You need to know how to fill out Schedule C of IRS Form 1040 if your therapy practice is a sole proprietorship or a single-member LLC.
Schedule C is where you report the self-employment income you’ve earned running your therapy practice, and the deductible expenses you’ve incurred.
Since Schedule C is the main factor differentiating your business tax return from your personal tax return, it can be a major stumbling block for therapists new to running their own practices.
Luckily, by the time you’re done reading this article, you’ll know the core essentials you need to complete Schedule C.
The fastest, easiest way to file Schedule C for your therapy practice
Before we get neck deep in a line-by-line breakdown of Schedule C, a quick disclaimer: This is a good time to look at hiring an accountant.
When you work with an accountant—or the team of tax professionals at Heard—they give you personal guidance filling out Schedule C. You’re less likely to make a mistake (potentially incurring IRS penalties), and more likely to benefit from expense deductions or smart tax moves that save your business money. They can also help you understand what is and isn't deductible based on IRS tax laws.
Learn more about how to hire an accountant for your therapy practice.
Schedule C for therapists: a broad overview
Feast your eyes upon the glory of IRS Form 1040 Schedule C:
It may look intimidating, but Schedule C becomes easier to digest when you break it down into bite-size pieces. Read on for line-by-line instructions on filling out each section of Schedule C’s five sections.
Schedule C for therapists: section by section, line by line
As mentioned above, you can save yourself a lot of time and effort completing Schedule C for your therapy practice by hiring an accountant—or the financial experts at Heard, who work exclusively with therapy practices.
If you’re determined to go it alone, however, here’s what you need to know to fill out your Schedule C.
For additional context and, in some cases, more detailed guidance, refer to the IRS instructions for Form 1040, Schedule C.
The first chunk of Schedule C is where you’ll provide the IRS with your personal info, and key information about your therapy practice.
Only enter your SSN if you don’t already have an EIN. (More on that below.)
A & B. The IRS has a list of business types, each one with a corresponding six digit code. A general description, eg. “therapy practice,” works here. For most therapists, the code to use is 621330 (“Offices of mental health practitioners (except physicians.”)
C. Here you’ll list your business name, or “doing business as” (DBA). Only fill this out if you’ve registered a DBA.
D. If you have an employer ID number (EIN) for your private practice, enter it here. Otherwise, leave it blank.
E. If you work from home, use your home address here. Otherwise, list the address of your office.
F. If you’re not sure what accounting method you use, check with your bookkeeper. Our guide to accrual vs. cash basis accounting for therapists may also help.
G. If you work at your own therapy practice (as most therapists do), you materially participate—so the answer here is “Yes.”
H. If this is your first year in business, check this box.
I. If you paid an independent contractor $600 during the course of the year, the answer here is “Yes.” In that case, you should be prepared to file a Form 1099 for them.
J. Answer “yes” here if you answered yes for I. And, if you feel like you’re in the dark when it comes to Form 1099, learn about your responsibilities when you hire an independent contractor for your therapy practice.
In this section, you’ll report your revenue before taking into account any deductible expenses.
1. Since you’re self-employed, and reporting income from your own business, you likely won’t be checking off the box here. This is where you list everything your therapy practice earned during the year, not counting expenses.
2. This box is for reporting any refunds you made to customers over the course of the year.
3. Here’s where you calculate your income after taking into account refunds you made.
4. Since most therapists don’t need to purchase raw materials in order to run their therapy practices, this section is irrelevant and may be skipped. (COGS is only relevant to your business if you create and sell goods.)
5. Your gross profit goes here, after taking into account refunds and cost of goods sold (COGS). For many therapists, box 5 contains the same amount as box 1.
6. In the event you earn money that is related to your business, but not do day-to-day operations, you can list it here. Examples: Interest income from a savings account, cash back rewards from your business credit card.
7. One more time, you’ll calculate your gross income by taking into account the line above. Pay attention to this number; you’ll subtract your deductible expenses from it later in order to calculate your net profit.
This is the meat of Schedule C. The IRS asks you to report expenses you’re deducting from your taxes.
If you’re new to deducting business expenses, read these articles before proceeding:
- Deductible expenses for therapists
- Recordkeeping for therapists
- Complete list of deductible expenses for therapists
8. The cost of advertising your therapy practice may include your professional website, listings in online therapist directories, business cards, online ads, and other expenses. You can list the total here.
9. This part is strictly used for reporting business use of your car. If you’re planning to list your vehicle as a business expense, leave this box blank for now. Further on, in Part IV, you’ll calculate your total deductible expense.
10. If you’re a partner working as an independent contractor for another practice, and you pay them fees for office use, etc. you can list the total amount paid here.
11. The cost of any contractors you hired to do work for your business during the year are listed as a total here. These may include repair or maintenance people for your office, web and graphic designers, or other therapists doing contract work for your practice.
