According to the National Society of Accountants, the average fee in 2020 for a tax preparer to file a Form 1040 with no itemizations and a state return was $220; $323 with itemized deductions—and higher for a partnership or corporation. Schedule SE for self-employment taxes can cost an additional $41. By comparison, it’s not unusual for tax software to cost $100 or less.
Here’s how to go about finding the best tax software for your small business.
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What is tax software?
Tax software is a program that helps business owners prepare and file tax returns. Tax software can facilitate the process of gathering information and records, then sorting and categorizing expenses and various types of revenue, like business rental income. Tax software can prepare federal and state income tax returns, if required, then electronically file the returns.
Tax software is available as an app on a portable device or computer, or accessible through a website. When selecting tax software to do your own taxes, check whether you qualify for free online tax filing services.
Importance of choosing the right tax software
It’s important to choose the right tax software that can solve for the specific needs of your business. For instance, some software programs focus on self-employed sole business owners. That type of tax software program can help maximize tax deductions, therefore reducing your tax liability.
On the other hand, a business set up as a corporation may need a separate program. Small business owners also may need to pay state income taxes. Suppose you live in a state with state income tax or have business activities in other states that subject you to pay taxes. In such cases, the best tax software will provide the ability to file state income taxes as well as federal. However, filing federal and state income taxes may not be the only business taxes you’re required to pay.
Sales tax may be required for your ecommerce business—making it equally important to choose the right ecommerce sales tax software to sync with your selling platform and complete the calculations and filings for sales tax.
5 criteria for selecting the best tax software
- Price
- Ease of use
- Accuracy
- Features and functionality
- Customer support
There are many deciding factors when it comes to evaluating tax preparation software. Some of the main considerations when searching for the best tax software for your business include:
1. Price
Price might be toward the top of the list for people trying to pick the best tax software. However, the best tax software doesn’t have to be expensive. Programs range from free to $89 or more. The cost varies by software provider and version, such as for self-employed people or employees with a W-2.
Additional features, such as customer support, can cost extra, and increase costs. Some tax software also charge an additional fee for state filings. Even the best free tax software has fewer options for customer support than the paid versions, but can still provide an easy solution.
2. Ease of use
Ease of use is a significant factor because you want a program that simplifies what could otherwise be a complex tax preparation process.
Tax software usually comes in two formats: interview style, with question-and-answer choices; or fill-in-the-blank style. In the interview format, a typical question might be, “Have you had any major life events in the past year?” Multiple answers would be provided, such as “Started a business” or “Got married,” to determine any applicable tax breaks or additional forms that might be needed. This format can make tax filing easier because your answers automatically populate the appropriate places on the tax forms. Other software programs may require manually filling out the tax forms with the information provided on your tax documents, such as your gross wages.
3. Accuracy
Besides making it easier to complete taxes, tax software can also give you a more accurate tax return. That’s because the best tax software can offer an accuracy guarantee by the tax software stating that the math calculations completed by the program are correct. The guarantee applies to errors made by the software, not the user.
An accurate return helps decrease the risk of mistakes that could potentially lead to an audit, and improve the likelihood of receiving the maximum amount of deductions and credits—or the maximum tax refund, if warranted.
4. Features and functionality
Some tax software stand out because they offer additional features that benefit the preparer. One feature that streamlines the filing process and makes it easier to file is the capability to file electronically. The way this works is: You first complete the tax return through the software program, then electronically send the return to the IRS through the program. Electronic filing requires no additional work, unlike printing and mailing the tax return.
Some tax software also allows users to import their information from their W-2 and 1099 forms, which report income from an employer or freelance work. Importing can make it easier year to year to bypass having to enter basic information.
Other features include storage capability to save previous tax returns, suggestions for deductions and credits, and programs to file a state income tax return, if needed.
5. Customer support
Tax software usually offers some type of customer support, which can help with technical issues that may arise when using the software. Others also provide tax expert help by phone, email, chat, or, with some providers, in-person assistance. The level and type of support varies by provider and program options, however. For example, self-employed versions might include expert tax help. However, additional support may come with extra fees.
Note that some tax software provides support beyond tax filing. This may include tax professionals to help a filer who is subject to an audit. Keep in mind, you get what you pay for: Free or less expensive programs typically offer little to no customer support. Assessing your comfort level using tax software and how much customer support is needed will assist in narrowing your tax software search.
