Compared to when you work for someone else, the arrival of tax season can seem much more complicated when you run your own therapy practice.
There’s a lot to tackle, from itemizing deductible expenses to electing a business structure. It’s easy for important tasks to slip through the cracks.
Here are six easily overlooked steps you should take to prepare for tax season as a self-employed therapist.
Catch up on bookkeeping before the year is over
For a lot of business owners, tax season isn’t just about filing taxes—it’s about catching up on bookkeeping, too.
You can’t file your income tax unless you know your income for the year. The easiest way to do that is by looking at your annual profit and loss statement (P&L), which is generated with bookkeeping entries from your general ledger.
The problem is, if you haven’t recorded all of your business transactions on the books—if you’ve fallen behind, or you never established a bookkeeping system in the first place—you can’t generate a P&L. Meaning, you can’t report your income on your tax return.
As a result, many business owners who have fallen behind on their books spend tax season catching up, categorizing a bunch of transactions retroactively, chasing down records of deductible expenses, and generally trying to get everything in order so they can file.
If you’re behind on your bookkeeping, the best thing you can do is take care of it before tax season arrives. That way, instead of spending the first few months of the year trying to catch up on bookkeeping so you don’t miss the filing deadline, you’ll have everything you need at your fingertips when tax season arrives.
Pull receipts from the cloud
Back in the old days, when business owners paid for goods and services using cash or (gasp!) checks, it was incumbent upon them to save every paper receipt.
This gave rise to the shoebox phenomenon: A shoebox, often tucked away in the bottom drawer of your desk, where you stuffed all your receipts. At the end of the year, it was up to you to organize them in a file for safekeeping.
When the IRS audits a business, they can request records of deductible expenses as far back as three years (or even six years, if they suspect you of fraud.) Meaning, you’d better have all your receipts on hand to prove the expenses you deducted on your taxes were real.
Good news if you’re prone to paper cuts: The shoebox of old has largely been replaced by the cloud.
Bad news if you’re disorganized: You still need to keep your receipts filed away according and, if possible, categorized. Bookkeeping best practices demand it, and so will the IRS in the event of an audit.
You likely pay for many of your deductible expenses online. Examples include:
- Office or home office utilities, including phone and internet
- Booking and scheduling software services
- Teleconferencing apps
- Google suite
- Web hosting
You may even have the option to have your receipt emailed to you when you make deductible business purchases at brick and mortar stores, such as when buying office supplies or furniture. And in some cases, cafes and restaurants may even email you a receipt, which makes business meals easier to track and deduct.
The problem is, all these digital receipts are stored in different places. To see your phone bills, you need to log in to your carrier’s website. Bills for web hosting or other online services may arrive in your inbox as emails, or they may only exist under your account preferences when you log in to use the service.
Before tax season arrives, transfer all those digital receipts to local storage—your computer’s harddrive or, better yet, a USB key dedicated to one particular tax year. Not only will you ensure you don’t lose access to your deductible receipts, you’ll have them organized and on-hand in case you need to give them to the IRS.
Try to anticipate any outstanding tax payments or refunds
If you pay quarterly taxes, you estimate the amount you’ll owe the IRS in tax payments after the year is over, and pay that amount in installments.
In the event your estimate is too high, you’ll receive a tax refund. If your estimate is too low, you’ll have to pay the outstanding amount after you make your final quarterly tax payment for the year, in January of the following year.
(Our article on quarterly taxes for therapists explains how it all works.)
If the end of the year is approaching, it means you’ve already made a significant amount of your income for the year. This is a good time to:
- Recalculate your estimated tax burden
- See how close your first estimate was to what your tax bill is likely to be
- Try to anticipate any outstanding amounts (in terms either of taxes owed, or tax refunds)
You can re-estimate your taxes using the first estimated taxes method in our article on quarterly taxes by calculating your average monthly income, then using your tax form (Form 1040 if you file as an individual or Form 1120 if you’re incorporated) to calculate what you owe in taxes.
If you follow these steps, you’re more likely to be prepared in the event you need to pay the IRS more money. Alternatively, if you know how much the IRS will owe you as a refund, you can look forward to that cash injection next year.
Make sure you have all the information you need to file Form 1099s for contractors
Have you hired contractors this year? If so, you’ll need to deliver each one a copy of Form 1099-NEC during tax season, and send another copy to the IRS.
You can learn more about this requirement from our guide to hiring contractors for therapists.
In order to fill out a 1099 for your contractor, you need their taxpayer info. That includes information like their full name and address, as well as their taxpayer identification number (TIN) or Social Security Number (SSN).
Typically, contractors will provide this information by sending you a Form W-9 when they begin working for you. If you don’t have a Form W-9, you’ll need to chase down the contractor and get them to fill one out.
That’s easier to do before tax season arrives, when your schedule is (relatively) less hectic. So, if you can, track down your contractors’ information ASAP. Your future, busy self will thank you.
Decide which structure to elect
There are two reasons to rethink your business structure when tax season approaches:
- You have a limited liability company (LLC), which can elect one of a variety of different entity types at tax time
- Your practice has grown over the past year, and you may benefit from choosing a new entity type
LLC therapy practices electing different entity types
While they’re formed at the state level, LLCs may file taxes at the federal level as one of a variety of different business entities.
If your therapy practice is an LLC, you may file your taxes as:
- A disregarded entity (effectively the same as a sole proprietor)
- A partnership
- An S corporation. (The deadline to file Form 2553, electing S corporation status for the current year, is March 15th.)
Your ability to file as each of these different entity types will depend upon how you run your business, and it’s best to consult with your account before going ahead with an election. Plus, there may be tax benefits to electing a new business structure, and the best way to understand them is to talk to a professional.
Switching your therapy practice’s business structure
The end of the year is a good time to review how your business has performed, and decide on any changes you’d like to make. Changing your business structure is one such change.
For example, if you’re a sole proprietor, converting your therapy practice to an S corporation can:
- Help protect you from financial and legal liability
- Open up the possibility of sharing ownership of your business in the future (with employees or business partners)
- Potentially affect your tax bill
Before the year is over, book time with your accountant to review the previous year’s finances, and discuss whether it’s time to make a change.
Make financial admin resolutions for the year ahead
In our personal lives, as we approach the end of the calendar year, we may slow down to review the year that has passed, and make resolutions for the new year ahead. Your business can benefit from a similar practice.
What changes in how you handle your business financial admin would you like to see in the year to come? What concerns do you have about how your business is currently operating?
All too often, tax season is a frantic rush to get everything in order so you can file before the deadline. You may not have the time to slow down and reflect on deeper questions about your therapy practice and its future later. Taking time to reflect on these questions now—with the help of an accountant or tax advisor, if possible—can help you make concrete plans.
For instance, you may decide to:
- Hire a professional bookkeeper to help reduce your work burden and make tax season simpler
- Set up a comprehensive filing system for business records like receipts, invoices, and W-9s from contractors
- Set a schedule to review your estimated tax payments, and recalculate them if needed
- Create annual or quarterly budgets to better help you plan your spending
For more inspiration, check out our guide to tax basics for sole proprietor therapy practices.
Need help getting everything prepared for tax season? Learn more about hiring 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 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.