Tax Preparation Pricing: How Is It Determined?
Each tax season brings calls of individuals looking for a tax preparer and many times the caller's first question is "how much do you charge". Unfortunately, our answer is inevitably "it depends". It's not that we're trying to keep our prices secret or to pull a fast one on new clients. I hate surprises as much as the next person and prefer to be as upfront and transparent as possible. But two individuals can walk in the door thinking they have the same "simple" tax return. However, upon having more in-depth conversations, we may find that there are hidden complexities in their tax situations. Or, they could be correct and they may be better off doing their own return via the many DIY online software options now available.
Best Options for Simple Returns
In an effort to be completely transparent, I will start off by saying that if you have a very simple return, there are free filing options available. The IRS has a Free File threshold of AGI below $72,000 for 2020. The agency has partnered with the large software companies (such as H&R Block and TurboTax) to provide this service to the public. You can Google this option to see what each of the companies offer within the free tier, but if you simply have a W-2 and some free time on the weekend, this is may be the way to go.
Pricing Differences
In my experience, the prices of "big box stores", aka H&R Block and Jackson Hewitt and the like, are at least as much as you would pay to have a CPA prepare your return. I've heard many other CPAs voice the same. If you get in-person service from these providers (as opposed to the DIY online software options), they tend to charge by the form. I tried to do a little research to see what the current form fees were, but found that these are often unknown to anyone (including the employees). The itemized bill is finalized after the return is prepared. These entities tend to play the averages in fees by pricing this way. Everyone pays the same for a Schedule E, whether one number is input or several. So, on some returns, the company makes a little less and some they make a little more, depending on the time it took the employee for that particular appointment.
CPA firms tend to price a little differently. Historically, firms have charged by the hour, much as legal firms do. This allows firms to estimate their tax return prices on the amount of time and/or level of expertise it will take to prepare a particular return. The more complex the return, the more the preparation will cost. Because many clients would prefer up-front pricing, some firms are moving toward value pricing, which takes into account the time and complexity factors, but allows the CPA to estimate the fee up-front. However, in order to give an accurate estimated fee, the CPA will need to see the prior year's return and will probably ask if there have been any changes in your situation for the upcoming year. The more information you can provide to the CPA up-front, the more accurate the fee estimate will be. If the CPA digs in and finds that the business records aren't up-to-date (how many hours have to be spent cleaning up QuickBooks, for instance), or investments are more complex than anticipated, they could find themselves having to increase their fee and this isn't a comfortable conversation for anyone involved.
Service Factors
Most CPAs offer the added convenience of having you send in or drop off your tax documents at your convenience, which means you don't spend 2 hours or more in their office assisting in the preparation of your returns. Your return probably won't be done the same day, but you can take care of other tasks while your CPA handles the tax stress for you. They'll generally prepare a draft and call you with any questions that may not have already been discussed to ensure that an accurate return is prepared. You also have the added confidence that your CPA will be available throughout the year should questions arise. This has become even more important to individuals in the past year as issues arose with emergency funding needs, erroneous IRS notices because of the massive amounts of unopened mail that still needs to be processed, and missing stimulus payments.
If you have a small business, a CPA can also walk you through proper accounting and bookkeeping procedures. Handing a tax preparer a box of receipts may get a tax return prepared, but an accountant can go beyond tax preparation services throughout the year and help you with tax planning and preparation of tax estimates. They can also assist with non-tax related services like QuickBooks set-up, which can free up your time throughout the year. A CPA or IRS Enrolled Agent can also represent you before the IRS should problems arise. You may find yourself needing to hire a CPA to aid in situations where an uncredentialed tax preparer cannot.
Education Requirements
CPA firms will gladly help those with simple returns, but may tend to start out with higher prices because of education and regulatory requirements required of them to ensure that they have the expertise and knowledge necessary to handle more complex and ever-changing tax laws. Staff with accounting or finance degrees, peer reviews, and extensive continuing education requirements (80 hours every 2 years in Pennsylvania) lead to highly trained professionals, but higher overhead. In addition to the cost of the training, that's time out of the office when work isn't being completed and revenues aren't being earned. They are also required to pay e-filing fees and have liability insurance in the case of lawsuits arising from professional liability claims. (Look closely at the big box store invoices and you may find add-ons covering the cost of insurance for your return.)
Complexity Factors
When determining the estimated complexity and cost of preparing a return, a firm will generally look at the following:
Number of W-2s and any complex factors, such as employee stock options
Dependency exemptions (divorce or separation situations should lead to additional discussions to ensure claiming dependents is handled correctly)
Capital Gains & Losses (are your investments fairly straightforward interest and dividends, or are there stock sales, bonds, and tax-free state earnings to calculate)
K-1s from partnerships and S-corporations and related basis and loss carryforward calculations
Business income (is your LLC a very simple side gig with minimal income and expenses, or it is a larger business with employees, multiple bank accounts, credit cards, loans, etc)? These time and complexity differences can mean the difference between a $500 tax return and a $5,000 tax return. (And could suggest that you should be getting accounting assistance throughout the year and not just at tax time.) Keep in mind that each LLC creates a separate business return and balance sheet that needs to be prepared and reconciled. The taxable income just happens to be reported via a form on your 1040 to alleviate a second corporate tax return filing.
Rental Income (do you have one rental with minimal income and expenses, or multiple properties with basis schedules and related loans)
Depreciation Schedules related to business or rental income
Unemployment income
Child Tax Credits and Earned Income Credits (tax preparers must document that a taxpayer is eligible for these credits and must sign an affidavit that the due diligence was completed or a $500 per return penalty is assessed by the IRS)
Education credits and coordinating filing with the dependent student's returns (especially critical in the final year of college)
Required estimated tax payments
Cryptocurrency reporting
IRA or SEP contribution calculations
HSA contribution calculations
Number of state and local returns to be filed (and calculation of any part-year residency income)
Making a Decision
Take into account your budget, the complexity of your return, your comfort level with preparing your own returns, and the convenience of using a professional when deciding if doing it yourself or hiring a professional is the right route for you. Also, consider the risk that the professional is helping alleviate and whether you could benefit from creating a long-term relationship with a CPA.
Everyone's situation is different. Many will decide to hire a professional this year, given the increased complexity of tax returns and changes coming about because of the pandemic. When hiring a professional, find one that you feel comfortable with and that you can trust. And be honest with the services you need and be ready to heed their advice. An investment in qualified professional tax advice today could pay for itself in tax savings, and provide peace of mind in knowing that your return would stand the test of an audit or review.
Contact Us
If you do decide that you would like to hire a CPA to prepare your returns this year, please feel free to reach out to my firm at (814) 299-5505, or you can make an appointment online at www.terrijohnsoncpa.com. We work locally and virtually with businesses, nonprofits, and individuals and would be happy to discuss your particular tax situation and how we can help.
Also, we are giving back to our community in 2021 by donating to one of several charities on behalf of all new clients. It's our way of saying "thank you" to deserving organizations and helping children in our community at the same time.