We’ve all heard of Certified Public Accountants (CPAs), but what is a CPA? What can a CPA do to help you with taxes? These are both important questions to answer before you consider looking for one.
I started working at a CPA firm about two years ago. Since then, people often ask what I do at my job. “Taxes” just isn’t a clear enough answer.
I don’t blame them. Before I started my job, I didn’t know the answers to any of these questions either, and I took college courses in accounting.
Imagine me, bright-eyed after getting a job offer at a CPA firm, realizing I had no idea what the hell I’d be doing 40 hours a week. I was more than a little nervous.
Now that I’ve been enlightened, it’s time I share these deep, dark secrets with the rest of the world.
What Is a CPA?
All CPAs are accountants, but not all accountants are CPAs. There are Enrolled Agents, Certified Managerial Accountants, bookkeepers, and so many more.
Each type of accounting professional has its purpose, but CPAs are the holy grails of accounting.Tweet This
Just a few of their career options include working as forensic accountants, Chief Financial Officers (CFOs), and tax preparers. Some public accounting services offered by CPAs and accounting firms include:
- Tax preparation and planning
- Financial statement preparation and auditing
- Small business consulting services
- Retirement planning
- Payroll processing
- IRS representation
Accountants become CPAs when they have a license, the specifics of which are determined by individual state boards of accountancy. Common licensing requirements include:
- A bachelor’s degree plus an additional year of schooling
- Professional ethics training and/or an ethics test
- One or two years of work experience
- Passing a four-part accounting exam (which currently has about a 50% pass rate)
The requirements don’t stop there. Once someone passes the CPA exam, they have to take professional education courses every year. These education requirements keep your CPA up-to-date on all the riveting changes to tax laws.
Because of how hard it is to earn a CPA license, you can put your trust in a CPA. They have to follow strict standards, and they can lose their license for fraudulent activity.
An even greater indication that your CPA is trustworthy is if they’re a member of the American Institute of Certified Public Accountants (AICPA). The AICPA is the largest association for CPAs in the United States.
Membership means accountants have to follow the Code of Professional Conduct, so they’re holding themselves to an even higher standard (#overachievers).
Do You Need One?
One of my college professors used to say every person needs the three A’s: Accountant, Attorney, and Agent (as in insurance).
My one exception is that not everyone needs an accountant, but many people do. A good rule of thumb? You probably need a CPA if your income tax situation requires more than the most basic package of DIY tax software (usually called the “Free” version on sites like H&R Block).
Think of it like going to the doctor. Sometimes you’re carrying too many Whole Foods bags on your bike, and you take a tumble.
If it’s not bad, you can patch yourself up at home. No worries. But sometimes you’re not so lucky, and you need to see a doctor for stitches. It’s going to cost you, but you need their expertise to make you whole again.
The same thing applies to taxes. Some people can do everything at home, and others need to pay for the skills a CPA has.
If you’re in the market for a CPA, always trust your gut. If you meet with someone and don’t feel like they’re a good fit for you, move on to the next one.
The CPA or CPA firm you choose can make a monumental difference in your life, so be as diligent as you would be if you were searching for a family doctor.
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How They Can Help
1. Peace of Mind
CPAs give you peace of mind for two reasons: They know what they’re doing, and you don’t have to do your own taxes.
It’s estimated that it takes an employed individual about 8 hours to do their taxes, and self-employed people take 24 hours to do their taxes. 24 hours.
Those are hours filled with stress. You’re stuck trying to figure out what all your forms mean and wondering if you’re going to make a mistake that’s going to get you audited.
This is where CPAs come in handy. They’re not perfect, but they’re less likely to make mistakes than the average person.
The only downside is the price. For people who take the standard deduction, the average price is around $175. If you itemize your deductions, it’ll add an extra $100 for an average fee of around $275.
But these fees mean you don’t have to spend your weekend sifting through all that nonsense. You can just submit your documents, live your best life, and wait for the results.
And you don’t have to worry that you botched your taxes. Your CPA wants to keep you happy, so they’re going to make sure they’re doing everything possible to minimize your taxes (while still being legal).
Your CPA knows you, and they know taxes.
It’s easy to forget important forms when you’re doing your taxes. They can get lost in your junk mail or kicked under the fridge like that piece of ice we’re all too lazy to pick up.
