When you’re bootstrapping your solo therapy practice, hiring an accountant or a bookkeeper may seem like an unnecessary expense. And when your business is still new and relatively simple, doing your own accounting doesn’t seem like a big time or energy commitment.
But DIY accounting solutions—whether it’s using a spreadsheet or accounting software—can catch up with you. Here are seven reasons to hire an accountant for your therapy practice.
Note: While accounting and bookkeeping are two different practices, for the purposes of this article, “accounting” is used as a catch-all term.
DIY accounting costs money
It costs money to hire a bookkeeper or accountant. But doing your own bookkeeping and accounting is free, right? Not exactly.
Spending a few hours a week balancing your books and organizing receipts may not seem like a major investment. But in order to understand the true cost, you need to calculate the missed opportunity cost.
Assume that every hour you spend on financial back-office tasks is an hour you could spend with clients. If you charge clients $100 per session for therapy, and spend three hours per week wrangling finances, that’s $1,200 in unpaid work hours per month.
Naturally, your hours spent bookkeeping don’t precisely match up with hours spent seeing clients. For one thing, seeing clients is likely to take more mental and emotional energy on your part than categorizing your transactions for the week. And for each appointment with a client there’s extra work to be done, in the form of progress notes and other admin tasks.
So just to be conservative with your estimate, cut it in half. Suppose you only pay yourself half your hourly fee to do bookkeeping. That still adds up to $600 per month.
Would you prefer to spend $600 per month, and still have to do the work yourself, or would you rather spend the same amount—or even less—and have it done for you?
DIY accounting could get you in trouble with the IRS
There are three ways you can run afoul of the IRS when you do your own taxes: file late, pay late, and file incorrectly.
If you fall behind on your bookkeeping, it’s easy to find yourself filing or paying your taxes past the deadline. It’s an easy error to anticipate, and one you can avoid by filing for a tax extension.
Incorrect tax filing is a trickier problem. In some cases, business owners who file incorrectly won’t know it until they land in trouble with the IRS.
If you’re late filing your taxes, you’ll incur the Failure to File Penalty. The IRS will charge you 5% of the total amount you owe each month, up to a maximum of 25% of the total amount you owe in taxes.
If you’re late paying your taxes, you’ll incur the Failure to Pay Penalty. The IRS will charge you 0.5% of the total amount owed each month, up to a maximum of 25% the value of your unpaid taxes.
Inaccurate tax filing
If, when preparing your tax return, you significantly underestimate the amount of taxes owed, or make another error due to negligence, the IRS may charge you a 20% penalty.
Bad arithmetic is one easy way to make an error on your taxes and incur a penalty. The other is failing to track your exact income.
This tends to happen when business owners lack complete records of all the money they’ve earned over the course of the year. Businesses with bookkeepers or accountants avoid this problem with the help of monthly and yearly profit and loss statements, which tell them how much profit they earned, and how much to report on their tax returns.
DIY accounting doesn’t scale
Do-it-yourself accounting solutions of every type—from simple spreadsheets to full accounting software suites—struggle to keep up with growing businesses.
In some cases, that’s due to the limitations of software. In others, it’s due to the human factor. If you’re already struggling to keep up with your bookkeeping, what happens when your therapy practice grows?
Here are three ways DIY accounting typically fails to keep up with a growing business, and how an accountant or bookkeeping can help make up the difference.
Books become too complex
Growing businesses increase in complexity because of:
- New staff and the payroll routine that comes with them
- Additional expenses, both regular and irregular
- More streams of income, which must be categorized and accounted for
- Greater fluctuations in cash flow
If you do your own accounting, these types of changes may translate into hours of extra work per week. They also introduce new opportunities to make errors in bookkeeping.
When your financial back-office is handled by professional bookkeepers and accountants, they’re able to adapt to these changes, and may even be able to suggest ways to streamline your business.
The business needs to incorporate
Therapy practices that start out as sole proprietorships often transition to partnerships or S corporations.
