Accounting

Common Questions Therapists Have About Their Finances

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January 5, 2024
January 7, 2024
Bryce Warnes
Content Writer
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You have questions. We have answers. 

Here are some of the most common queries the financial professionals at Heard get from therapists new to private practice:

Do I need separate personal and business bank accounts?

Abso—and we cannot emphasize this enough—lutely. 

Having a separate business bank account for your therapy practice not only makes it easier to track your income and expenses, do your bookkeeping, and file your taxes; it’s also essential if you plan to form your practice as any business entity more complex than a sole proprietorship, like an LLC or S corporation.

One of the first steps you should take after launching your business is to open a new bank account.

Read: How to Choose a Checking Account for Your Therapy Practice

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What is bookkeeping?

Good question!

Bookkeeping is the practice of recording day-to-day business transactions. Every time your business earns or spends money, you record it in the General Ledger, a kind of master document that tracks all your transactions.

Each transaction is categorized and assigned a date. You use this information later to generate financial reports, which tell you how your business is performing. Your financial reports are used—by you, personally, or by your accountant—to prepare your tax return.

You can do your bookkeeping with a spreadsheet or with accounting software, outsource it to a bookkeeper, or sign up for a complete bookkeeping, accounting, and tax solution like Heard.

Read: What Does a Bookkeeper Actually Do?

How much should I set aside for taxes?

When you work for someone else as an employee, they automatically withhold income tax from your paychecks and pay it to the IRS.

When you’re self-employed, it’s up to you to withhold that income and pay it to the IRS either in one lump sum or as quarterly installments. 

The exact amount you need to withhold in order to pay your tax bill depends on how much you earn over the course of the year. There are also several methods for setting aside money on a regular schedule.

It seems complicated at first, but once you figure out how much you’ll likely owe, and put in place a plan for withholding income, the process is straightforward.

Read: How Much Do You Have to Earn to Pay Taxes as a Therapist?

Do I have to pay quarterly estimated taxes?

If your therapy practice is going to owe more than $1,000 in federal taxes for the year, you’re required to pay quarterly estimated taxes.

These tax installments are “estimated” in the sense that they’re based on how much you expect to earn for the year. It’s unlikely you’ll end up paying exactly what you’ll owe once your final income for the year is calculated, but as long as you pay 100% of what you paid the prior year in taxes, the IRS won’t penalize you for underpayment. (And if you overpay, you’ll get a tax refund.)

Read: How to Pay Quarterly Estimated Taxes for Your Therapy Practice

What business expenses can I write off for my private practice?

Just about any expense you incur in the course of running your business is wholly or partially tax deductible.

But it’s important to make sure you definitely qualify for a tax deduction before you try writing it off on your tax return. Otherwise, you could be penalized by the IRS.

Read: The Complete List of Tax Deductions for Therapists

Do I need to hire a bookkeeper?

A bookkeeper records and categorizes your practice’s financial transactions. Typically they do this using software that syncs with your business bank account and automatically imports the information. 

Most bookkeepers also generate financial transactions for their clients, which can be used for filing taxes.

Besides hiring an independent bookkeeper or a bookkeeping firm, you also have the option of using a complete bookkeeping, accounting, and tax solution like Heard.

Read: What Does a Bookkeeper Actually Do?

Do I need a business credit card?

A business credit card can help you save money by letting you earn up points and travel miles when you pay for recurring business expenses. It can also give you access to cash flow in case of an emergency.

As always, however, using a credit card comes with risks, including the possibility of accumulating debt you can’t afford to pay.

Read: How to Choose a Business Credit Card for Your Therapy Practice

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Do I have to pay taxes in other states if I see clients via telehealth?

In most cases, if you see a client in a different state from the one where your practice is based, you’ll need to pay taxes in that state. 

There may be additional steps you need to follow, like registering with the state in question.

It’s a bit tricky: states are rushing to keep up with new ways private companies do business (including providing telehealth services). But our guide has you covered.

Read: How do I Pay Taxes as a Therapist if I Have Clients in Different States?

Should I form an LLC/PLLC?

Forming a limited liability company (LLC) or professional limited liability company (PLLC) comes with a lot of potential benefits, including more protection in the event of legal and financial proceedings, and more flexibility in how you file your taxes.

