Billing Clients

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#1
TAXTAX  
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I mostly do prep and tax planning works and give clients estimated quotes (for new clients and some old clients).
I would assess from prior year returns and do an estimate of time needed. Then give them a fixed price. I will ask for increase (not very often) if the returns got more complicated as I start working on them.

I find my approach quite stressful every year. For new clients, this approach seems to give them some peace. For old clients, I wonder if I should still give them a quote or just increase it a bit every year.


I thought of changing it to regular rate time hours used. If I give the client my regular rate (eg $300/hr), I am afraid that they will flip out and not engage with me or leave me. And I also have to do timesheet (which I am trying to avoid). But some may think that the bill could run up. How to I make them feel comfortable if I am using the regular hour approach?

What method do you use in your practice?
 

#2
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Of course there are pros and cons of each method.

I find that flat pricing by complexity, with a very clearly defined and agreed upon scope, increases my profit significantly and creates more trust with new clients (better conversion rates).

I apply simple and straightforward controls to prevent scope creep. If a client is a time drainer, I somewhat eat it in the first year and then raise their price (or fire them) in advance for the next year.

My preference in charging flat rates might also be due to that I am an EA and my practice is very heavily focused on income tax preparation.

I have a simple flat rate price list (by complexity) that I present along with a short summary of terms, and then a ridiculously long engagement agreement.

This model allows for some very high hourly rates - and I seek out and specialize in the situations that create them (and turn away the one's that don't).
 

#3
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TAXTAX wrote:I find my approach quite stressful every year. For new clients, this approach seems to give them some peace. For old clients, I wonder if I should still give them a quote or just increase it a bit every year.


I'm going to make a big assumption here and assume this is an indication of your rate being too low. The stress of this process is in not being high enough.
When you have 10-20% of your prospects declining because of price, you're probably in the right range. If you find all your prospects are accepting your price, you're definitely too low.

Price aggressively, do good work, sleep better (and more) at night.
~Captcook
 

#4
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When you have 10-20% of your prospects declining because of price, you're probably in the right range. If you find all your prospects are accepting your price, you're definitely too low.



+1

Though in my case it's like 90%+ of inquiries declining my prices because I have a massive Yelp and Google presence and an "unsophisticated" retail-like name for my practice and I get so many inquiries.

My point is that your actual conversion rate might be a sliding metric in the analysis.
 

#5
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Whether you charge by the hour, by the form or just give a firm quote, the end result is the same. You are charging for your time (and expertise of course). How you figure out the fee depends a lot on your own circumstances. I am a sole practitioner with no admin staff. I started giving a fixed fee. That didn’t work. So I switched to hourly billing last year and it has reduced my stress level. When a potential client asks for a quote, I tell them that I bill by the hour and try to slip in a line about well organized clients not subsidizing a disorganized client with a similar return. That has gained me, I think, some good quality clients and sifted out the chaff. With no admin staff, I don’t have enough hours in the day to deal with disorganized bawheids who think they are important.
 

#6
CathysTaxes  
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I charge by form and if a client takes up way too much time because of research, then that work gets billed by the hour. An example would be a self employed client who doesn't have any records and brings me their receipts. That work gets paid by time. If a client is high maintenance with frequent calls and emails, again, an additional charge.
Cathy
CathysTaxes
 

#7
smtcpa  
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I never bill by the hour. It limits me too much. For new clients, they get a quote. For existing clients, they see an inflationary increase, and/or adjustment based on complexity. I almost never have any questions or complaints although this year I have had a few questions for the first time in a while.
 

#8
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Stop doing hourly, by form, etc. They're incredibly old school methods and need to die--they do all of us an injustice. The only fit I see for hourly is an engagement that is so unpredictable that it is the only fee structure that fits. Inflationary increases are also a joke because they do not account for our continuously increasing levels of experience and education, year-over-year. Basically inflationary increases state "I've set my baseline worth, and now I'm only adjusting based on the economy."

Each of us should have sufficient experience to know how long something will take based on tax documents presented to us and prior year returns. I also ask if anything has changed that I am not aware of relative to prior years, and then I arrive at my estimated or total fee (total fee is only for recurring clients I know very well). It is always stated upfront if it is estimated and subject to change (per engagement and invoice for nonrefundable upfront payment). Rarely do I find I more than slightly underpriced an engagement where I cannot make up for it in subsequent years.

