How to Determine Tax Preparation Fees

by Dwight Dunkley; Updated September 26, 2017
Businesswoman

Pricing a service such as tax preparation is both a science and an art. According to marketing expert Kim Gordon, writing in Entrepreneur Magazine, "every business owner must arrive at her own pricing structure ... your rates will depend on three things: your actual costs plus a reasonable profit margin, the pricing the market will bear and the ways you'll add value to your service offering." This is an excellent skeleton of the process of determining how to price tax preparation work.

Instructions

Step 1

Calculate your total fixed costs and your marginal costs. Fixed costs are those you will incur regardless of whether you have any customers. Marginal costs are those that increase in direct relation to the number of customers you have. Determine how much each additional customer costs.

Step 2

Research the fees charged by competitors in your geographic area, as well as the fees charged by any online tax preparation options available to your target customers. This will give you a idea both of what the market is able to bear, as well as the competitiveness of your eventual price.

Step 3

Determine which customer segment you want your pricing to attract. Example: You can compete on price by choosing to target bargain-hunting customers seeking the lowest price, or you can choose to charge an average price and market aggressively to customers seeking personal service, or you can choose to charge a premium price and offer value-added services.

Step 4

Set a pricing fee that makes your tax preparation service profitable and targets the customer segment of your choice. Charge different fees based on the complexity of different types of returns to ensure that your fees are commensurate with the complexity of different tax returns.

Tips

  • In January 2010, the IRS announced its intent to require tax preparers who charge money to meet certain criteria, which include registering for a preparer tax identification number, passing certain competency tests and fulfilling continuing education requirements. The burden of these new requirements should be reflected in your pricing.

    Think of low-cost or free, value-added services you can provide your customers that would justify a premium fee. Example: If you are qualified to represent clients before the IRS, you can guarantee to provide two hours' free representation in the event of an IRS audit.

    Offer discounts if you realize your fees are out of alignment with customer expectations. Example: You can offer early bird discounts in January, late-filer discounts in April, discounts for clients who refer others and discounts for clients referred by others, among other ideas.

Warnings

  • Setting low fees via a value pricing strategy may cause customers to perceive that they've been given lower-quality service. According to StartUp Nation, a study at Stanford University Graduate School of Business showed "that perceptions of quality trigger activity in the part of the brain that registers pleasure. Conversely, if a product or service is perceived as being of low value (even if in reality it is of high value), the brain will respond as if it was of low value."

About the Author

Dwight Dunkley is a freelance writer based in New York. His work has appeared at Huffington Post and various other online publications. A devoted generalist in a world that is too often over-specialized, Dunkley is a Renaissance man and an avid traveler and language learner.

Photo Credits

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