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Year-End Financial Planning for Therapists

By the time December rolls around, don’t feel bad if tax planning for your therapy practice is the last thing on your mind.

Even for busy small business owners, the holidays are usually a time to rest, enjoy time with family and friends, and prepare for the New Year ahead.

But taking a few simple steps now to get your business organized could significantly lower your bill come tax season.

So think of end-of-year tax planning as a delayed gift to yourself. Here are six moves you can make now to enjoy the benefits come tax season. 

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Deduct startup costs if your practice is new

If you started your practice this year, you can lower your tax bill by deducting startup expenses.

So long as your total startup expenses totaled less than $50,000, you can deduct up to $5,000 of the money you spent getting your therapy practice up and running.

That includes expenses like:

  • Lawyer and accountant fees
  • Marketing consultant fees
  • The cost of doing your own market research (e.g. accessing publications or databases)
  • The cost of finding an office space and leasing it
  • The cost of furnishing and equipping your office
  • Wage or salaries paid to staff members (an admin assistant, for instance) while you trained them
  • The cost of advertising your practice prior to opening

You can also deduct expenses like fees paid to form an LLC or register a name for your practice. For a deeper dive, check out our guide to deducting start-up fees for your therapy practice.

Clean up your bad debt

In a business context, “bad debt” doesn’t refer to a Christmas credit card hangover, or that $200 Dutch oven you bought during the first wave of COVID when you thought you’d get really into baking sourdough.

Bad debt, in this case, is money you’re unable to collect from those who owe it to you. That could be a client who moved away and conveniently changed their phone number before paying the last bill you sent them. Or it could be a trendy new startup that brought you in for a series of mental health workshops, then lost funding and went under before they could pay your invoice.

Whatever the case, it’s important to differentiate between two types of bad debt and two ways of cleaning it up:

  1. Bad debt you’ve already reported as income on a prior tax return
  2. Bad debt in the form of unpaid invoices that you have not yet reported as income 

In the first case, if you review your books and discover bad debt you recorded as income, you could deduct the cost of the debt this year even if you’ve already paid income tax on it for a prior year. Learn more about the bad debt deduction.

In the second case, there’s no need to deduct the cost of the debt on your tax return. But you do need to go back and write off the debt if you’ve recorded it as income on the books. Otherwise, you run the risk of reporting income you never earned. To write bad debt off the books, use the direct write-off method.

Redirect income to HSAs and IRAs

Contributing to health savings accounts (HSAs) and individual retirement accounts (IRAs) reduces your tax burden for the current year, while allowing you to put aside money for retirement or unforeseen medical expenses.

For 2023, the maximum contributions are: 

  • HSA: $3,850 for individuals ($4,850 if you’re 55+), or $7,750 for families ($8,750 if you’re 55+). Besides allowing you to defer tax payments, some HSAs also allow you to make tax-free contributions.
  • IRA: $6,500 ($7,500 if you're 55+). If you have a spouse and they have an employer retirement plan, however, it could limit how much you’re able to deduct from taxes using your own IRA. 

The deadline for both types of contributions is April 15, 2024. For more, read our article on how to choose a retirement plan for your therapy practice.

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Defer some of your income

The less income you earn this year, the less income tax you’ll have to pay on it.

Don’t get too excited—any income you earn in the New Year will still get taxed. But if your tax bill for the current year looks like it’ll be a big one, deferring income can prevent it from getting any bigger.

First, determine whether deferring income will benefit you. Total up your financial statements and try to get a ballpark figure for what you’ve earned so far this year.

Compare that with last year’s income. Are you ahead? If so—and if you’ve been paying quarterly estimated taxes for this year based on last year’s figures—it could mean you owe the IRS extra cash once you file your taxes.

If that’s the case, it’s time to look at deferring income. That’s easiest to do if you use the cash basis method of accounting.

Quick refresher: Cash basis accounting tracks revenue the moment you earn it, ie. whenever you have cash in hand. In contrast, accrual accounting tracks revenue when you bill for it (that is, when you send a client an invoice).

If you use the accrual method, you’re limited in your ability to defer income (short of rescheduling clients to come see you in January rather than December). 

If you use cash basis accounting, on the other hand, you have more flexibility. For instance, instead of immediately invoicing clients you see in the last two weeks of December, you could invoice them January 1st. Then, when you’re paid, the income won’t appear on your tax return for the current year.