I agree with the statement that 10-20% of prospects declining because of fees is a good place to be. Similarly, you should be rejecting at least that many prospects because they're not a good fit.
 

#9
MWEA  
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smtcpa wrote:I never bill by the hour. It limits me too much. For new clients, they get a quote. For existing clients, they see an inflationary increase, and/or adjustment based on complexity. I almost never have any questions or complaints although this year I have had a few questions for the first time in a while.


That's how I do it. I have baseline based on complexity from the prior year and I increase each year for a minimum of the inflation rate. If you don't, not only are you going backwards this year, but all future years in which the increases are based! Don't ever miss a year of increasing rates.

If I have a return with added complexity in a given year, one off or ongoing, I put a separate line on the invoice. I find if people understand the reason for the above inflation increase, they don't gripe.

Example:
Line 1: Prepared 1040 with Sch C and state return. $Base Price
Line 2: Additional complexity due to exercising stock options $XXX

In future years if the stock options/planning remains, I lump it all into Line 1.
 

#10
MWEA  
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CornerstoneCPA wrote:Stop doing hourly, by form, etc. They're incredibly old school methods and need to die--they do all of us an injustice. The only fit I see for hourly is an engagement that is so unpredictable that it is the only fee structure that fits. Inflationary increases are also a joke because they do not account for our continuously increasing levels of experience and education, year-over-year. Basically inflationary increases state "I've set my baseline worth, and now I'm only adjusting based on the economy."

Each of us should have sufficient experience to know how long something will take based on tax documents presented to us and prior year returns. I also ask if anything has changed that I am not aware of relative to prior years, and then I arrive at my estimated or total fee (total fee is only for recurring clients I know very well). It is always stated upfront if it is estimated and subject to change (per engagement and invoice for nonrefundable upfront payment). Rarely do I find I more than slightly underpriced an engagement where I cannot make up for it in subsequent years.

I agree with the statement that 10-20% of prospects declining because of fees is a good place to be. Similarly, you should be rejecting at least that many prospects because they're not a good fit.


I typically do inflation increases. But I raise the minimum return fee as time goes on, cut the less profitable portion of my book of business, and get very selective on who comes in. The effect is much higher than inflation growth.
 

#11
JAD  
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I go with hourly. I don't know how long something is going to take until I jump in. I have some business clients that have big changes each year, and there is no way I could provide a quote without taking a big risk. My 1040s run from $2500 - $20k+. I just can't provide a quote for those at the higher end. They are too dynamic. And the clients are used to hourly. I think that they perceive it as fair. I enclose a printout of the pre-bill worksheet from Timeslips so they can see the detail of the days and hours I worked on them.

An increase based upon the rate of inflation works for me. I disclose the increase and the rate in the organizer. The amount clients pay goes up more than that due to ever increasing complexity in the law and reporting requirements, which almost always results in this year's tax return taking longer to prepare than last year's tax return. No one feels like he/she is underpaying me, and I don't feel underpaid. And I am not stressed about my realization rate.

I agree with above - if you don't have a decent % of people moving on, your rate is too low.
 

#12
smtcpa  
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Yes to this. That and billing a surcharge for credit card charges. All of those need to die.

I do disagree with the inflationary increase as a minimum is a bad practice. If their complexity doesn't change, my new experience is not worthwhile to them. It may be worthwhile to me, though, if I can prep that return faster or provide other services faster. That's why billing by the hour is such a bad business model; more experience means less time and lower fees. Dumb. If you can't estimate a fee looking at a return and then let them know if something changes, you'll give a new quote, then that needs to be improved upon. You can systematize that to a large degree.

CornerstoneCPA wrote:Stop doing hourly, by form, etc. They're incredibly old school methods and need to die--they do all of us an injustice. The only fit I see for hourly is an engagement that is so unpredictable that it is the only fee structure that fits.
 

#13
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smtcpa wrote:That and billing a surcharge for credit card charges. All of those need to die.


I haven't read the rest of the thread in detail, but I agree with this.

Surcharging for credit card fees in 2023 is bad optically. I even advise my clients as much. Just increase your fees 3-4% across the board.

