Tax Basics for Sole Proprietor Therapists

July 30, 2021
Editorial Team

Tax season can often come with feelings of shame and confusion for private practice therapists.

It doesn’t matter whether you’re just starting your private practice or have been handling the accounting for your private practice for years⁠—tax season can always feel daunting and stressful.

If you're a mental health professional still feeling lost as to where to begin when filing your annual return, we're here to help! At Heard, we want to make sure you're as prepared as can be for filing your returns, while providing tips and tricks to help make your relationship with the IRS more understandable and less stressful.

If you're filing your taxes as a sole proprietor, here are some basic details that are important for you to know around your annual taxes, quarterly taxes, and tax extensions.

Filing your annual taxes as a sole proprietor

As a sole proprietor, you are taxed as an individual. This means that you will report all income and expenses from your business on your personal tax return. The only difference between filing as a sole proprietor as opposed to an individual is that you must complete a Schedule C with your Form 1040.

You can find your income tax bracket by looking at the annual tax table. Your business income is then your personal income.

Filling out your Schedule C

As a therapist operating as a sole proprietor, you will need to file a Schedule C, Profit or Loss from Business, which is a basic, two-page schedule.

What information do I need to fill out a Schedule C?

Sole proprietors will need to have the following information to complete the Schedule C:

  • IRS instructions
  • Social Security Number
  • Employer Identification Number, or EIN
  • Financial statements –– more specifically, income statements showing earnings and expenses
  • Records and receipts for planned tax deductions
  • Mileage records, if you plan to take business vehicle deductions

How do I fill out the Schedule C for my therapy practice?

There are five distinct parts that need to be filled out to complete your Schedule C, four of which relate to your private practice:  

  • Income is where you report all of your practice earnings for the year. This can be found on your financial statements.
  • Expenses is where you include all of your practice expenses for the year. This can be found on your financial statements.
  • Information on your Vehicle is for sole proprietors who want to account for the Business Use of Vehicle deduction.
  • Other expenses are for any other expenses that you would like to report that you couldn’t find a location for in the above sections, namely the expenses section.

As a private practice owner, you are selling your services and not physical goods, and as such, you do not maintain inventory on hand. This means you do not need to complete the Cost of Goods Sold section.

Do I need to file more than one Schedule C?

If you run multiple, non-related businesses, then you will need to complete a separate Schedule C. Be sure to talk to your accountant or the Heard team if you have separate, distinct forms of income (e.g. coaching, consulting).

Paying your quarterly taxes for private practice

If you're a self-employed therapist who will owe more than $1,000 in taxes for a given tax year, you're still required to pay your taxes four times a year in estimated payments. These are also known as "quarterly taxes." The estimated quarterly tax is calculated based on several assumptions around income, self-employment, and other taxes that you may be subject to as a practice owner.

If you're a sole proprietor and meet these requirements, you will need to make these quarterly payments. Employees don’t need to worry about quarterly taxes as taxes are typically taken out of paychecks throughout the year.

You also won't need to pay if you meet the three following conditions: you didn't owe taxes in the previous year and therefore didn't file a return, you are a US citizen, and your tax year was 12 months long. If you do not pay quarterly taxes, you may be subject to penalties, so this is important to be aware of throughout the year!

In order to calculate estimated tax payments, you'll add up your tax liability for the year and divide by four. The IRS offers an Estimated Tax Worksheet found in Form 1040-ES, or Form 1120-W for corporations, that helps you make these calculations. If you’re a Heard customer, we also work to provide quarterly tax estimates for you based on your income throughout the year.

Filing for an extension on your taxes

Needing an extension for tax filing this year (or have you always wanted to know how to do it)? Here are some tips you should know!

To begin, just because you have an extension on filing your return doesn't mean you have an extension on paying your taxes! In order to avoid any additional fees or penalty charges, you should still plan to estimate and owe your taxes on the day they're due. Yes, this is a bit of a buzzkill, but knowing this will help you prepare financially for years to come.

If you're an individual filing for an automatic extension, you can file Form 4868 to request said extension. Special cases apply for certain individuals living outside the US or barring special circumstances, so be sure to check on the IRS website for any regulations that may pertain to you.

You (or any tax professional helping you file) can also file for an extension online using Free File via the IRS, which will grant you an extension until October 15th. You will need to estimate your tax liability for the year and pay anything owed.

You're also able to receive an extension by paying your estimated income tax through Direct Pay, the IRS' Electronic Federal Tax Payment System portal, or by card. If paying this way, you can indicate the payment is for an extension and bypass any separate forms needed for filing.

There is so much financial jargon that can come up around these topics, making it easy to write off, and frankly, put off paying your taxes. That’s why, at Heard, we strive to make tax season the easiest possible experience for the clinicians we work with.

Wondering about tax basics for S Corporation therapists? Check out our article.

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.

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