Charge What You’re Worth. But How?

I’ve fired a couple of clients already this tax season. If you are a taxpayer you may be scratching your head. It’s important to understand that some #taxpros work on a retail, volume-based business model where typically any paying client is a good client. Those are what I refer to as “transactional” tax shops. Others, like Tax Therapy, operate as “relationship” shops. We want to be a trusted partner in your success over the long term. So what does that have to do with firing clients? Well, I fired the clients because they complained about the prices I am charging. I am a small shop that provides year-round, personalized service. I am not a volume-based shop that is simply doing as many tax returns as I can from January through April and then closing my doors to count my cash (there’s nothing wrong with that, it’s just not how I roll). The price I charge for a tax return is based on many things including my year-round availability and the overhead that goes with it. I charge what I’m worth. If you as a client or potential client don’t think I’m worth it then you are free to find another tax professional who meets your requirements and your price point. Good luck. As I said in this earlier post, it’s getting to be a seller’s market.

If you are a #taxpro reading this you may know all about firing clients. But you may be concerned about doing that and your ability to earn a living. The answer to work-life balance and the overall sustainability of your tax practice is to charge what you are worth. But how? Here’s how:

  • Know your business model;
  • Know what is “average” pricing for your region;
  • Know your clients; and
  • Identify services that you are giving away for which you could be charging

Know Your Business Model

I said above, I’m a relationship shop. I’m also an Enrolled Agent, a non-attorney admitted to the bar of the U.S. Tax Court, and a working tax writer. I am not a seasonal form filler with an e-services account (which may be all that some taxpayers need, those taxpayers are not necessarily a good fit for my practice). There’s nothing wrong with being a seasonal form filler with an e-services account if that’s what you want to do (especially if you like working only part of the year). But it is important for tax professionals to understand that preparers doing several hundred relatively uncomplicated 1040s during tax season only may not have to charge as much per return as tax professionals offering year round planning and compliance to taxpayers with more complex needs. My “average 1040” may be quite a bit different than your “average 1040” and my prices are a reflection of that. If you are providing relationship services at volume-based prices, chances are you are, well, going a little nuts. That is not a practice that is sustainable over the long term and setting prices too low at the outset is really difficult to overcome.

Any time you touch a 1040 or answer a client question your profit margin on that 1040 goes down. If you’re not charging a high enough base price you start losing money on even simple 1040s pretty quickly. Ask me how I know. I inherited my practice and my mother’s low prices. Those worked for her because return preparation was the icing on top of a cake that was commission-based insurance sales. It also worked because most of her clients were simple 1040s. It worked for me until the insurance business went away and so did most of the simple clients. I was left with a completely new business model and an old pricing structure. I have worked hard to get my prices in line with the service level I provide and it has been painful for both me and for some of mom’s legacy clients.

Know What’s Average Pricing in Your Area

Ask around on social media. Join a professional organization like NATP that publishes an annual fee study broken out by region. Undercutting other professionals on prices doesn’t just harm you, it harms the entire industry. When people look at tax return preparation as a commodity to be shopped for based on the lowest price rather than a professional service with high consequences of failure for mistakes it devalues the knowledge and experience many #taxpros work so hard to gain and maintain. A true tax professional doesn’t set their prices in line with the ghost preparers; they don’t set them based on “just a bit more than DIY box software”; they use standards set by other professionals. Tax Therapy is in line with national and regional averages when it comes to price. Our prices are a little higher than regional averages, but probably low based on the knowledge and experience level I bring to the table. Not all of my clients need all of that knowledge (or they don’t need it all the time), so I’m OK with being a bit “below market” on my averages. You aren’t going to be able to set a good base price for your practice if you don’t have any idea what a good base price is for your area.

Know Your Clients

There’s a big push in the industry right now to go to “value pricing.” That means setting a price based on a year-round portfolio of services as opposed to pricing by the return and/or by the hour. Value pricing is being pushed as a one-size-fits-all solution for tax and accounting services. It isn’t. While most of my clients understand that I am way more than a form filler and filer, most typically don’t need me outside of tax season. The value pricing model works great for clients with year-round service and compliance needs. In other words, clients who need accounting services, payroll, sales tax, and income tax returns (or some combination of these services). It can also work really well for high-earning self-employed clients with advanced tax planning needs. I have some clients for whom value pricing could be a good fit and, if I ever get the model worked out, I expect to present them with that option. Other clients, however, just want their returns prepared and me to be available to answer questions outside of tax season.

Remember when I talked about “base price”? My base price includes a certain amount of off-season consult time built in to encourage clients to call me when they have a potentially taxable event during the year. I also offer “blocks” of consult time at a discount on my regular hourly rate to existing clients. My clients like this option because most of them do not have needs that make value pricing a good choice but they are happy to pay for my time on the occasions when they have a complex situation that needs advanced analysis and planning.

You need to take a look at your business and your clients to determine the pricing model that best meets your needs. It may not be just one pricing model either. You can charge by the hour. You can charge by the return. You can charge by the return but charge by the hour for certain services (e.g., sorting and totaling shoeboxes full of receipts). You can offer discounted blocks of consult time for current clients. If you want to keep some of the more transactional clients you can do return, or notice, or W4 “clinics” where the prices are discounted, but so is the level of service/engagement. Find a solution that works for you and understand that it may not be the solution being pushed by social media influencers who are marketing themselves and/or their product.

Identify Value-Added Services

Tax professionals, especially new ones, are often anxious to prove to clients that they know their stuff. We’re living in an information economy and knowledge is power. Power that we should not be giving away for free, especially when it involves an hour on the phone with a client that could be spent either making money or figuring out how to make more money or sipping a beverage of choice in the sun. Here’s a short list of services many #taxpros give away for which they probably could (and should) be charging:

  • Complex analysis of the advantages of filing separate returns (MFS)
  • W4 consults
  • Consults for sales and other tax compliance
  • Accounting/bookkeeping consults
  • Small business compliance advice (advising on the tax tradeoffs of various entities, the administrative burden posed by the entities, etc.)
  • FASFA help
  • Running detailed scenarios outside of tax season for clients with a taxable event (e.g., selling a rental property)

If you give these services away, clients will not value them and they will continue to expect them even after you’ve decided to charge for them (ask me how I know). Throughout the year I provide general updates on tax law changes and other information to my clients using a newsletter. It’s one of the benefits of being my client. I also build a small amount of off-season consult time into the price of return preparation. This consult time covers basic answers to questions such as W4 adjustments, additional withholding on unanticipated retirement distributions (when a client needs a new car or a new roof), and ballpark estimates on how much to withhold on the sale of a rental property. But if what the client is expecting is me to do an almost full tax return outside of tax season, that information is not provided for free and most certainly not without an appointment. I include a mid-year withholding check as part of my full-service return preparation. This is designed to ensure that clients are withholding enough from their retirement distributions and/or their wages to cover their tax bills. It is not designed to cover multiple stock transactions, sales of rental properties, and every other possible taxable event that the client is considering that year. That requires the client to purchase a block of consult time, which most of my clients are perfectly willing to do. Yours will be too. At least the good ones. Which brings me full circle to the clients who get fired.

I am not a volume-based practice. I have a certain number of returns that I can do in a given season while still maintaining a high level of personalized service during and outside of season (while also having a personal life). So I let go of clients who don’t value the service I provide to make room for those who do. I’ve already replaced the two clients I let go. And then some. Take some time to define your business model, your ideal client/client type, and then decide how and what you are going to charge. And charge what you’re worth! It will be time well spent. I guarantee it.