12. This section only applies to people working in resource extraction industries, and isn’t relevant to therapists.
13. If you’re depreciating large expenses (such as furniture or computers purchased for your office), you list the annual depreciation here. Since depreciation is a bit tricky, it’s best to get help from an accountant.
14. The cost of employee health insurance or health savings accounts, or other benefits, is listed here. (This only applies to your employees’ health insurance, not your own self-employed health insurance.)
15. The cost of all insurance not including health insurance for employees goes here. That includes liability and property insurance.
16a and 16b. If you happen to own an office building or other commercial space where your practice is based, you deduct the cost of mortgage insurance here.
17. The cost of hiring or retaining a lawyer is entered here.
18. Your total office expenses, not including rent and utilities, go here. (Work from home? Check out our guide to the home office deduction for therapists.)
19. Any pensions or profit sharing plans you offer your employees counts as a business expense.
20a and b. Most therapists don’t rent or lease vehicles and equipment in order to run their practices, but if you did, it would go here.
21. The cost of any repairs or maintenance you make to your office space goes here. Note that new renovations don’t count—only work considered necessary to the functioning of the space. Refreshing the paint on your walls every few years may qualify; installing a commercial grade espresso machine in your office likely does not. This category also includes repairs to equipment like office furniture or computers.
22. Any supplies that don’t qualify as office expenses—therapeutic aids or learning toys, for instance—may be deducted as expenses here. (In the case of tools used in therapy, you may want to check with your accountant; they could be deducted either here, or in Part V below.)
23. The cost of any local or state business licenses, as well as sales tax you collect, franchise tax, and payroll tax (for employees) can be reported here.
24a and b. It can be a bit tricky determining which travel and meal expenses qualify as deductions for your business. Check out our complete guide to tax deductions for therapists—or, better yet, consult with an accountant.
25. This is where you deduct the total annual cost of utilities (phone, electricity, heating, internet) for your office.
26. The total wages you paid to employees of your practice during the course of the year can be deducted here.
27a. If you have additional deductible expenses that don’t fit into the categories listed in Part II, skip ahead and add them up in Part V. Then, return here to report the total.
27b. This box is a mystery. Leave it blank.
28. Add up all your expenses listed in the previous boxes (without taking into account any additional home office expenses), and enter the total here.
29. Subtract your total expenses from your gross income (as listed in box 7 above) to get your tentative income (your net income, before taking into account home office expenses.)
30. If you work from home, this is where you’ll calculate and/or deduct the cost of your home office, depending what method you’re using to calculate your deduction. Make sure these expenses aren’t reported elsewhere. See our article on the home office deduction for therapists.
31. Subtract your home office expenses from your tentative income to get your net income (or loss, if you failed to make a profit). You’ll enter your net income on Schedule 1 of Form 1040, your personal tax return; and Schedule SE of Form 1040, the part of your personal return where you report earnings from self-employment.
32. If you did not make a profit, you’re required to specify how much of your investment in the company is at risk. If you are a sole proprietor, you’ll check off “All investment at risk,” since your personal assets are one and the same with your business.
The good news about Part III is that you can almost certainly ignore it.
In manufacturing businesses, cost of goods sold (COGS) includes the cost of manufacturing items—including the cost of raw materials and labor.
In retail businesses, COGS is the cost of inventory, usually purchased at wholesale prices.
In therapy, you almost never have COGS to report. Skip ahead to Part IV.
You may be able to deduct some of the cost of your vehicle if you use it to travel to work events somewhere other than your office.
Which is to say, you cannot deduct the cost of owning and operating a vehicle if you use it to drive to work every day (even though this section provides a box for listing how much you used it to commute.)
Since vehicle expenses have the potential to be quite financially impactful, and the IRS is so strict about what it considers a vehicle used for business, it’s best to consult with an accountant rather than trying to complete this section on your own.
Any expenses that do not fall into the categories listed in Part III may be listed here.
Some expenses that don’t quite fit into Part III may include:
- Different types of therapeutic aids, toys, or tools
- Subscriptions to scholarly journals
- Books (for your own use)
- Workbooks and guides (for patients)
- Personal therapy (deducted as a business expense)
Proceed with caution here: trying to list expenses that don’t qualify, or listing them in an ambiguous way that confuses the IRS, can lead to a lot of time-consuming back-and-forth, even if it doesn’t result in penalties. Your best bet is to be as descriptive as possible when listing additional expenses in Part V.
As always, consult with an accountant if you’re unsure.
Not sure where to start with expenses? Check out our complete list of tax deductions for therapists.
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.
Heard partners with third-party tax preparers who are familiar with therapy practices to handle your annual business and personal income taxes from start to finish, including federal and state returns. Schedule a free consult today.Schedule a free consult