How Does TurboTax Make Money? Business Model of TurboTax


How Does TurboTax Make Money

TurboTax is a tax-preparing software program that enables consumers to file their taxes electronically. The company uses a variety of business models.

TurboTax primarily makes money from fee-for-service premium tax services. The company also makes money through live assistant tax services, live full service tax support, and a partnership with TaxAudit,

TurboTax was launched in 1984 by developer Michael A. Chipman as a part of a company known as ChipSoft. It was later sold to Intuit as part of a combined ChipSoft acquisition in 1993 for $225 million.[1]

TurboTax, also known as Intuit TurboTax, is a SaaS or Software as a Service product. It is a market leader in the tax software industry for its ease of use and support. It has been ranked Editor’s Choice for best tax software multiple times and is noted for having a 25-year history of excellence, according to PC Mag Review. [2]

What is TurboTax & How Does it Work?

TurboTax is a tax filing software designed for users to file their taxes online. Both business owners and individuals can use its services. TurboTax has a number of different solutions for different income brackets and tax complexity. Using TurboTax’s platform, American and Canadian users can file their taxes at the State, Provincial and Federal level.

Based on data reported by the IRS, “nearly 203.6 million returns and other forms were filed electronically” for the Fiscal Year in 2021. This number makes up nearly 78 percent of all filings.[3]

Users visit the TurboTax Intuit website or download their free app and quickly get an overview of the services offered. They can choose between filing with a tax expert or filing on their own. TurboTax offers financial management solutions on tax filing in a user-friendly interface with either of these selections.

They also offer tax filing software for those who want to upload a TurboTax program onto their computer and manage their tax return from there.

When a customer uses TurboTax to file their taxes electronically, they are guided through the process of filing both Federal and State or Provincial taxes. With the free edition, users just need their tax documents to fill out the questions.

The software can automatically import data from millions of employers and financial institutions based on users’ input. This feature is incredibly helpful to tax filers who have little to no prior knowledge of doing their own taxes. For users who want to write off deductions or report self-employment income, additional forms are needed.

TurboTax also offers significant value via various package options and tiers. These cover almost every type of business and personal tax-filing need. Their individual tax-filer services range from Deluxe to Premier to Self-Employed. Premium features give users various advantages for their specific tax filing requests.

Next to the Basic package, Deluxe is the least expensive option. TurboTax searches through hundreds of possible tax deductions and credits applicable to the filer. Users can also consult with a live tax expert at any time during the process.

The Premier package is the next tier level. Premier offers a valuable option for investors covering investment income as well as cryptocurrency. Premier users also receive expert advice on their investments, such as rental properties. It will also allow users to import income from things like stocks, employee stock purchase plans (ESPPs), and bonds.

TurboTax also offers a specific service for people who are self-employed. This service option is specifically tailored to help small to midsize business owners. The Self-Employed version searches for more than 500 possible tax deductions.

TurboTax is not the cheapest option in electronic tax filing software. For federal and state returns, for instance, packages can run cost up to $100 more than the free version.[4] Finally, they sell tax return software in bulk for those with multiple family members to do returns for.

When it comes to business tax filing software, TurboTax offers two different options. First, they offer a Home and Business option for those who are self-employed or investors. They also have a business version for incorporated businesses.

TurboTax also allows users to easily track how much they donate to charity and claim their deductions with a program called ItsDeductible, which is included in many of their packages. That helps users optimize how they take advantage of their charitable donations.

Still, its user-friendly interface is what wins most users over. The user experience, in-depth explanations of tax topics and virtual support options are unmatched compared to similar software programs. The company also consistently refines TurboTax to improve and maintain user experience, and security measures.

In recent years, TurboTax has been the subject of controversy for deceptive business practices. In 2020, it was reported that an estimated 14 million Americans who paid for a tax prep service like TurboTax, qualified for free tax filing. [5]

The IRS Free File Program is a private-public partnership with tax preparation software companies like TurboTax-owned Intuit, and H&R Block. Under this program, Free File tax filers with an adjusted gross income (AGI) of less than $39,000, active-duty military with an AGI of less than $72,000, and taxpayers who qualified for the Earned Income Tax Credit are eligible to file their taxes for free.

An audit conducted in 2020 explored why so few taxpayers utilized the Free File program. It revealed that companies like Intuit advertise their services in such a way that it directed users away from the Free File program. Likewise, the platform made it hard to get access to the company’s free services by searching via search engines.

Users were, instead, being directed to the commercial editions of these services. Tax filers may have been charged fees for additional services they incurred while filing their tax return forms that were eligible to file for free.

 

Business Model of TurboTax

The business model of TurboTax is based on a freemium model. TurboTax offers simple tax filing features at no cost, to encourage a large number of customers to try them out. They then upsell premium products and services for those with more complex tax filing needs.

The company then provides fee-for-service packages with multiple tier options. These packages offer additional resources and benefits that are not offered in the free edition. Each package option charges a fee annually, so users must pay the fee to use the software service each tax-filing season.

With TurboTax, users can also choose from options based on their individual needs during the filing process. At the lowest cost level, individuals can opt to file their taxes completely on their own. From there, they can add services or products using TurboTax’s tiered services business model.

At the highest cost level, users can opt for a full-service package to hire an expert to file their taxes for them. TurboTax Live Full Service provides a professional CPA to file your taxes from start to finish.

TurboTax makes filing taxes for individuals easy with step-by-step guidance throughout the process. The option of hands-on virtual support and assistance is one of the benefits many users like over other programs. The tax preparation service also equips users with helpful resources such as tax calculator, tax reform resources, and tips and videos at no additional cost.