(In the event you take this approach, check with your clients ahead of time to make sure the delayed billing schedule works for them.)

There may be ways to defer income from other revenue streams as well. For instance, that guest blog post you wrote for a mental health website, or that editing work you did on a colleague’s book, are both prime candidates for deferral.

Just be sure to use your best judgment, and communicate clearly with the people or businesses you’re billing. They may be eager to pay off as many expenses as possible before the end of the year—for reasons explained in the next tip.

Make major purchases before year-end

If you have the cash to cover a major business purchase before the end of the year, and it’s a purchase you’d be making next year anyway, go ahead and do it now.

Every deductible expense you incur this year lowers your tax bill. That’s a good thing if you’re trying to reduce your income and avoid paying any extra cash to the IRS once you file.

(Keep in mind, though, that you are only able to deduct—at most—the full amount of tax you would pay on revenue that you would otherwise spend on a deductible business expense. The full value of the expense is not deductible. If you plan to spend money to save money, do it judiciously.)

This is a time-tested strategy used by businesses both large and small. It’s most effective for companies with a lot of inventory, or ones that rely on frequently upgrading or repairing equipment. On first glance, it may be hard to see how your therapy practice can take advantage of it.

But think ahead. You’ve got a whole 12 months, comprising the coming calendar year, for spending money. What are some expenses that might come your way?

For instance, maybe the laptop you use for online client appointments has started to make scary whining sounds in the last few months. You know it’ll be time for an upgrade soon; how likely is it you’ll upgrade next year?

Or maybe the summer heat in your office was brutal this year, and you’ve already resolved to upgrade your air conditioner before next summer. Why wait until May when you can make the purchase now?

Best of all, Boxing Week could be your chance to score deals on items your practice can use. For instance, the $1,000 you’d budgeted for a new laptop may get you a more powerful model that would normally cost $1,600. A little thoughtful consumerism now could lower your tax bill in the future.

Set yourself up for better expense tracking in 2024

Good bookkeeping helps you track and categorize all your expenses. Combined with careful recordkeeping in the form of saved and organized receipts, that sets you up to report as many deductible expenses as possible on your tax return.

If you don’t have a solid bookkeeping solution in place—for instance, if you do your own bookkeeping, but you keep falling behind—then December is a smart time to get a new system set up.

That way, when January 1st arrives, your new bookkeeping system is ready to track every expense of the financial year from Day One. There’s no rushing to catch up and get organized mid-year, and you’ll be on track to take advantage of as many deductions as possible.

For help, check out our article on why bookkeeping is important for therapists.

Excited for tax season? Just us?

Grab out our complete tax season checklist for therapists, so you’ll be ready to get organized and file as soon as the New Year arrives.

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.

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

Maybe your therapy practice is brand-spanking-new. Or maybe you’re running it as a side hustle while working elsewhere as an employee. You may be asking yourself, “Do I really need to file a tax return?”

You probably do. The tax cutoff for self-employment income is low, and once you cross it, the IRS expects you to file.

The good news: once you understand how the cutoff works, and how to differentiate between regular employment and self-employment income, you’ll have an easier time staying organized and meeting tax deadlines. Here’s what you need to know.

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Wages or salary vs. self-employment income

Broadly speaking, there are two categories of income you may earn as a therapist:

  • So-called “W2 income.” This is a full- or part-time wage or salary you earn from an employer. The employer withholds income tax and employment taxes when they pay you. They report your income and withholdings to the IRS using Form W2.

  • Self-employment income. This is money you earn operating as a sole proprietor or any other pass-through business entity. You report the earnings on Schedule C of your personal tax return.

When you work for another therapy practice as an employee, you earn W2 income. When you run your own therapy practice—or do contract work for another business as a therapist—you earn self-employment income.

The W2 income filing cutoff

If your wages as a W2 employee are low enough, you may not need to file a tax return. 

Tax filing cutoffs for W2 employee therapists

Filing Status Under 65 Under 65
Single $12,950 $14,700
Head of Household $19,400 $21,150
Married Filing Jointly $25,900 (both under 65) $27,300 (one spouse 65 or older)
$28,700 (both spouses 65 or older)
Married Filing Separately $5 $5
Qualifying Widow(er) $25,900 $27,300

Keep in mind that if you work more than one job—that is, you earn W2 income from two or more sources—your total W2 income from all jobs is used to determine whether you need to file.


