Tax preparation fees

The NSA (National Society of Accountants, not your Uncle Sam) recently released their most recent survey of members in regards to tax prep fees.

If you haven’t seen the data yet, here are the highlights. This year, among the 1300+ practitioners surveyed, the average fee for an itemized 1040 and state return was $261. Tack on an extra $142 to $218 for a Schedule D or C, respectively. Average 1120S fees were reported as $761.

I’m definitely glad to see that average tax prep fees among survey respondents are going up. These fees increased ahead of the CPI inflation rate over last year’s NSA survey.

Here’s what alarms me about the publication of this data, however: At least in various online forums, it prompts fee discussions among practitioners seeking to base their next season fees on these averages.

Right now, in the comment sections of several blogs and on a couple of tax/accounting discussion boards, this survey is causing practitioners to engage in unhealthy discussions about what their fees “ought to be”.

I want to do my part to try and nip this in the bud right now. Let me state right here and now, unequivocally and without apology: Your fees should NEVER be based on what other people charge.

It’s one of the biggest mistakes that ALL business owners make, but it’s especially visible within professional service fields such as our own. In almost every field of endeavor, new business owners look to what their competitors are doing, and base their pricing, marketing, and operations on what everybody else is doing.

That is a completely ridiculous way to run a business.

You already know that I advocate doing marketing in ways that your competitors don’t. But I feel the same way about pricing.

Here’s the bottom line on fees: Your fees should be based on the value that you bring to the marketplace. If your fees are too high, the marketplace will let you know. But it’s better to start high and come down, than to start low and have to fight the uphill battle when you raise fees.

By far the most obvious arena where I see this is in tax prep fees versus hourly rates. Most practitioners have an hourly rate floating around inside their brain, even if they don’t bill by the hour, and this is perfectly fine. The problem comes when their tax preparation fees are significantly less than their hourly rate, regardless of whether that hourly rate is stated or not.

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Here’s an example. Let’s say your hourly rate is $250. Let’s also say that your base rate for an itemized 1040 is also $250, and that you charge an extra $150 for a Schedule C. That’s $400 for this example return. But after all the work that goes into the actual return, particularly on creating a P&L for the C from bank statements and random receipt from your client, you’re actually four hours into this entire return.

At your hourly rate, this should be a $1,000 return. But your fee is only $400. While some practitioners reading this will have charged the client the $1,000, an alarming number of tax professionals will only charge the $400!

If you’re one of the practitioners that would only charge $400 for this return, I want you to go sit in the corner for an hour and think about what you’ve done. 🙂

This is the danger of using survey data and competitive shopping (calling around to other firms asking for price quotes, pretending to be a potential client) for setting your own fees. You think that you’re taking steps to be competitive in the marketplace, but you’re actually just shooting yourself in the foot.

Survey data has it’s place, for sure. As a data junkie, I actually enjoy seeing these numbers. But I caution you against making one of your most important business decisions based on that data. Your fee structure should be based on how much revenue you want to generate, the value you bring to the marketplace, and your target market’s ability to pay the fee. In reality, those are the only three factors that should matter when it comes to setting fees.