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Counseling the Counselors: What your Therapy Business Needs to Know About Taxes

Therapy and counseling are invaluable services, and counselors make such a difference in clients’ lives that it’s hard to remember that they’re also operating a business. But if you’re a therapist it’s no surprise to you. With tax time right around the corner, now’s the time for a quick update on what you need to know about filing your income taxes. We’ve compiled some important tips to help make sure that your bookkeeping and accounting records are up-to-date and that you’re in compliance.

Don’t Mix Your Business Accounts with Your Personal Accounts

You create a clear separation between your professional relationships with clients and your personal relationships, and you need to exercise the same discipline when it comes to your finances. That means keeping separate accounts — both banking and credit card — for your practice. You should be keeping track of business income and expenses too. It doesn’t matter whether you do this using an old-fashioned ledger book, an Excel spreadsheet, or any of the easy-to-use apps and software packages that are available, though we will point out that the latter makes it much easier to import information for tax prep.

Be Sure to Pay Your Taxes – Quarterly and Annual

All self-employed individuals are required to submit quarterly estimated income taxes, as well as additional self-employment taxes that make up for what others pay through employer-withheld payroll taxes. The due dates for these change each year depending on where weekends and holidays fall, but they are generally due mid-April, mid-June, mid-September, and mid-January. If you’re a sole proprietor your annual federal and state taxes are due April 15th, though if you’ve set yourself up as an S-corporation you’ll need to have them in a month earlier.

Deductions and Expenses

Knowing which of your expenses are legitimate write-offs is one of the most challenging aspects of doing your own taxes. You know about office space, but what about any continuing education that you are pursuing in support of your continued expertise, or having to pay for childcare to allow you to see patients while your children are home? Determining whether an expense is legitimately in support of your practice requires a thoughtful approach. Here are a few tax deductions that you can feel comfortable including:

  • Subscriptions and membership fees

  • Costs of advertising and marketing

  • Fees you pay to credit cards or banks (for your business accounts)

  • Meals and travel expenses associated with your business

  • Fees to maintain your license and registration

  • Continuing education costs

  • Depreciation of any office equipment or furniture

  • Home office expenses and supplies

  • Liability and malpractice insurance

  • Fees paid to attorneys, accountants or other professionals in support of your business

  • Office rent and utilities

  • Personal therapy

  • Software

Do You Practice Across State Lines?

If your practice includes telemedicine or you travel across a nearby state line to provide your services, you may need to research the reciprocal tax agreements between your state and any other state where you provide service. Where these agreements exist, you can simply pay income tax on what you earn in your own state, but without such agreements, you will likely have to file a comprehensive resident tax return in your state that includes all of your income (both local and from out of state clients) and a nonresident one in the state where you don’t live that is strictly reflective of the income earned there. You will probably be eligible for a tax credit in your residential state for taxes paid to another state.

How Do I Determine My Own Wages?

When you’re running your own business as a sole proprietor, all of the income flows directly to you. But that doesn’t mean that it is all available to spend as you like. Determining what represents salary, what needs to be set aside for taxes (federal and state), what pays for business expenses, and what gets set aside as savings is one of the biggest responsibilities of being self-employed. We recommend that sole proprietors determine a percentage of income to set aside for each category on a monthly or bimonthly basis and then do so regularly.

If you’ve chosen another type of business structure, such as an S-Corp or LLC, for your practice, then you will need to identify the salary that your state has identified as reasonable for your profession. Upon doing so you will then be able to pay yourself that amount, as well as owner distributions that are not taxed as income.

It is easy to get caught up in caring for your clients that your bookkeeping and accounting get away from you. If that is the case, it may be time to call in a professional. We can provide the guidance you need regarding your practice’s taxes and bookkeeping. Contact us today to learn more.

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