The First 5 Steps to Starting Your Own Tax Practice

If you are a tax professional for a big company or a small firm, you might have thought about going off on your own. Here’s what its going to take to get started.

Starting a tax practice – step one – get your CPA or EA credentials

Now is the time, while you are working for someone else, for which to prepare and pass your exams.

When it comes to difficulty and studying requirements, the EA exam is tough, but certainly not impossible to pass.

To get a CPA license requires even more work, but the long-term benefits are greater (of course) than that of just getting an EA rating.

Note that technically you do not need to be either an EA or a CPA, but to put it bluntly, you will make MUCH more money when you become officially qualified.

Since you are going to be spending so much time and energy to start a practice from scratch, it is is a HUGE waste of time, money, and effort not to take that extra step and get rated.

You will have so many dues to pay and time to devote in starting a tax practice, that getting your EA, at the very least, will make it more worth while.

The time it takes to study for and pass the Enrolled Agent Exam is only a small percentage of the many tasks that await you on your journey to owning a successful tax practice. It’s sort of a waste to go through all of that work and trouble just to end up with mediocre results as an un-rated tax professional.

Starting a tax practice – step two – ride out any non-compete agreements

A non-compete agreement is perhaps the biggest barriers to starting out on your own. If you can’t “hang a shingle” or advertise to get clients for two years, how are you going to make money to pay your personal bills?

To ride this out, you will probably need to find a job that does not involve taxes for a year or two. You may be able to find a CPA or EA to work for who will not make you sign an agreement if you agree not to take his or her clients and they trust you.

You also might request from them that you will only sign an agreement saying that you will not take THEIR clients, but that you can open you own office after you resign.

It can’t hurt to ask.

It is my official advice that you follow your non-compete agreements to the letter and that you do not start practicing on your own at all until the time is up.


I’m not a lawyer, but from what I understand is that an agreement that states you cannot work anywhere else int he same capacity is one that is hard to enforce.

So if you do put yourself out there a bit, do so quietly, and do NOT steal ANY clients from your recent employer under any circumstances. In this case you should be OK. Just give out your cards to people here and there to get a few new clients as a base.

Of course, if you are breaking the law you do so at your own risk – don’t blame me if it works out bad for you.

NEVER would I advise on stealing client’s however, and I mean NEVER!

It is unethical, underhanded, illegal (if there is an agreement), and it will only do you harm, not good.

You will be able to get PLENTY of your own clients, believe me.

If a client from your former employer seeks you out, decline to help him or her in the first 2 years. After that, I think it would be OK to serve them if they came to you.

In some cases, there are geographical limits on these agreements, such as is often the case with the big retail tax firms. In these cases, tell your employer that you are moving, and get a transfer with them at an office a couple of counties away from your home. You will have to deal with a 60-90 minute commute for two years or whatever, but this will be worth it.

In any case, if you are waiting out an agreement, do not sit idle. Set up your brand name and your business cards. Print up flyers and other literature.

Build your website!

This is important because it takes 6 months to two years to realize your potential rank in search engines, etc. You will also want to establish an email address, of course.

Finally, I can’y put enough emphasis on blogging about taxes, mostly of which should be local to your area. This will catapult your search engine results (after a year or two) and you will enjoy a steady stream of new clients for FREE.

I rode out a no-compete agreement for two years and I wrote tax articles the entire time. When I did finally hang my shingle, I had 250 clients in my first year and 600 in my second. I feel like most of this rapid growth was due to my blogging efforts.

Another idea to deal with a non-compete agreement that is geographically specific is to form a website and advertise outside of the area in which you agreed not to practice.

For example, if you are not allowed to compete in Los Angeles County, start a website called “Orange County Online Tax Services”. Check carefully with the details of your agreement before you do something like this.

Starting a tax practice – step three – find reasonably priced tax software

I suggest that you set up your new business with as little capital and overhead as possible at first.

You are certainly going to need good preparation and e-filing software, however and this will be money well spent. Do not plan to use an online filing company for individuals like Turbo Tax or Tax Slayer.

I personally use Drake Software and I find it to be cheap, professional, and they have excellent support. You will also want to go out and become an “ERO” so you can e-file tax returns. Click here for the IRS instructions on becoming an e-filer.

Do not skimp out in these areas.

Be sure to be legitimate right form the start with your software and your e-filing. As a third party for hire, using software that is designed for individuals is not professional and in many cases may not be legal.

Starting a tax practice – step four – build clients from home for a couple of years before committing to an office

first steps in starting a tax practiceThere is no shame in this and do not be shy about it.

Yes it is true that some new clients will not like that you work from home and do not have an office, but many will not care.

Just be honest.

I used to be very self conscious about this and I think my own apprehensions prevented some of my new sales. That was silly, looking back. If someone cares that you don’t have a real office then, “fine”, next client.

But most of your new clients will not care!

As I became more confident, I started being very straight forward and outgoing about this. I would tell new clients, “no, I don’t have an office yet, but I plan to get one soon. In fact it is my dream to have my own brick and mortar firm and it is one that I’m sure I will realize. IĀ ask you for you help in this and if you believe in me early on as one of my core clients, I will never let you down”.

Seldom was this an issue and in my first year from home I prepared and filed over 100 tax returns. Do the math on an average of $300 per return. Yes that is $30,000 in three months. Not too bad a start and without an office and for when I had super low overhead.

Speaking of numbers, the most common mistake here is to be too cheap. Do NOT think for a second that you are not worth an average price (do a search for average prices). I see so many new practitioners make the mistake of not charging enough from the start. They figure that people will not pay them $350 for a tax return like they would pay H&R Block.

I have some very important news for you – they certainly WILL!

Price should depend on complexity, of course, you cannot charge $350 for a 1040EZ. My prices would range form about $100 to $500, depending on the return.

There are two huge problems with being too cheap. One is that you will work too many hours for not enough money, and two is that the type of clients you get will be “the most unreasonable people on the planet” and your new life as a practitioner will be miserable.

I personally love it when I lose sales because I won’t give a discount or I’m too expensive or whatever (I am quite sure that I am not too expensive) because I know I just fended off a probably trouble maker.

I don’t have time for trouble makers, and you must believe that it will not take long before you won’t either. Disengaging with bad clients is also a pain in the neck as they tend not to take it well. Do not compromise your values to make a quick $150. Consider the rapid success that waits just in front of you and save yourself the stress.

Starting a tax practice – step five – start with the smallest office you can find

Once you have a client base like this you can go out and rent an actual space. Just make it as small and as inexpensive as possible. Try not to sign more than a two year lease (things will grow fast for most new practitioners) unless you are in a building where you can move to a bigger space by amending your lease.

If you have 100 clients to start, built up from when you didn’t have an office, you should be able to get to 250+ clients in your first year with an office. If you gross $75,000 in the first year and your expenses are $25,000, hopefully you can meet your personal expense obligations at least for another year where your take will be much better.

Remember, you might have to pay for some advertising at first, and that your expenses will actually end up being whatever-you-figure plus 50%, trust me on that one. If you figure $20,000 in expenses, plan on $30,000 plus!

There are alternatives to starting your own practice

I’m not going to lie to you, wearing all of the hats of the tax practitioner is going to be a LOT of work.

You will be totally married to your new business. No one is going to do anything for you, things will always be going wrong with no one to turn to to fix them, there are a ton of things to worry about and take care of, expenses (as I mentioned) will be insanely high, and you are taking a massive capital and time risk.

Instead, if you feel for one second like you might not be up for this task, is to find someone that has already set up a firm, and negotiate with him or her. Her’s how to do it. Find a practitioner and tell them you want an office and you will give them 50% off ALL of your business. Tell them you will sign exclusivity and non-compete agreements and that you promise not to take any clients if you ever leave – which is not likely anyway.

Assure him or her that every single tax return or work that you do for clients will be on the record and that he will be sure to get his 50% in every case. In exchange for that you get the office, phones, receptionist, software, printers, office supplies, emails, computers, your share of the new clients when they call, credit card merchant and banking support (your clients write the checks to him or her), and so on.

Basically, you give him or her 50% in exchange for everything. Is this a good deal for you? You bet it is. You get a turn key practice set up, with a stream of new clients, all at a price of LESS than what it would cost you to do it by yourself, but you do not suffer the risk and the time commitments of owning a practice.

Is it a good deal for the owner?

Again, yes it certainly is.

He or she gets 50% of your revenue, minus the cost of the additional office space and office supplies (and a bit of the share of reception labor, merchant fees, etc). All in all he or she should be keeping 25% or so of the total labor as net profit for doing nearly nothing additional that he does not already do. That’s a pretty good deal. Presenting such a win/win situation might be you answer.

If you are in Hawaii and this interests you, please send me an email.

Here is our complete guide to starting and managing a tax practice.

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