Most tax preparers work too hard for what they get paid because they set their fees incorrectly. As a professional you should be charging professional rates. You’ll need to consider what your education, expertise, time, and experience are truly worth. Since your experience and expertise increase each year your fees should reflect your greater value to your clients each year.

You’ll want to set your prices so that they are “in line” with your competition, and so that they will provide you with enough income to cover your expenses and labor. Many tax preparers charge a flat rate fee based on the type of tax return – i.e. 1040-EZ, 1040-A, or 1040 – or based on the “profile” of the taxpayer. Others set their fees based on a set price for the forms and schedules. Still others set their fees based on the number of pages that they have to fill out. For instance, for a 1040-A with no supplemental forms or schedules the fee would be 2 pages X $45, or $90.

While many CPAs charge by the hour, it is usually a bad idea for tax preparers to do so. Have you ever hired a professional by the hour? What goes through your mind when you call them on the phone? How do you feel when you give them work to do? Most clients have a fear of being billed for even casual conversations with professionals billing by the hour. 

There are many different pricing strategies, including:

• Setting a price based on what the competition charges;
• Cost-plus pricing;
• Profile based pricing;
• Forms based pricing;
• Job based pricing;
• Setting a price based on what the market will bear; and
• Setting a price based on the client’s perceived value of the service that you provide.

Most tax preparers either charge a flat fee (“profile” based pricing), or use forms based pricing. If you are going to charge based on the forms you are preparing, your fee may look like this:

• Capital gains and losses
• Divorce during the current tax year
• Income from self-employment
• Gambling winnings
• Home office expenses
• More than two (2) W-2's
• More than two (2) work related expenses
• Moving expenses
• Rental property

You’ll want to decide in advance how much you’ll charge for these situations. It's best not to discuss these additional charges separately for the above situations unless you have already quoted your client a lower price before learning of the situation. When providing an initial quote, just add the charge for any of the above situations to your quote for that profile. There are many other situations that will arise. You'll need to handle those on an individual basis.

The trick in setting your fees is to be a little lower than your competition, but not too much lower. Overprice your services, and prospective clients just won’t be willing to pay for them. Under price your services, and you’ll get a lot of business, but you won’t make any real profit. You’ll need to find that perfect balance, which only you can do because tax preparation pricing is set locally. Many new tax preparers charge around $90 per return. More experienced tax preparers charge $150 per return. In time, as their practices grow, some even charge $200-$300 per return. In order to entice clients away from their existing tax preparer, some new tax preparers charge only half of the average tax preparation rate in their area.

However, discounting prices by a lot, as a means of attracting new business, is usually not a good idea. It can make you look cheap and make it harder for you to increase your prices down the road.

Keep It Simple Stupid!
When people ask you what time it is, are they asking you for the time, or are they asking you to tell them how to build a watch?

In the first few years of your tax preparation business you’ll be completing mostly simple tax returns. Therefore, the pricing method you use should be simple and straightforward – such as profile based pricing. The time will come in the years ahead that you’ll find that you are preparing more and more complex tax returns. At that time you may want to consider adding forms based pricing, or job based pricing (charging an individually calculated price for the whole job, which may take several days), to your profile based pricing to insure that you are appropriately compensated for those complex tax returns. 

New tax preparers often incorrectly try to use forms based pricing. They feel that providing the taxpayer a schedule of forms and prices justifies their fee and shows what a great price they are offering. However, they are misguided. There are two problems with their thinking:

1. Most taxpayers have absolutely no idea what all the forms are, other than Form 1040. Think about it - if the taxpayer knew what all the forms were and what they did, then what would he need you for?
2. The average taxpayer is trying to think of what they paid last year and compare it to your price – which they cannot do by looking at a list of forms and prices. 

The last time you asked the salesman for the price of that television, refrigerator, or automobile, did you really want to be handed the parts list with a price for each part – or were you asking for a total price for the product? We suspect it was the later. So keep it simple and come up with three profiles and what you’ll charge for each of those profiles.

Consider the following important points when setting your fees:

• If your clientele is made up of primarily lower income 1040-A’s and 1040-EZ’s the returns are fairly simple and most taxpayers know that. They just don’t want to deal with IRS forms, and they may not have a computer on which they could do the return themselves. You’ll be able to “mass produce” these simple returns but you won’t be able to charge as much for them. These taxpayers tend to be price sensitive and they shop around. To offset the lower fees however, you can charge for providing tax related bank products. Plus all fees can be deducted from the tax refund, which often will include an Earned Income Tax Credit.
• If your clientele is made up mostly of professionals (1040’s plus several schedules) you’ll be expected to provide a more professional service and this should be reflected in your fees. This group may expect special jackets for tax returns, and PDF copies on CD.
• As you gain experience in the business, and you are less hungry, your fees for new clients should increase.
• Raise fees for returning clients a few dollars each year to keep pace with inflation and the rising costs of payroll, rent, etc. If a client complains just tell them that the cost of living went up. That’s what all businesses do, so it should be no surprise to your client. Your costs went up, why shouldn’t your fees? Over the years your existing clients will probably still be paying less than the “street rate” anyway.
• Failing to raise your fees by say $10, even for just one year, can be very costly over the long run. If you prepare 300 tax returns per year you’ll be losing $3,000 per year for as long as you are in business.
• Taxpayers are aware that if their tax situation changes your fees will probably go up, at least for this year’s tax return. So don’t be afraid to charge more for clients with special needs.
• Tax preparation fees are generally much higher in metropolitan and affluent areas.
• Only give discounts for special reasons, like referrals. Once you give someone a discount for no special reason at all you’ll have a hard time raising his or her fee back up next year.
• The best time to raise fees across the board is when a much publicized tax law change goes into effect. Clients probably heard of the change on TV, radio, or in the newspaper and won’t be shocked by the fee increase. Just be prepared to inform them of the extra work you’ll be doing in case they ask.
• Always be reasonable in your fees. Be prepared to explain the work that you do - to justify your fees, if asked.
• If a client questions your fees tell him you appreciate his concern as it’s his money. Inform him that you needed to raise your prices to offset the new additional costs of IRS examination, licensing, and Continuing Professional education.
• Don’t forget the amount of time the client is saving by not doing the tax return himself.