Tackling tax accounting yourself, or using an agency? Here's what you need to know.
If you need a little help with your tax accounting, you’re not alone: 65% of businesses need full-time, professional support to ensure they’re compliant with tax regulations.
Whether you’re trying to handle tax accounting on your own or looking to hire an outside firm, it's important to understand the purpose of tax accounting, various tax accounting methods, and how it differs from financial accounting.
What is tax accounting?
Tax accounting focuses on preparing, planning, and analyzing tax-specific accounting issues. At the heart of tax accounting lie tax laws and guidelines, and accountants use these to decide how to handle their clients’ accounts.
For example, a tax accountant may keep an eye out for regulatory changes regarding the kinds of deductions a business can claim in order to categorize expenses and maximize savings.
Tax accounting vs. financial accounting
Tax accounting focuses entirely on helping individuals and businesses meet their tax obligations and reduce tax liabilities where possible. Financial accounting aims to enhance the accuracy and transparency of financial reports.
Tax accounting solves a foundational business problem: How do you satisfy your tax obligations without overpaying? A tax accountant understands each savings opportunity and ensures businesses take advantage of as many as possible. A financial accountant focuses more on making things clear for regulatory purposes, investors, and decision-makers.
Types of tax accounting
While everyone’s tax accounting is unique, you can group the discipline into two buckets: individual and business tax accounting.
Individual tax accounting
Individual tax accounting refers to taxing a person’s income while factoring in deductions, liabilities, and credits. A tax accountant hired by an individual prepares their client's tax returns and endeavors to find ways to reduce the amount they owe the government.
For those owed a refund, accountants also seek to maximize the amount those clients get back from the government. They may also recommend ways their client can reinvest those funds, perhaps putting them toward future tax obligations.
Individual tax accounting experts can also assist with tax planning. For instance, suppose you want to reduce your tax burden but haven’t been able to figure out how to do that. A tax accountant may recommend that you:
Increase the amount of money you contribute to your retirement account
Put some of your money into a health savings account
Put more money toward a 529 college savings account
Narrow your search for accounting firms with our list of companies in the following areas:
Business tax accounting
Business tax accounting shares some of the same objectives as individual tax accounting, but there are unique considerations to consider.
Business tax accountants typically make sure their clients:
Comply with tax laws. This involves filing a range of forms, such as those dealing with sales tax and payroll, and accurately calculating each business’ tax liabilities.
Choose the right business structure. Each business structure comes with different tax implications. For example, corporations may pay more or less taxes than those structured as partnerships.
Plan for future tax issues. A tax accountant helps businesses make decisions that enable paying less taxes in the future. For example, investing in business trips to meet prospective clients in person may come with more tax deductions than if the company spent the same amount of money on online marketing.
Have representation during audits. If a company is audited, a business tax accountant can represent them and help them meet the audit’s requirements. In some cases, they may even be able to uncover additional tax savings during the audit process.
Why is tax accounting important?
Tax accounting can help you meet your tax obligations while simultaneously relieving your tax burden.
More specifically, tax accounting is crucial for businesses that want to:
Reduce their tax obligations using tax planning. Whether it’s how you invest in your business or how you categorize depreciating assets, a tax accountant can pave a clear path toward future tax savings.
Comply with tax requirements. An accountant can ensure you comply with tax laws to avoid penalties and audits.
Ensure an ethical, fair public image. If a business skirts its tax obligations and the public and investors find out, it can tarnish its image and reputation. Proper tax accounting can prevent errors—intentional or not—which, in turn, reduces risk of financial-related harm to its public image.
Evaluate investment opportunities from a tax standpoint. Two investments with the same gross yield can have different impacts on how much tax you owe. Tax accounting can help you work through issues such as when to liquidate investments to reduce capital gains taxes.
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An example of how tax accounting can help boost your bottom line
Suppose you’re running a fulfillment business where you store goods and prepare them to be shipped out to online customers. Your company has been meeting its revenue goals and hasn’t been over-investing in overhead.
Half of your team wants to invest some surplus revenue in real estate, while half would rather hire more staff to improve productivity. Both strategies can result in more income, but they have different tax implications.
Your tax accountant advises you to hire more employees rather than invest in real estate. Here are some of the reasons they provide:
When you hire new employees, you can deduct many of your expenses, such as wages, employee-connected expenses, benefits, and payroll taxes. This makes the cost of each employee lower than their salary figures may indicate.
If your real estate investment depreciated, you could get a tax break, but that’s unlikely in your area, where real estate tends to appreciate in value.
In your jurisdiction, you can get a tax credit for hiring veterans, and there are plenty of veterans on the job market. You can save even more on your taxes by targeting them in your recruiting efforts.
In this way, tax accounting empowers you to make decisions that support the long-term financial health of your company.
You can tackle tax accounting in-house or hire an outside agency
A tax accountant is far more than someone who helps file your taxes. For both businesses and individuals, a tax accountant can identify significant ways to save on your taxes and keep you aligned with local and national laws.
Ninety-three percent of business owners say they have a good understanding of how new tax policies may affect their operations in 2023. If you’re in that 93% and decide to handle your own tax accounting, you put yourself in a position to significantly improve the cash flow of your business. At the same time, handling your own tax accounting could take considerable time and energy, so many turn to professionals instead.
If you’re considering hiring a tax accountant, these resources will help you make the best decision for your business: