Which Is Cheaper: Using An Online Tax Service Or Hiring A Professional?

As the winter holiday festivities wind down to a close, Americans can soon expect to start receiving those pesky W2 forms from their employers. In the case of freelancers or gig economy workers, you'll receive a 1099, while remote workers could find themselves in either camp. In any case, these statements that report your annual income to the IRS are a surefire sign that tax season is fast approaching. 

To get your federal and possibly state income tax returns submitted by the proper deadline, many taxpayers will opt to use popular tax filing software like those from TurboTax or H&R Block, and with good reason. The cost of using online tax preparation software is quite reasonable, ranging between $0 (yes, free) and $179 according to the online accounting service Taxfyle. Plus, the task can be completed from the comfort of home. 

However, what if you're really not good with numbers or simply too busy to use tax preparation software? Or perhaps your tax situation is more complex than average? In those cases, hiring a real live human tax professional is also an option, though you'll typically pay more for the personal treatment.  Per Taxfyle, it costs an average of $273 to hire a certified public accountant (CPA) to prepare your taxes. So while hiring a tax pro will almost surely be more expensive than online preparation methods, that extra cost could be worthwhile to certain Americans.

Just like the fee for using tax software, a tax professional's fee will factor in the complexity of preparing your tax return. For example, whether you own a small business, have multiple sources of income, and whether your state requires an income tax return will affect how much you'll pay. However, unlike software, the accountant's experience level and geographical location will also influence their rate. For example, the elevated cost of living and practicing in an expensive city like New York factors in. 

Although online tax prep software is continually improving, including the introduction of AI features, many CPAs will be quick to point out that their breadth of tax code knowledge is even wider. Not to mention identifying potential tax deductions as a result of a more in-depth personal relationship with the taxpayer. A tax return prepared by a pro is also likely to be free of errors. For example, you could make a typo when inputting data or misinterpret one of the financial questions asked by online software.

As far as cons to hiring a tax pro, besides higher cost, a potential negative exists in that you'll cede control and some understanding of your finances to this individual. As unpleasant as the task might be, filing your own taxes can provide insight into the way that tax laws work and possible steps you can take to shield more of your hard-earned money from Uncle Sam.

In summary, if your taxes aren't overly complicated and you're reasonably comfortable with numbers, do take advantage of free or cheap tax filing software. You might even learn something valuable during this otherwise dreaded right of passage. That said, tax filers who are short on time or lack mathematical skill may be wise to hire a professional. For example, you're having trouble setting aside several hours to prepare your tax return online and the filing deadline is fast approaching. Although filing for a one-time extension is possible, you might opt to enlist some professional help to clear your obligation sooner than later. Especially if you're entitled to a refund. 

Hiring an expert can also make sense if your financial situation is more complicated than average. For example, if you own your own business or have vast investments with strategies like tax loss harvesting in play. As well, consider the value of your time. For high earners, the minor extra expense of turning a stack of papers over to a professional could be a bargain if the alternative of time-consuming self-preparation means considerable lost income. 

As far as locating a reputable tax professional, asking friends, family, and co-workers can be a good place to begin. Your financial advisor or even the staff at your local bank or credit union may also be able to make a recommendation. Finally, the IRS itself maintains a list of tax pros with good credentials all throughout the United States.