A good CPA will compare this year’s taxes to the prior year. They know what forms you had last year, and they should contact you with any questions they have about any missing information.
They also know what forms to look for when you have a new situation. If your kid starts college, they’ll know all about education credits, which ones you qualify for, and which documents you need to support those credits.
This support doesn’t just end with tax season. They’re working year-round to make sure they’re doing your taxes right.
Remember how we said CPAs have to take continuing education courses to keep their licenses? Well, these courses talk about changes that the regular news doesn’t cover and is so boring no normal person would want to read about it in their free time.
But CPAs aren’t normal people. They’ll get this education, and they’ll get it with their clients in mind.
Bottom line: You have a better chance of covering all the bases because both you and your CPA will be looking out for you.
3. You Can Ask Questions
Does your refund look different this year? Are you wondering how your side income will affect your tax returns in the future?
You can ask your CPA all these questions and more. Not only will they give you basic explanations, but they’ll give you a personalized response because they know you.
Let’s consider the side income question. You could ask the Internet, and some guy on Reddit will tell you matter-of-factly that you’re going to pay self-employment taxes.
This is true, but your CPA can give you more details. They know what your refund or tax liability was in previous years, so they can give you advice as to whether you’ll need to make estimated tax payments or if your extra withholdings will be enough to cover those taxes.
They can also be your go-to person for all finance and tax matters. If you ask them about those pesky self-employment taxes, you can ask them for help with other self-employment matters too.
They can help you determine if you need to set up a Limited Liability Company (LLC), what expenses you can deduct, how to use QuickBooks for your business, and pretty much anything else you can think of.
4. Audit Representation
IRS audits are real. They’re nightmares. They’re real nightmares.
The good news is audits aren’t very common. You have less than a 1% chance of being audited, but it’s nice to be prepared if it does happen.
If you get audited, you’re going to have so many questions on your mind and a limited amount of time to respond to the IRS. You’re going to need a CPA, enrolled agent, or attorney to help.
If you already have a CPA, that’s one less thing to worry about. They’ll know what to do, and you don’t have to waste any time explaining what your tax situation looks like.
What’s even better is a CPA is allowed to represent you during an audit. This means they can both talk to the IRS and prepare any documents needed.
They’ll protect your rights as a taxpayer and will keep the IRS in check, making a stressful situation feel a little more manageable.
CPAs can do more than just prepare your taxes. They can help plan for next year’s taxes too.
Are you selling your home or rental property? Consult with your CPA. They can help with the structure of the sale. They can tell you which costs to deduct, what kind of gain to expect, and any taxes you might pay on that gain.
If you contribute the maximum amount to your Traditional IRA, would it put you in a lower tax bracket? Your CPA can tell you.
Are you worried about how capital gains from stock sales are going to affect your taxes? Your CPA can determine the number of capital gains you can handle before you jump to the next tax bracket.
This tax planning is often lumped in with financial planning, making CPAs the best advisors for all your money problems.
Bonus: How to Reduce CPA Fees
If you’re considering hiring a CPA but are worried about the fees, you’re not alone.
Many CPAs will bill you for any extra time they have to put towards your taxes, so make it as easy for them as possible.
Does your CPA give you an organizer or a packet of questions for you to answer? Fill this out. This will give them most, if not all, of the information they need in the format they want.
Eliminate unnecessary work. You don’t need them to total your receipts for all the meals you ate while you were working for your business. You can do this. It takes time, but it’s not hard. A kid could do it.
In fact, tell your kids to work on their math skills and make them do it. Get them started on taxes while they’re young.
All joking aside, only give your CPA the hard jobs. Do your best to give them everything they need without giving them too much unnecessary information at the same time.
CPAs are total ballers. Like any professional, they earn their fees by providing a service, and the services they provide often save you money.
The biggest benefit of having a CPA is that they’re going to take away your stress and provide you with more information than you could ever hope (or want) to learn on your own.
If you’re going to hire a CPA, ask if they do taxes for people similar to your situation. Do they have clients in your line of business? Are they familiar with newer investments like cryptocurrency?
Ideally, you’ll be able to keep the same CPA or CPA firm for the majority of your life. You don’t want to dread meeting with your CPA, so make sure they’re someone you like and trust.