If you cross the threshold requiring you to file a tax return for your W2 income, but you don’t cross the threshold requiring you to file a tax return for your self-employment income, then you are only required to file for W2 income.

The self-employment income cutoff for therapists

Self-employment income is any income you earn by working as a contractor or operating as your own business.

Working as a contractor

In contrast to an employee, a contractor is usually hired for a fixed, limited period to complete particular tasks. They typically submit an invoice to the company or individual who has hired them.

Examples of contract work you may do in your capacities as a therapist include:

  • Leading a limited course of group therapy sessions for an addictions treatment center
  • Facilitating a series of workshops for employees of a business or students at a school
  • Writing blog posts or recording videos for a therapy practice to use on their website or social media
  • Editing or ghostwriting the manuscript for another therapist’s book
  • Providing clinical supervision
  • Tutoring an aspiring therapist in the process of completing their post-graduate degree

Working for yourself

When your clients pay you directly for clinical services, and you’re not working as an employee for another therapy practice, you’re a self-employed therapist.

By default, the IRS treats you as a sole proprietor. For tax purposes, you are both an individual and a business. You report your business income and expenses on your personal tax return (Form 1040, Schedule C).

You also report your business income on your personal tax return if you are a single-member LLC electing S corporation status or a member of a general partnership.

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The filing requirement cutoff for self-employed therapists is $400

If you run your own therapy practice, work as a contractor for another business, or do both, you are required to file a tax return once you owe more than $400 in taxes.

There’s a common misunderstanding that the cutoff is $600. In actual fact, $600 is the cutoff for individuals or businesses reporting money paid to a contractor.

How do you know whether you’ll owe $400 or more in taxes? You look at your tax bracket, then calculate how much you’ll owe.

Example: You earned $32,000 over the course of the year as a self-employed therapist. That puts you in a tax bracket with an income rate of 12%. On top of that, you’ll owe 15.3% in self-employment tax.

Twelve percent of $32,000 is $3,840, and 15.3% of the same amount is $4,896. In total, you’ll owe $8,736. That’s well in excess of the $400 limit, so you must file taxes for your self-employment income.

Keep in mind, the self-employment tax filing requirement is based on your total self-employment income. For instance, if you earn income running your own therapy practice, but you also earn income working as a freelance copy editor, you must add up income from both side hustles to figure out whether you need to file.

How much do you need to earn to pay quarterly taxes?

If you expect to owe $1,000 in federal taxes, you’re required to make quarterly estimated tax payments.

In brief, the IRS expects you to estimate the total amount you’ll owe in taxes for the year, then pay it in quarterly installments over the course of the year.

For the full rundown, check out our guide to quarterly estimated taxes for therapists.

Keep in mind that individual states have their own cut-offs for quarterly estimated tax payments; even if you’re not required to make quarterly payments to the IRS, you may need to make them to the state tax authority. Check with your Secretary of State to determine the cutoff for your business.

How to prepare for tax season

Feeling overwhelmed at the prospect of your first tax season as a self-employed therapist? We’re here to help. Check out the Heard Tax Hub for therapists to see your filing deadlines, get a list of must-have documents for filing, and discover new ways to reduce your tax bill.

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.

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How to Take Holiday Time Off as a Therapist

The holiday blues are real. Travel plans, credit card debt, and nostalgia for simpler, more innocent Yuletides gone by may leave you feeling less than holly and jolly. 

And when you run your own therapy practice, planning time away from work creates its own stressors.

But don’t go Grinch mode just yet. With a little planning, you can step away from your practice with the minimum amount of hassle—and maybe even snag some much-needed R&R. 

Here are seven steps for planning your winter vacation as a self-employed therapist.

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1. Plan your leave and return dates far in advance

Before doing anything else, set dates for when you’ll be leaving and returning to the office. 

When you’re dedicated to helping your clients and growing your practice, taking time off can create feelings of guilt. The farther in advance you block off time in your calendar, the less you’ll feel like you’re sneaking away or slacking off when the time comes. Winter vacation becomes just another part of the 12-month cycle.

It can also make it easier to enforce boundaries later on, in the event work threatens to encroach.

Bonus: if you’re planning to travel during the holidays, you may be able to save on the cost of airfare or hotel stays by booking well in advance.

