most of us, this level of commitment is not sustainable. Working with an outsourced accounting service can save you loads of time, giving you the ability to delegate tax returns and assignments rather than doing them all yourself.
Improved profitability (and lower costs).
You’re going to pay a cost when outsourcing your accounting services, either as a fixed fee for each project or as an ongoing monthly retainer. However, these costs can ultimately result in a net benefit for your agency. For example, let’s say you can successfully manage 100 tax returns within a specified time period. Working with a third party would allow you to take on an additional 50, so 150 in total. You’ll pay for the 50 extra tax returns to be completed, but you’ll make money on them in excess of the fees. Either way, you’ll make the same amount of revenue on the original 100, and all the profits you make from the additional 50 will be extra.
Most accounting outsourcing practices pride themselves on their flexibility. They can accommodate short deadlines and demanding clients, but also don’t have a minimum number of clients or projects to constrain you. This makes it much easier to accommodate all your clients’ needs, and gives you balance in an otherwise unpredictable and chaotic industry.
Client reviews and retention.
Accounting outsourcing services are incentivized to do the best job possible, so they can keep their clients and income. That means you’ll complete more tax returns to a satisfactory degree, and your clients will be happier. This is especially true if their returns get completed faster—which will likely be the case. In other words, outsourcing your accounting can help you improve your client satisfaction and retention.
Most accounting agency owners are interested in growing their business over time. Working with a third party is ideal for this goal; you can lean on the third party whenever you have more clients than you can handle, and you can still take control of the majority of your work. Assuming things go well, you can establish a collaborative and mutually beneficial partnership for the long haul.
Not all accounting outsourcing services are alike, so it’s on you to research and evaluate each service so you can find the best fit for your brand:
Licensing and resources.
What kinds of employees does this company have? Are they all formally licensed CPAs? How can you be sure? You’ll also want to find out how many people are on their teams, and what kind of resources they use to complete their accounting work.
Next, pay attention to how much experience the company has, and how experienced their top accountants are. It’s generally a good idea to work with a business that has multiple years of experience, and top employees who have many years of experience as well. However, you may be able to find a skilled, reliable agency that’s relatively new.
Reviews and testimonials.
Hopefully, this service will be in practice long enough to have attracted some client reviews and testimonials. These aren’t always reliable, but they should give you a high-level perspective on the firm’s strengths and weaknesses. For example, you should be able to gauge how reliable the employees are, how effective their communication is, and whether or not the service is worth the money, overall.
Transparency and communication.
This is more of a subjective factor, not directly related to the work, but it’s important nonetheless. If something goes wrong with a client’s tax return, you’ll want to make sure your partner will proactively communicate with you. Pay close attention to how fast their reaction times are, and how easy they are to communicate with.
Costs (short-term and long-term).
You can’t make a firm determination of an organization’s worth until you know how much money you’ll pay for their services, both in the short term and long term. Are you able to charge more for a tax return or project than you’d pay to have the work outsourced? This should be relatively easy to calculate.
Security standards and privacy.
Data security is super important for accountants, and that means it should be important to your outsourcing partner. You’re going to be dealing with hyper sensitive client information, and the last thing you’ll want is for that information to be compromised. Check the security and privacy standards being enforced by your partner before you get involved.
Approach to management.
How does this business approach management and the flow of projects from client to third party? This is mostly a subjective question, since different firms will have different preferences. Just make sure you understand the workflow before you sign the contract.
The final question is when to seek accounting outsourcing, and that’s going to be different for every firm. As a general rule, accounting practices will take on more clients and more projects until their internal resources run thin; you’ll start working longer hours, your staff won’t be able to keep up, and your queue will grow longer and longer. At some point, you’ll be forced to either stop taking on new work or find a new resource to handle the new work. Since it’s not in your best interest to turn clients down, this is the point when you should seek accounting outsourcing.
Accounting outsourcing has the power to transform your accounting business for the better. If you’re ready to learn more about how accounting outsourcing can increase your firm’s profitability, schedule a live demo of Taxfyle today!
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