How to Start a Tax Practice
Step 1 — Licensing and Credentials
| Credential | Issuing Authority | Requirements | Annual Cost | Scope |
|---|---|---|---|---|
| PTIN (required for all preparers) | IRS | $19.75 registration fee; no exam | $19.75/year | Required to prepare any federal return for compensation |
| Enrolled Agent (EA) | IRS | Pass 3-part SEE exam; 72 CPE/3 years | $0 (IRS-issued) | Unlimited practice before IRS; no state restrictions |
| CPA | State Board of Accountancy | 150 credit hours; pass CPA exam; 1-2 years experience | $100-$500/year | Unlimited practice; audit authority; state-licensed |
| Tax Attorney | State Bar | JD degree; pass bar exam | $300-$600/year | Unlimited practice; attorney-client privilege |
| Annual Filing Season Program (AFSP) | IRS | 18 CPE hours/year (including 6 ethics) | $0 (IRS-issued) | Limited representation rights; not full representation |
| State preparer license | State (CA, MD, NY, OR) | Varies by state; exam + CPE | $25-$100/year | Required in some states to prepare returns for compensation |
Source: IRS Publication 947; Circular 230 §10.3; Rev. Proc. 2014-42
The EA vs. CPA decision: For practitioners focused exclusively on tax, the Enrolled Agent credential is often the better choice — it is less expensive to obtain, has no state restrictions, and provides unlimited practice rights before the IRS. The EA exam (Special Enrollment Examination) has three parts: Individual Taxation, Business Taxation, and Representation/Practice/Procedures. The pass rate is approximately 70% per part. Many successful tax practitioners start with their EA and add a CPA later if they want to expand into audit, attestation, or financial statement services.
Step 2 — Business Structure and Setup
| Business Structure | Liability Protection | Tax Treatment | Best For | Setup Cost |
|---|---|---|---|---|
| Sole proprietorship | None | Schedule C | Solo practitioners just starting out | $0-$100 |
| Single-member LLC | Yes (limited) | Schedule C (default) or S-Corp election | Solo practitioners wanting liability protection | $50-$500 (state filing) |
| S-Corporation | Yes | Pass-through; salary + distributions | Practitioners earning $80,000+ net | $500-$2,000 (setup + election) |
| Partnership / Multi-member LLC | Yes (limited) | Form 1065 (pass-through) | Two or more practitioners | $200-$1,000 (state filing) |
| Professional Corporation (PC) | Yes | C-Corp or S-Corp election | CPAs and attorneys (required in some states) | $500-$2,000 |
Source: IRC §1361; §1362; §7701; Rev. Rul. 59-221
If you plan to elect S-Corp status for your LLC, the election must be made by March 15 of the tax year for which it is to be effective (for calendar-year taxpayers). A late election can be made with IRS relief under Rev. Proc. 2013-30 — but it is better to plan ahead. The S-Corp election typically saves $5,000-$15,000/year in self-employment taxes for practitioners earning $80,000-$300,000 net. The key: you must pay yourself a 'reasonable salary' — typically 40-60% of net income — and take the rest as distributions not subject to SE tax.
Step 3 — First Clients: The Fastest Paths to Revenue
| Client Acquisition Channel | Time to First Client | Cost | Expected Conversion Rate | Notes |
|---|---|---|---|---|
| Personal network (friends, family, referrals) | 1-4 weeks | $0 | Very high (50-80%) | Best starting point; warm leads; no cost |
| Uncle Kam marketplace listing | 1-2 weeks | Free to join | High (30-50%) | Clients actively searching for tax professionals |
| Google Business Profile | 2-8 weeks | $0 | Medium (10-20%) | Free; takes time to build reviews |
| Referral partnerships (bookkeepers, attorneys, financial advisors) | 4-12 weeks | $0-$500 (networking events) | High (40-60%) | Long-term highest ROI channel |
| Facebook/Instagram ads | 1-4 weeks | $500-$2,000/month | Low-medium (5-15%) | Good for volume; expensive; requires ad management |
| Tax season pop-up office | 1-2 weeks | $500-$2,000 (space rental) | Medium (20-30%) | Good for volume; limited to tax season |
Source: NATP Practice Management Survey 2024; AICPA PCPS Survey 2024
The referral partnership strategy: The highest-ROI client acquisition strategy for a new tax practice is building referral partnerships with bookkeepers, financial advisors, estate attorneys, and business attorneys. These professionals serve the same clients you want — and they are not competing with you. A single good referral partner can send 5-20 clients per year. The key: provide exceptional service to the first referral, then ask the partner for a formal referral arrangement. Offer to reciprocate with referrals from your own client base.