Creating an LLC/PLLC is done at the state level. The cost to register varies state to state, as do the steps involved. No matter what, you should be prepared to invest time and money if you’re going to do it.

Read: The Complete Guide to LLCs and PLLCs for Therapists

Should I become an S corp?

Once you’re working full-time as a self-employed therapist, forming an S corporation comes with serious benefits—including opportunities to lower your tax bill.

That being said, if your practice is still growing, you may want to wait a while before going the S corp route. Our article gives you the full rundown.

Read: The Complete Guide to S Corporations for Therapists

How do I set fees for my therapy practice?

It can be difficult setting fees when you’re first starting out as a self-employed therapist. How high is too high? How low is too low? What if you decide to change your fees later on?

Our article on the topic covers the major mistakes therapists make when setting fees, and steps you can take to make sure you’re charging—and earning—a fair amount. It 

Read: How to Set Your Fees in Private Practice (Plus 3 Mistakes to Avoid)

How can I save money on taxes?

Your best resource for saving money on taxes is an accountant who’s familiar with how therapy practices operate (or Heard, which specializes in helping self-employed therapists).

There are a lot of approaches you can take, from choosing a business structure that gives you more control over how you file your taxes, to taking advantage of tax deductions and credits. Our article covers them all.

Read: Tax Planning Strategies for Therapists

What records do I need to keep for my therapy practice?

Recordkeeping is essential when you run your own business. You need financial records to back up your claims when you file taxes, as well as tracking your finances over the long term.

Most importantly, you need to make sure you save receipts and other proofs of purchase for any deductible tax expenses you plan to claim.

Read: Do Therapists Need to Save Paper Receipts? 

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Do I need professional liability insurance?

Yes. Our guide explains what professional liability insurance is, how it works, how much it costs, and how you can get it.

Read: Do Therapists Need Professional Liability Insurance?

How do I improve my practice’s cash flow?

“Cash flow” has two definitions.

In technical accounting parlance, it refers to how quickly your Accounts Receivable—money clients owe you—becomes cash. It’s only relevant if you use the accrual method of bookkeeping, with which you record income every time you bill a client, regardless of whether you’ve been paid yet.

In a broader, more casual sense, “cash flow” refers to how quickly cash comes into your business for the sake of covering expenses. It’s important regardless of whether or not you use the accrual method of accounting.

Read: How to Manage Cash Flow in Your Private Practice

How do I create a budget for my therapy practice?

A budget is more than a list of regular expenses. It’s a complete expense- and revenue-planning tool.

The first step to creating a budget is to list your regular expenses. The second step, just as important, is going back and updating your budget—so you can track exactly how much you spend, and see how that amount measures up against expectations.

Read: How to Build a Budget for Your Therapy Practice

How much should I budget for marketing and advertising?

In our 2023 State of Private Practice Report, the majority of self-employed therapists said they spent less than $100 per month on marketing and advertising.

Marketing and advertising, when done right, can attract new clients to your practice. It’s especially important to invest in marketing when your practice is young, and your client list has a lot of open slots.

But there’s also a danger of investing in marketing that doesn’t get you a return on the money you spend. A marketing budget helps you keep on track and make sure you’re getting what you pay for.

Read: How to Set a Marketing Budget for Your Therapy Practice 

Can I write off the cost of continuing education?

As long as you’re pursuing it in order to upgrade your skills as a therapist, continuing education is tax deductible.

The tax deduction may extend beyond the tuition or fees for any courses you take to include the cost of books and supplies, and even traveling to class.

Keep in mind that student loans are not tax deductible. Since you paid tuition for your education in order to become a therapist, you weren’t technically a therapist—or a business owner—when you were in school. So it doesn’t qualify as a business expense.

Read: What Therapists Need to Know About Deducting Education Expenses

How do I take a vacation as a self-employed therapist?

When your practice’s income is entirely dependent on your own labor, it can be hard dragging yourself away from the office and taking some downtime.

But time off is essential for your own mental health, as well as your performance as a professional. So think of it as doing both you and your clients a favor.

Our article breaks down everything you need to plan for when you take time off.

Read: How to Take Holiday Time Off as a Therapist

More questions? Get in touch with the professionals at Heard.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their 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.

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