Figuring out how much to charge for tax preparation

Every freelancer asks the question, “How much should I charge?” You’ll see it come up frequently in forums and Facebook groups, but it doesn’t always get a good answer.

But answering this question is extremely important if you provide tax preparation services. As someone who handles money for a living, it’s important to appear confident about how you handle your own.

A loose rule is to charge three times what you would earn as an employee. But that’s not very precise. And it’s best to have a solid reason why you charge what you do. So let’s break it down and go over the steps you need to take when you’re figuring out how much to charge for tax preparation.

Calculating business expenses

Something that new freelancers and low-ball clients alike regularly overlook is the real cost of doing business. Think about what it means to be self-employed.

You are an employee and a business. As a business, you have to provide yourself and any employees with everything necessary to do business. That includes a laptop, office space, and work equipment. Then there are all the necessary digital tools and software — this can include tax preparation software, personal/business tax software, marketing tools, etc.

And you need to provide yourself and your employees with all the basic necessities, which might include vacation time, sick days, holidays, medical and dental insurance, and so on.

As you well know, you can write off a number of business expenses. That’s why it’s a good idea to keep these expenses separate from your personal expenses.

Calculating personal expenses

This category is more familiar to most people. You probably know how much you need to earn in order to get by. Or at least you know how much things cost.

So add it all up. Figure out the firm bills — like rent, car expenses, and insurance. And figure out the flexible bills — like groceries, gas, and utilities. Once you add up all of those flexible bills, take the figure at the top end of the range into consideration.

Don’t forget extra money for savings and emergencies. And of course, don’t forget taxes. This isn’t about how much you need to squeak by. An employer would pay you that. This is about setting your own salary and living on your terms.

If you’re still struggling to come up with a salary, there’s evidence that somewhere between $60,000 and $95,000 a year is the maximum amount of money that can impact a person’s happiness. More than that won’t make you any happier — but that’s assuming you live in a reasonably priced area.

Another approach is to take an hourly wage and multiply it by 2,000. Here’s the formula: hourly rate x 40 hours per week x 50 weeks per year. 

Adding it all up

Now that you’ve figured out what all of your business and personal expenses are, it’s time to do the math. Using a tool like JotForm Tables or even a simple spreadsheet, calculate everything in separate tables or sheets.

Itemize all of the items in both lists. You can calculate them as monthly or yearly expenses — whatever works best for you. Just remember to keep it consistent.

Add your salary to your business expenses because your personal income is coming from your business. When you’re done, you should have a good idea of exactly how much you need to earn per year and per month. 

Determining an hourly rate

Now you need to figure out your time. Don’t make the mistake of assuming that you can work 40 hours per week. The average employee only does about three hours of work per day. As someone who is self-employed, you’ll be motivated to do more than that, but don’t burn yourself out.

And don’t forget that you have several jobs beyond tax preparation. You have to market yourself. You have to handle invoices and collections. You have to do customer service. You’ll need to constantly educate yourself on tax law. You’ll have to handle a lot of demands on your time.

After everything you have to do, you may only have 16–24 billable hours of work per week. Take your yearly income and divide it by 52. Then divide that by 24. That’s your hourly rate.

Choosing a billing method

Businesses know the cost of freelancing and expect to pay it. Individuals likely think in terms of employee rates. Telling an individual you charge $120 per hour (for example) can be a hard pill to swallow.

If you’re experienced with your business, you know how long it takes to complete tasks like gathering and itemizing receipts, income statements, expenses, etc. It can be a wide range, but it’s more predictable based on the client type.

Create a menu of prices. It will cost X to itemize expenses and Y to file with government agencies, for example. The more detailed you make it, the more transparent your process will be — and the more trust you’ll gain. You’ll still need to charge your clients hourly for tasks like customer service and acting as an arbitrator, though.

If you want to charge hourly, then you know your rate. If you want to keep things simple and not make your clients feel like they’re being “nickeled and dimed to death,” then give them a flat rate menu. Just ensure your menu prices represent your total estimated hourly rate for each task, and give yourself plenty of wiggle room.

Streamlining your client interaction

As mentioned earlier, you can use JotForm to calculate your expenses and make working with clients easier and more affordable. It’s easy to set up a form with a list of services that you provide. Then your clients can simply select what they need.

This article is originally published on Apr 12, 2021, and updated on Apr 15, 2021.
AUTHOR
Lee Nathan is a personal development and productivity technology writer. He can be found at leenathan.com.

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