Profit Margin Guidelines

I’m struggling with pricing and trying to do so intelligently. I’m a one man operation with an admin. I try to keep my operating expenses at 30% of revenue. As I keep growing, I will need to bring on more help.

Are there any industry standards such as X% going to operating expenses, Y% for the accountant doing the work, and Z% firm profit?

I recall reading in one of the industry journals that the average profit margin runs between 17 to 18% for a CPA office.

I am not aware of any industry standards to allocate in the way you described.

If your margins are above the average, you can decide where to allocate your money

In the old days there was a rule of thumb, off what you collect, generally 1/3 goes to the employee, 1/3 overhead and 1/3 profit. That puts expenses 67% of revenue.

Obviously you also have to consider that your billing will be ultimately determined by what the market will bear

Thanks everyone for the input. I get pricing to what the market will bear. The reality check would be to find out how much it would cost to replace myself and determine the amount left over.

It’s too easy to pay yourself less as a solo when you get the profit percentage as well. As I keep getting busier, I either need to go more up market on my client profile for higher billing rates or keep taking everyone on and make sure it’s priced to support an employee doing to work with enough profit to make it worth it.

I have asked that question myself and have come to the conclusion that my "pay" is whatever is left after paying expenses and taxes! If I wanted to be simply an investor I would need to hire someone to do my work and what would I be willing to pay that person? You can search industry sources for average pay and ball park it if you want.

I think it's important for sole practitioners to try to view themselves as both an employee and an investor. Even if there isn't a line item on a P&L for it, we should be viewing the pay and benefits we would earn as if we were an employee doing the same work as an expense of our business.

If a solo practitioner, no employees and let's say no valuable office location, wouldn't your profit as an investor come mostly when you sell your practice (client list)? What assets does the solo tax practitioner have that generate investment income on an annual basis?

Regarding employees, I believe H&R Block, for the highest-billed tier of returns, pays office preparers roughly a 30% commission. But remember, employees also have payroll taxes paid on their behalf, some employee expenses (such as license renewal), and unemployment benefits when they are laid off after April 15, so your employee portion of expense should take that into account as well (meaning, you need to count more of your profit as "employee" compensation to yourself to include these extras).