As a subsidiary of Intuit, TurboTax extends the company’s individual and business financial management product line into tax preparation. Intuit owns the popular accounting software QuickBooks, the budgeting app Mint, and the credit score monitoring website Credit Karma.

TurboTax helps Intuit co-market various services to their customers to improve cross-sell and capture more of their customer’s accounting and tax planning dollars.

TurboTax has a number of competitors, such as H&R Block, Tax Act, and IRS Free File. Much like TurboTax these tax software companies allow users to file their taxes electronically.

H&R Block similarly offers tax filing services with category-tailored considerations. While its services do run cheaper than those offered by TurboTax, what H&R Block doesn’t offer is itemized deductions and similar benefits on expenses that freelancers might have.[6]

TurboTax has significant direct and indirect expenses. Its parent company, Intuit, pays for things like product design, staffing, marketing, and general administrative costs. This added up to $7.1 billion in 2021 and $5.5 billion in 2020.

The company increased their revenue from 2019 to 2021 going from $6.7 billion in revenue in 2019 to $9.6 billion in revenue in 2021.[7]

 

How Does TurboTax Make Money

TurboTax makes money in four different ways. These are from providing tiered tax filing support, live assistant service, full-service filing, and through a partnership with TaxAudit.

While Intuit is a public company, it does not break down how much TurboTax makes from its different revenue streams.

Tax Filing Software

Whether via a program installed on a user’s computer or via TurboTax’s website, the company provides software that help businesses and individuals file their taxes.

For individuals who wish to file their taxes themselves without the assistance of a tax professional, TurboTax offers three tier levels: Deluxe, Premier, and Self-Employed. Each tier level offers additional features for writing off deductions, filing for rental properties, or filing self-employment income.

For businesses, they offer a home and business and an incorporated business option. They also offer a deal for people who want to do multiple returns.

Users simply answer a few survey questions regarding their financial situation. TurboTax finds the right forms for your needs. They provide directions and guidance to walk users through on most tax forms.

TurboTax Charges $59 for their Deluxe service, $89 for their Premier service, and $199 for their Self-Employed service. They charge $170 for TurboTax Business software and $120 for TurboTax Home and Business.

 

TurboTax Live Assistant Services

Another option users can choose from when filing their taxes through TurboTax is the use of their Live Services. TurboTax Live provides professional CPAs their customers can hire to assist during the process when filing their own taxes.

They can ask them questions and get advice. The tax expert can easily be accessed via their website and app. Users can choose to chat with them via chat messages or set up a video call.

TurboTax Live Full Service
For individuals or business-owners that wish to hire a professional CPA, TurboTax Live offers a full-service option. TurboTax matches them with the right expert given their specific needs and that person then handles everything for the user.

Unlike many other services, taxpayers can get tax filing help without having to meet in person. They send over the information electronically and meet over a video call.

 

TaxAudit Partnerships

TurboTax also makes money through a partnership with TaxAudit. TurboTax Audit Defense is a monitoring service. Users can purchase the Audit Defense feature for each tax return filed. It will provide support to manage tax audits should they occur.

 

TurboTax Funding, Valuation, and Revenue

TurboTax is currently a subsidiary of Intuit (INTU). Intuit is a public company that trades on the NASDAQ exchange. There isn’t publicly available data on how much TurboTax earns separate from Intuit.

It is also unclear what the TurboTax’s valuation is currently. It was acquired by Intuit in 1993 for $225 million but has likely increased significantly in value since then.[8] Intuit was valued at $118.49 billion in August 2022. It is also unknown what kind of funding ChipSoft raised in the nine years prior from the acquisition made by Intuit.

In 2021, Intuit reported a 25% increase year-over-year with total revenue of $9.6 billion.[9] The company made $2 billion in net revenue that year. That was a modest increase over previous years where the company made $1.8 billion in 2020 and $1.5 billion in 2019. [10]

Despite those small income gains, the company has increased revenue significantly during that same period going from $6.7 billion in revenue in 2019 to $7.6 billion in revenue in 2020 to $9.6 billion in revenue in 2021.[11] That was an almost $3 billion increase in revenue over 2019 with a small $500 million increase in net income.[12]

YearTotal RevenueNet Income
2019$6.7 billion$1.5 billion
2020$7.6 billion$1.8 billion
2021$9.6 billion$2 billion

 

Is TurboTax Profitable?

TurboTax is profitable. However, it is unclear how profitable TurboTax’s business model is due to lack of publicly available data on its financials. Because TurboTax is a subsidiary of Intuit, the company rarely lists specific data about how much TurboTax makes independent of Intuit’s broader financial results.

Intuit had slowly increased their revenue from $6.7 billion in 2019 to $9.6 billion in 2021. That worked out to a $500 million increase in net income over the same period. How much of that income growth comes from TurboTax is unclear.[13]

 

Conclusion

Thanks for joining us for this blog about TurboTax, the behemoth tax preparation software that has become a household name. We hope you learned something new and enjoyed our take on the business model behind TurboTax.

The tax preparation industry is expected to grow in the future, driven by both an increase in e-filing and an increase in self-employed individuals who need to file taxes themselves instead of using a tax preparer.

TurboTax has been able to capitalize on these trends by offering a streamlined user experience, which makes it easy for customers to navigate through the process of filing their taxes without having to worry about learning how their software works or paying exorbitant fees for additional features they don’t need (like audit protection).

As more people become self-employed or decide to do their own taxes instead of hiring an accountant every year, TurboTax’s user base will continue growing—and so will its profits!

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Sources

  1. LA Times
  2. PC Mag
  3. IRS
  4. Business Insider
  5. ProPublica
  6. Ask Money
  7. Intuit
  8. LA Times
  9. Intuit
  10. Intuit
  11. Intuit
  12. Intuit
  13. Intuit