It’s tempting to charge a flat fee for tax preparation, but even with the obvious advantages, it’s a big mistake in the long run. Here’s why.
The advantages of charging a flat fee for tax preparation
Charging a flat fee for tax preparation is definitely the easy way to do things.
It’s also great for client goodwill because it creates such a straight forward billing situation. Most clients resent being charged by the hour, and charging a flat amount completely avoids that.
It’s also great for advertising and referral purposes. Potential clients know exactly what they can expect, and current clients will know exactly what they can tell their family and friends when they ask about price.
But despite these advantages, don’t be tempted to charge a flat fee.
Why you can’t charge a flat fee for tax preparation
If you charge a flat fee for tax returns, in the long term, you will end up with a book of business that is a total disaster. That’s because all of the simple, fast, and low maintenance clients will be overcharged and will migrate somewhere else – while all of the demanding and complex clients will be getting a super cheap product at your expense.
Think about it.
Let’s say your flat tax return fee is $350. Why would a single person, with no kids, one W2, a student loan deduction, and a 1099DIV or two ever come to you for tax services? It wouldn’t be difficult for this person to find a preparer to do a return like this for a fee of $200. Also, faced with only very expensive options given the amount of work involved, this person will probably go online and slog through his or her own taxes on their own.
On the other hand…
Let’s say that you have an unorganized and ineffective client, who also emails you several times a month for tax advice about odd and non-related things just because he has your email and because the thought popped up in his mind. This client always has small business adventures going on and needs several Schedule Cs each year with start up cost and hobby rule concerns. Of course he throws his expenses at you in piece meal. Then he has you change the finalized tax return a few times and makes three appointments before the return is finished.
Are you really going to be happy about doing a tax return for this person for $350? No, you are going to be mad and he is going to sense your anger.
If you charge a flat fee for tax preparation, this is what you will end up with. A bunch of complex situations from clients who do not understand efficiency for which you undercharging and will soon resent.
It’s not going to be easy to fix, either. You can’t just go from $350 to $700 in on year with these types of people.
Instead of a flat fee, charge by the form (or maybe by the hour)
Generally, instead of charging a flat fee for tax preparation, charging by the form is the best way to go. There is also the option of charging by the hour – but this is not my preferred choice.
If you are busy and don’t really have time for new clients, then by all means, charge by the hour.
But many practitioners will argue that charging by the hour is a “practice killer”, simply because clients resent it. I know that when my lawyer charges me by the hour, I cringe when I have to talk to her. It’s not that I’m cheap – I understand that she’s worth it – but even still, there is some sort of stress when I know I’m on the clock.
When you charge by the form, however, you get the best of both worlds. You can set a fairly straight forward list of prices that clients will appreciate, plus you will almost always be getting paid for your hard work.
In my personal tax practice, I do this, and I also charge differently for filing status, claiming dependents, and additional states. With that, I don’t have to nickel and dime every form because I’m already getting extra for the situation. For example, if I charge additionally for dependents, that covers forms like child care credit and education credits.
That just leaves me with a simple fee listing for all of the schedules (mostly, except for complex items like the foreign earned income exclusion or FATCA reporting).
As a final note, my engagement agreement also states that I can charge by the hour as I need to to deal with clients who are unorganized or otherwise demand a lot of time. So now I have my bases covered for “those” types of clients as well.
So don’t charge a flat fee per tax return, it will really put you in a bad spot down the road. You can charge by the hour, but generally, charging by the form is the best way to grow your tax practice.