Many tax preparers don't charge enough for their services. A tax return preparer has two things to sell: time and value.
Pricing Your Time
Time is extremely limited. There are only about eight hours in an honest working day, and part of those hours are spent doing mundane office administration that you can't charge anyone for. So you're lucky if you can bill six hours out of eight.When you quote hourly rates to most people, the first thing they'll do is compare your rate to what they earn on their job. If they earn $25 per hour and you quote a rate of $175 per hour, it can be sticker shock for most folks. It's often better to quote a fixed fee up front, so there are no surprises.
Still, it's good to have some minimum hourly rate in the back of your mind so you don't under price yourself. Let's say you want to have $100,000 in gross billings for the year. Assume you'll be working all year, that you are a sole proprietor, and that you reasonably expect to bill 25 hours of your time per week. The rest of the time is sales and marketing, administrative duties and other non-charge time. Let's say you'll take four weeks vacation time. That's 48 weeks at 25 billable hours per week, which equals 1,225 billable hours per year. If you divide $100,000 by 1,225 you find that you'll need to price your time at about $82 per hour to reach your goal of $100,000. That would work out well for a sole practitioner working from home. If you will be working out of an office, you might need to add another $25,000 making it say, $100 per hour.
Value Billing
Value, on the other hand, can be priced much higher than time. Let's say you have an hour-long meeting with a client, and after looking over their information and interviewing them, you discover a way to save them $3,500 in taxes each year over the next 5 years. That's a total savings of $17,500. How much are you going to charge them for that? Your hourly rate? Put yourself in your client's shoes. How much would you pay someone to put $17,500 in your pocket? I'm thinking $1,500 would be quite reasonable. That's not bad for an hour's work. Sure beats your hourly rate! And you have a happy client!Calculating fees is more of an art than a science, so some combination of hourly billing and value billing is usually called for. The more experience you have, the higher your hourly rate can be, and the more value you can bring to your clients that will justify very high rates.
Here's an example of how value billing might work: Each year you spend a few minutes identifying which clients may be in a position to qualify for certain credits, retirement plans, or other tax-saving opportunities. When you meet with your client, tell them that you've come up with a way for them to save, say $15,000 in taxes over the next three years. Tell them that you'll tell them what the idea is, and if they decide to use your idea, they owe you $1,500 for your advice. Otherwise, if they decide not to use it, they owe you nothing. Of course your idea would have to be something that would have to be set up. It would have to be a strategic plan that calls for action above and beyond what any preparer would do for a client during the ordinary course of preparing a tax return. That's where specialized knowledge pays off.
Structure your practice to maximize your billing rates where possible. For instance, many tax preparers don't do bookkeeping. It's hard to bill more than $40 per hour to do bookkeeping. It's very time intensive and requires a lot of back and forth with the client. And, the perception of value received is very low from the client's perspective.
One of the problems with the tax return preparation business is that it is seasonal. Not everyone likes that. One way to get around that is to work on a monthly retainer and provide year-round value to clients. Not every person needs this much access to their tax planner / preparer, so you'll need to find clients who see the value of a close working relationship with their tax adviser. Many people would prefer to pay a modest monthly fee rather than get hit with one big bill on April 15th.
It is important to understand that when you are first starting out, value billing may not be part of the equation for you. Reasonable hourly rates and flat-fee billing will be the norm. As you gain expertise and experience, keep your eye open for value billing opportunities. Meanwhile, learn how to be the best tax adviser you can be and learn how to put "value billing" to work in your practice.