Step 4 — Pricing Your Services
| Service | Beginner Rate | Experienced Rate | Expert Rate | Notes |
|---|---|---|---|---|
| Individual return (1040, no schedule) | $150-$250 | $300-$500 | $500-$800 | Complexity-based pricing is better than flat rates |
| Individual return (1040 + Schedule C) | $250-$400 | $450-$700 | $700-$1,200 | Add $50-$150 per additional schedule |
| S-Corp return (1120-S) | $500-$800 | $800-$1,500 | $1,500-$3,000 | Include payroll review in price |
| Partnership return (1065) | $600-$1,000 | $1,000-$2,000 | $2,000-$4,000 | Complexity varies widely |
| C-Corp return (1120) | $700-$1,200 | $1,200-$2,500 | $2,500-$5,000 | Rarely worth doing for small corps |
| Tax planning consultation | $200-$400/hr | $300-$500/hr | $500-$750/hr | Highest margin service |
| IRS representation (per hour) | $150-$250/hr | $250-$400/hr | $400-$600/hr | Specialized; high value |
Source: NSA Fee Study 2024; NATP Fee Survey 2024
The math: 80 individual returns × $350 average = $28,000. 15 business returns × $1,200 average = $18,000. 10 tax planning clients × $1,500/year = $15,000. 5 IRS representation cases × $3,800 average = $19,000. Total: $80,000. This is achievable in year one for a practitioner who actively markets their services and builds referral partnerships. The key is to avoid underpricing — many new practitioners charge 30-40% below market rates out of fear of losing clients. Price at market rates from day one.
Frequently Asked Questions
You must have a PTIN (Preparer Tax Identification Number) to prepare federal tax returns for compensation. This requires a $19.75 registration fee. Some states (California, Maryland, New York, Oregon) require additional state preparer licenses. To represent clients before the IRS, you must be an Enrolled Agent, CPA, or attorney.
The EA exam (Special Enrollment Examination) has three parts. Most candidates pass all three parts in 6-18 months. The exam is offered year-round at Prometric testing centers. Study materials cost $300-$800. The IRS does not charge for the EA credential itself — only the exam fees ($182/part).
For a new practice with under 50 returns, Drake Tax ($1,695/year) or TaxSlayer Pro ($1,495/year) offer the best value. For practices with 50-200 returns, Lacerte ($2,500-$5,000/year) or ProSeries ($2,000-$4,000/year) are popular. For practices focused on advisory services, CCH Axcess or Thomson Reuters UltraTax are the gold standard (but expensive: $5,000-$15,000/year).
A realistic first-year revenue target for a solo practitioner is $50,000-$100,000. The key variables are: (1) number of clients; (2) average fee per return; and (3) whether you offer year-round services (tax planning, IRS representation) or just tax season preparation. Practitioners who offer year-round services earn 40-60% more than those who only prepare returns during tax season.
Most new practitioners start from home to minimize overhead. A home office is fully deductible (IRC §280A) if used exclusively and regularly for business. As your practice grows, consider renting office space — clients often perceive office-based practitioners as more professional. A shared office space (WeWork, Regus) costs $300-$800/month and provides a professional address without a long-term lease.
Start with your personal network: friends, family, former colleagues, and neighbors. Offer a 20% discount for first-year clients who refer others. List your practice on Uncle Kam and other directories. Build a Google Business Profile. Partner with bookkeepers, financial advisors, and estate attorneys who serve the same clients. The first 20 clients are the hardest — after that, referrals become your primary source of new business.
You need: (1) Professional liability (E&O) insurance — $500-$2,000/year for a solo practitioner; (2) General liability insurance — $300-$800/year; and (3) Cyber liability insurance — $500-$1,500/year (critical given the sensitive data you handle). If you have employees, you also need workers' compensation insurance.
The information on this page is intended for licensed tax professionals (CPAs, EAs, and tax attorneys) and is provided for educational and research purposes only. Tax law is complex and fact-specific — all strategies discussed are subject to limitations, phase-outs, and conditions that may not apply to every client situation. Practitioners should independently verify all information against current IRS guidance, Treasury Regulations, and applicable state law before advising clients. This content does not constitute legal or tax advice.
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