There’s a chance it’s too late to take this step—sometimes, the holidays just seem to sneak up. In that case, fight procrastination and book off the time ASAP. (Or, if it’s really getting down to the wire, consider booking time off in January instead.)

2. Set your holiday budget

Beyond shopping expenditures and the electricity bill, how much do you expect to spend covering personal costs during your time away?

One of the biggest mistakes newly-self-employed therapists take when planning time away is overlooking cash flow. While you’re not working, you’re (probably) not earning your typical week-to-week income. So you need to plan how you’ll pay for food, gas, utilities, and other essential items.

That could mean:

  • Planning how much you’ll spend from existing savings;
  • Designating a credit card to cover expenses, and creating a plan to pay it down in the New Year; or
  • Using savings you’ve already specifically put aside for the holidays.

Whatever plan you choose, the important thing is to create a real budget—a spreadsheet or written notes. When you own your own business, stress over personal finances has a way of leaking into your professional life. Keep yourself accountable, and the New Year will get off to a better start.

3. Create a savings plan if necessary

If you don’t have a pile of personal savings to fund your holiday vacation—or you’d simply rather not dip into them—the trick is to build a savings plan well before your time off arrives.

That could mean starting in July to set aside funds every week to eventually cover your time away. It may be hard staying disciplined when the holidays are still five months out, but it’s seriously satisfying to leave the office in December knowing your time away is paid for.

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4. Notify clients in advance

Notify your clients of your time away twice:

  1. Once, two or even three months before you leave; and
  2. A second time, one month beforehand

The first notification sets the groundwork, so nobody feels blindsided when you notify them later. And the one-month-to-go reminder gives them enough time to plan without being far enough away to procrastinate or forget.

(Naturally, your clients’ reactions and the amount of support they need will differ on a client-by-client basis.)

Your final notification to clients should come in the form of an email, and include:

  • The precise dates of your absence
  • Contact info in case of emergencies 
  • Hourly fees of the therapist covering you while you’re away

5. Get coverage for emergencies

Work with a fellow therapist to ensure they can cover your practice in case any of your clients need emergency mental health support.

Set up a meeting to determine their own availability and expectations, as well their hourly fee in the event they need to provide one of your clients with an emergency counseling session.

It’s not uncommon for therapists to cover one another’s practices reciprocally, i.e. your fellow therapist may ask you to cover their summer vacation later in exchange for them covering your winter vacation now. 

If you plan to be away longer than two weeks, you may want to offer clients the chance to see your coverage therapist for their weekly or biweekly counseling sessions. Supposing you go that route, you’ll need to take time to meet with the therapist covering you to brief them on the relevant clients and provide treatment notes.

6. Plan and complete last-minute tasks

Set yourself a deadline and, if necessary, schedule extra work hours to complete final tasks before going on vacation.

If you’re thorough now, you won’t have any leftover work nagging your conscience while you take time away from the office. Be sure to:

  • Catch up on patient notes
  • Make sure your bookkeeping is up to date*
  • File expense receipts for safekeeping
  • Send out invoices
  • Settle unpaid bills

* Depending upon when you return from vacation, you may need to close the books and generate year-end financial reports when you get back. If that’s the case, making sure your books are up to date now will save you a lot of hassle later on.

7. Set up your auto-replies

Finally, before you turn off your devices and enjoy some much-needed downtime, create:

  • An auto-reply message for your email account
  • A vacation voicemail message for your phone
  • A sign for your office door (if applicable)

Each message should include:

  • The dates you’ll be away
  • Emergency contact information for the person covering you
  • A promise to respond to all messages once you return to work

Once your auto-reply messages are set up, you should feel comfortable stepping away and enjoying your time off.

As soon as January 1st arrives, tax season begins. For help staying organized and making smart year-end tax moves, check out our Tax Hub 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.

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How to Create an Invoice for Your Therapy Practice

When you run your own therapy practice, good invoicing helps you get paid faster. 

Thorough, carefully filled-out invoices make it easier for clients to understand what they owe and how they can pay you. Not only that, but clients filing health insurance claims in order to be reimbursed for the cost of therapy rely on detailed invoices to do so.

The easiest way to invoice clients is with a template. Keep reading for a free invoice template for therapy practices, plus instructions on how to fill it out.

