Five Ways to Measure Success in the Tax Preparation Business

Tax preparation can be a competitive business.

Tax preparers no longer need brick-and-mortar offices and can work from home (or anywhere in the world); it’s easier than ever for the entrepreneurial-minded to enter the business. But how do you measure your success as a tax preparer?  While the average annual salary for a tax preparer in the United States is nearly $56,000, how much you make is only one way of evaluating progress and accomplishment in the field. 

Financial metrics are important, but you also need to measure other key performance indicators (KPIs), including the number of tax returns you prepare, the average effective tax rate for those returns, your client retention rate, and your business’s error rate. Here’s a quick guide to measuring the success of your tax preparation business:

1. Revenue Growth and Profitability

Revenue growth is, of course, a key metric of success. Be diligent about monitoring your annual revenue and comparing it to previous years. Consider the impacts of inflation and any changes you may have made to your tax preparation service offerings. 

To determine your business’s profitability, calculate your net profit margin (net income divided by gross revenue) to see how well you convert income into profit. A healthy profit margin of 10% or more will help ensure the long-term sustainability of your tax preparation business.

2. Average Tax Return 

Another KPI to consider is the number of returns you file each year. Is that number growing from year to year? If so, by how much? Generally, filing more returns every year increases your tax office’s revenue, allows you to work efficiently, and keeps clients satisfied.

However, even if the number of returns you file is increasing every year, dig a little deeper. Not all returns are created equal. Some are relatively simple to complete. For example, clients who have only W-2 income to report should have straightforward 1040s. Others may take hours or days to complete, like a return for a small business owner with many 1099s, tax deductions, and tax credits. Thus, the quality of your services will often override the quantity of returns filed regarding revenue and business sustainability. 

3. Effective Tax Rate (ETR)

The Effective Tax Rate (ETR) is often considered the most obvious measure of how well an organization is managing its tax cost, and it’s your job as a tax preparer to help clients keep this number low. Your client’s ETR is the percentage of tax they owe on taxable income. How many clients you’re able to help stay within a lower tax bracket (i.e., minimizing the percentage of income they have to pay out in taxes) can indicate your success as a preparer. 

4. Return Client Rate

Acquiring new clients is time-consuming, and it can be expensive, too. Thus, your client return rate is a critical indicator of business success. Set up a system for tracking the number of new clients you acquire each year, and then also track how many of those clients return for help the following tax season. 

In professional services, 65% of business typically comes from existing clients. To find your client retention rate, subtract the number of new clients acquired in a given year from the number of clients you retained that year and multiply the sum by 100. In professional services, the average client retention rate is 73%. If you’re not close to that number, you’ll want to evaluate why clients aren’t returning and double down on marketing efforts to existing customers. 

Distribute surveys after tax season to gauge client satisfaction and determine where you could improve your services. Ask clients what you’d need to do differently in order to earn repeat business and referrals. Request testimonials from highly satisfied clients that you can post on your website or use in other marketing materials like email campaigns and social media. 

5. Error Rate 

Evaluating your tax return error rate is another way to evaluate your success as a tax preparer, especially since accuracy is crucial to client satisfaction and retention. A low error rate likely indicates your office has a high level of competence and that penalties and audits for your clients are rare. A low error rate builds client trust and helps solidify your reputation as a tax professional.

However, errors happen, even for the most seasoned tax preparers. Often it’s the result of external factors like clients failing to supply complete documentation for preparing their returns. But sometimes an error can also result from something as simple as a typo. 

To reduce your tax office’s error rate, track errors over time, paying special attention to where they occur most frequently and why so you can target where to improve your processes. Likely, you’ll never be able to prevent all errors on your clients’ tax returns, so focus on eliminating high-impact mistakes that cost your clients money. 

Measuring your success in the tax preparation business extends beyond counting dollars. To obtain an accurate picture of your business performance, you’ll need to consider your operation’s financial health, client satisfaction, and operational efficiency and accuracy.  Understanding how your tax preparation firm performs in these areas will help you identify which areas of your business need improvement, so you can work on accessing the resources and building the capabilities you need to increase your revenue and grow your retention rate for years to come.