- Allow other therapists to own portions of the practice, and benefit financially when the practice succeeds
- In the case of S corporations, may offer greater liability protection as the business takes on financing
- Help to cultivate a professional image, making them more attractive to lenders (or in the event you sell the practice, to buyers)
Incorporating as an S corporation or forming a partnership is best done with help from an accountant. The process of forming a new business entity and figuring out how you’ll divide equity, assets, and liability may take some serious number crunching.
Besides that, consulting with an accountant can help you choose the right business entity for your therapy practice.
Financial forecasts become essential
You need to create financial forecasts if you’re planning to:
- Borrow money to expand your practice
- Build a therapy practice you can eventually sell, or
- Increase profitability according to a set plan (e.g. a “five year plan”)
They help you model how your practice will perform in the future, so you can take the right steps today to prepare.
At its simplest, a financial forecast takes the form of pro forma financial statements. These are profit and loss (P&L), balance sheets, and cash flow reports that model different scenarios for your therapy practice, and they’re invaluable for planning future business moves.
When the future of your practice pivots on accurate and useful financial forecasts, it’s time to bring in an accountant. This type of planning is typically beyond the abilities of someone who lacks a professional financial background.
DIY accounting makes it harder to get a loan
If you’re approaching a bank for a loan, or you’re trying to sell your practice, showing up with financial statements you created yourself doesn’t project a trustworthy image.
Lenders want to know their loans will be paid back in a timely manner, with interest. And buyers want to know the business they’re acquiring will be profitable.
They may find it difficult to trust financial statements prepared by someone who isn’t a professional accountant. Even if you bring them your general ledger, with complete records of all your business transactions, they may question the contents.
Even before it comes time to apply for a loan or sell your business, working with an accountant makes it easier to keep organized records. And they can advise you on any major business moves you plan to make.
DIY accounting can miss out on tax deductions
There’s a swath of tax deductions you can benefit from when you run your own therapy practice. Everything from professional fees and dues, to your home office, to the cost of your own sessions with a therapist, can lower your tax bill.
While you can check out our complete guide to tax deductions for therapists, an accountant familiar with therapy practices is still an enormous asset. Not only will they be able to identify expenses you may have overlooked, they can help you avoid the mistake of claiming expenses that don’t qualify—and avoid running into trouble in the event of an IRS audit.
DIY accounting oversights can have major consequences
As if IRS penalties for late or inaccurate taxes weren't enough, you have to worry about the fallout from accounting mistakes on your profit and cash flow.
It takes only minor mistakes to cause problems. For instance:
- Failing to reconcile your bank statement one month means you could come up short when it’s time to pay your rent
- Forgetting to withhold a portion of your income another month means you may not be able to pay your tax bill
- Miscalculating depreciation on a major expense like office furniture or a work laptop means you could spend more than necessary on taxes
On their own, none of these errors is a death sentence. But taken together, they could threaten the ability of your practice to survive—particularly when you’re just starting out, and lack cash reserves.
When you work with an accountant or a bookkeeper from day one, you can avoid these problems.
DIY accounting isn’t your “zone of genius”
Take a moment to reflect. Why did you start your own practice?
Was it because:
- You love collecting and categorizing business receipts?
- You have a passion for generating financial reports?
- You just can’t get enough of estimating your quarterly taxes?
Probably not. As a trained, experienced therapist, you’re able to provide far more value to others—not just directly, to your clients, but indirectly, to their friends, families, and co-workers—as a therapist.
When you hire an accountant, you’re letting someone who’s really good at accounting take care of your finances, so you can focus more time and energy on your “zone of genius:” helping your clients. And that benefits everyone involved.
Thinking about hiring professional help? Learn more about the difference between accountants vs. bookkeepers.
If you’re ready to hire an accountant but not sure where to start, check out our article on how to hire an accountant for your therapy practice.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post.
Bryce Warnes is a West Coast writer specializing in small business finances.