Customers and clients expect to be able to pay with card, and don't want to be made aware they're being penalized for it, or feel like they're being penalized for it. And, that's how the majority of your clients will feel. Forget about what's fair to the minority who *may* pay with check or EFT, just internalize it.
 

#14
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My father-in-law, who was a CPA and owned and sold a successful business to fund his retirement characterized accepting credit cards like this: You don't want to create situations where you're telling your clients 'no' wherever possible. Not taking credit cards or applying an additional fee is a 'no' answer to their question "Can I pay you with a credit card?"
If there is ever a place in your business that needs to have only 'yes' answers, this is it.

There are plenty of 'no' answers we must share with our clients in discharging our services. When it comes to the business of running our practices, we should avoid them.
~Captcook
 

#15
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It's friggin' merchant account intermediary companies pushing surcharges for credit cards because "businesses can recover thousands or millions in costs they should not be paying." Ironic, but it is definitely those companies that push it, and are responsible for restaurants and others adding the "convenience fee" for paying by credit card vs. cash. I won't name the company but there is one that has been absolutely swarming the area in Michigan I have expanded into and unfortunately, many of the companies are falling for it while pissing off customers in the process. I never carry cash, I do not do a surcharge for credit cards (and prefer them because they settle next day, guaranteed funds vs. ACH that takes 5 days for clearing and settlement). The merchant processing world is filled with liars and crooks that ultimately do more harm to businesses because they do not think long term--they're sales people looking to close a deal, nothing more.

There are a few industries where I think it is acceptable to do a surcharge for credit cards, but they are very few and far between. Regime fees with POAs/HOAs, for example. It isn't a cost of doing business because like paying a loan, it is expected to be paid by check or ACH. Nothing in the consumer goods or service sector is otherwise expected to be paid by cash or check these days and credit cards are indeed a cost of doing business because so few people pay with cash.
 

#16
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They're only hurting themselves. Again, optics.

I agree with you that sometimes they're appropriate and understandable. HOA dues. Payments to gov entities. Basically payments in which the payee has a fiduciary duty to collect the entire amount free of charge.
 

#17
CathysTaxes  
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I don't charge a surcharge for credit cards or mailing the return. Since I hold off e-filing until payment, I would rather pay the fee and get instant payment instead of waiting for the mail and following up with them. I do push Zelle and now many credit card and check payers are using Zelle.
Cathy
CathysTaxes
 

#18
smtcpa  
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That's a great thought process.

The other thing I noticed is when I started accepting credit cards a long time ago, my bad debt and slow-pays dropped down to almost zero. It was a big problem before that. Making it easier for people to pay you is a good business practice.

CaptCook wrote:My father-in-law, who was a CPA and owned and sold a successful business to fund his retirement characterized accepting credit cards like this: You don't want to create situations where you're telling your clients 'no' wherever possible. Not taking credit cards or applying an additional fee is a 'no' answer to their question "Can I pay you with a credit card?"
If there is ever a place in your business that needs to have only 'yes' answers, this is it.
 

#19
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CaptCook makes an excellent point. My local bagel shop offers a 3.99% discount for paying with cash. Same result, different perception.

I wish my bank took Zelle. They only do so for personal accounts.
 

#20
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American businesses pay stupidly high fees to accept payments (compared to Europe) and so I understand why businesses want to institute credit card surcharges. Cash-back rewards cards in America do not help the situation. But I'm with most of you in that it's just easier to build it into my fees for the expected amount that I'll pay.

My concern is watching companies like Klarna and Square Afterpay grow. For those unaware, these are "buy now pay later" programs and the typical way these work are that the merchant gets paid just like if it was paid by credit card, but the buyer pays 25% immediately and makes 3 future payments, usually biweekly.

Like so much of our tech economy, their business model is to subsidize customers in the hopes that they grow quickly to become vital infrastructure, and then they can then use their oligopoly/monopoly power to make profits. The only saving grace is that they seem to be trying to convert to profitability too early in the US. Square's subsidy ended last September, and the original 2.6% fee rate (matching their normal rate for credit card payments) jumped to 6%, and I don't know how many businesses will accept a transaction fee that high.
 

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