Fixed fees or hourly billing in a small CPA practice

First decide what the fee buys

A fixed monthly fee is useful only if both sides understand the deliverable. Define accounts, entities, transaction scope, frequency, document readiness, reports and included queries. Define what constitutes cleanup, a new entity, additional payroll work or a special advisory project. A monthly accounting engagement, a tax return and a representation matter are different units; combining them into one vaguely unlimited price hides time and review risk.

The illustrative recurring accounting engagement bills $750 per client-month, with 6.0 preparation hours and 75 owner minutes. Those standards total 435 productive minutes. Revenue yield is $103.45 per productive hour. That figure is not the price of every staff hour, an owner wage or net margin. It is a way to compare the contracted fee with the workload it promises.

Hourly billing offers a different contract: work performed at agreed rates, subject to authorization and billing rules. It does not guarantee every recorded hour will be approved, invoiced or paid. The modeled advisory rate is $225.00 before the same 96.0% realization factor used for tax jobs. A high rate with unapproved scope or a heavy review burden can produce a weaker economic result than a well-controlled fixed engagement.

Price productive time, not only visible task time

The preparer’s starting wage is $32.00 per paid hour with 16.0% burden. The case pays 160.0 monthly hours and expects 120.0 productive hours. Allocated productive labor therefore costs $49.49 per hour. The owner’s loaded productive time costs $84.00 per hour after the gross monthly salary and burden are spread over owner productive capacity.

For one accounting client-month, allocated labor is $401.96. Supplies, billing cost and expected credit loss add $19.25, leaving $328.79 before shared overhead. The allocation recognizes paid nonclient work, but it does not make permanent wages variable. In the full firm ledger the salaries are paid once each month, whether one client uses fewer hours or another uses more.

Do not subtract allocated client labor and full payroll again in the same profit statement. Use allocation to set or review a fee; use actual payroll commitments to forecast the practice’s cash. When an additional engagement requires a new employee, the incremental cost becomes a staffing step, not just its allocated task cost. The unit guide makes that boundary explicit.

What happens when a fixed tax job takes longer?

The example allocates seasonal productive preparation at $58.00 per hour and owner productive time at $84.00. It applies the same invoice, supplies, billing cost and expected loss to both columns. The slower column uses 120.0% of standard preparation and owner time without changing the price. This is an engagement sensitivity, not a rerun of the whole base forecast or an industry estimate of how often scope overruns occur.

A lower hourly yield matters in two ways. It leaves less to fund shared commitments and consumes capacity that could serve another client. If the practice is already full, longer jobs can displace revenue rather than merely add variable labor. If a permanent preparer has unused hours, the immediate payroll payment may not change, but the scope problem remains relevant to future capacity and fee review. A cost allocation and a short-run cash decision therefore answer different questions.

Before changing the fee, classify the cause. Missing client records, previously undisclosed complexity, staff rework and an understated standard estimate need different responses. A new scope item can require authorization; a training issue may require internal correction. Automatically charging every excess hour to the client without checking the engagement terms is not a pricing system.

Keep standard fees, invoices and receipts distinct

The case’s 96.0% factor represents tax/advisory price write-down against standard fees. It is applied before revenue. The separate 0.5% expected loss applies after invoicing, and the collection lag determines when cash arrives. Recurring accounting has no separate price realization haircut in this model. These distinctions allow the owner to diagnose whether weak cash comes from scope pricing, unbilled time, late invoices or nonpayment.

For hourly work, record authorized hours, performed hours, standard value, invoiced value and received cash. For fixed-fee work, record the same effort and collection information against the agreed deliverable. Neither contract makes time records optional. The practice needs them to understand review effort, staff capacity, rework and engagement profitability even if clients never see an hourly breakdown.

Set billing milestones around the actual service and client relationship. The projection assumes 50.0% of tax/advisory collectible billings arrive in the invoice month and the rest next month; it does not assume deposits. An advance-payment policy would need a different balance-sheet treatment and a tested forecast. Client tax money is separate from the practice’s fees and must not make a cash exhibit look stronger.

Make the fee review operational

At onboarding, set scope, document requirements, due-date responsibilities, rates or fixed amounts, additional-work authorization and payment terms in writing. Establish an internal preparation standard and a review standard for each engagement type. At completion, compare those standards with actual hours and note whether the client received the promised work. Review exceptions frequently enough to affect the next quote, rather than discovering them only at year end.

For recurring clients, reconsider the price or scope when activity, entities, reporting frequency or required review changes. Explain the concrete change in work. For seasonal jobs, decide whether a fee tier, a separately priced cleanup project or authorized hourly work better matches the uncertainty. Do not infer a universal tier structure from this small illustrative case; jurisdiction, professional standards and client mix can alter the available choices.

Preserve confidentiality in the analysis. Keep identifiable work records inside controlled practice systems and use aggregate/anonymized pricing summaries for planning. IRS security guidance and FTC safeguards remain relevant when billing portals, document exchanges or outsourced systems are used. The practice-software budget is an allowance and does not certify an installed, secure workflow.

Which billing approach should the owner select?

Choose a fixed client-month or fixed job when the scope, task standard and change-control process are sufficiently clear. Choose authorized hourly or separately scoped project work when effort cannot reasonably be bounded. In both cases, reserve owner review time and test collection terms. Judge the approach by realized revenue per productive hour, contribution after a consistent allocation, client clarity and the firm’s cash capacity.

The right response to a low-yield engagement may be improved records, narrower scope, a different fee, better staff training or declining the work. The right response to late cash may be invoicing and collection changes instead. Use the firm forecast to test whether the proposed mix supports paid owner work, permanent payroll, replacement assets and debt. The illustrative case helps frame that decision; its fee assumptions still need validation with actual clients.