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How to send a HIPAA-compliant invoice

In order to be HIPAA-compliant, invoices you send patients electronically must be protected from third parties.

On the surface, emails may seem like a simple, direct way to communicate with your clients. On the technical side, it’s much more complex. 

The data contained in an email may bounce between a number of different servers before reaching its final destination. Each time it travels from one server to another, it’s vulnerable to theft.

Hackers may use your patients’ data for the purpose of identity theft, blackmail, or fraud. Not only does that hurt your client, but it could result in steep fines for your practice.  

There’s not much you can do to stop emailed invoices from being intersected and stolen. But there are steps you can take to make sure the data is unreadable and can’t be used to violate your clients’ privacy.

The most direct method is encryption. When you pay for a HIPAA-compliant email service like Gmail for business, you can encrypt emails to clients, keeping their private data safe.

Any electronic health records (EHR) tool that allows you to bill clients should also be HIPAA-compliant. 

Other invoicing apps or accounting software may or may not be HIPAA-compliant or provide encryption. Make sure you’re using a 100% HIPAA-compliant method before sending any client data over the internet.

For more information, check out our HIPAA Compliance Checklist for Therapists.

Why you need an invoice template for your therapy practice

If you’ll be invoicing your clients by email, it’s absolutely essential to choose a template that works for your practice.

While your exact needs may differ somewhat, here’s what any template you use should include:

  • Your practice’s name, your address, and other contact info
  • Your client’s name and address
  • The invoice number
  • A section where you list services being charged for (line items)
  • A section showing the costs and total cost of the items you’re charging for
  • Details on how clients can pay you by check, eTransfer, or ACH
  • A section for extra notes
  • The date and your signature

Heard’s free invoice template for therapy practices below includes all of these sections.

Heard’s free invoice template for therapists

Here’s a quick preview of Heard’s free invoice template for therapists:

Here’s how to access the template and make a copy for yourself:

  1. Log in to your Google account.
  2. Sign up to receive the template in the Heard Resource Hub: Invoice Template for Therapists. The email will be sent directly to your inbox.
  3. Check your email, then access the template by clicking the “Download template” button.
  4. In Google Sheets, go to File > Make a copy.
  5. Google Sheets will prompt you to save a copy of the file to your own Google Drive folder
  6. Select a folder in Google Drive*, then click “Make a copy.”
  7. A new tab will open showing your own, personal copy of the template.

* If you’re not super familiar with Google Drive and you’re not sure where to save the template, don’t worry. When the dialog opens prompting you to choose a folder, click “All locations” and select My Drive.

You can now close the tab with the original Heard Invoice Template for Therapists, and begin using your own copy of the template to create invoices.

How to create an invoice in Google Sheets with your copy of the template

The easiest way to create new invoices using the template is to make copies of it, and fill out each copy as a separate invoice.

Heads up: Before saving any client data in the cloud, make sure to read up on Google and HIPAA compliance.

But before making any copies, fill out your practice name, address, signature, and contact info. It will save you having to enter the same information each time you create a new invoice.

Then, go to File > Make a copy to start creating copies.

How to add your signature

If you have a copy of your signature saved on your computer, you can add it to the Google Sheets template so it’s included on every invoice you send.

First, select the shaded cell next to “Signature:” (cell E38).

Then, in Google Sheets, go to Insert > Image > Insert an image over the cells.

Now you can resize your signature and drag it into the right position on the template.

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How to email your client an invoice created with the template

Before emailing your client a copy of an invoice, convert it to a PDF.

The PDF format is easier to share if your client doesn’t have Excel or Google Sheets.

To export a PDF version, go to File > Download > PDF (.pdf)

How to turn the Google Sheets template into an Excel spreadsheet

You can convert your Google Sheets invoice template into an .xlsx file readable by Microsoft Excel.

This is a good idea if you already have Excel installed, know how to use it, and want to fill out and store all your invoices natively on your own computer rather than in the cloud.

To download a copy of the template for Excel, go to File > Download > Microsoft Excel (.xlsx)

Example therapy invoice 

To get a better idea of how the Heard Invoice Template for Therapists works, here’s an example of it in action:

The template is being used by an imaginary therapy practice in Boise, Idaho. The client being invoiced is imaginary, too.

At the top, we see names and contact info for the practice and the client.

To the right of that, there’s the invoice number and the date of issue, as well as the due date.

You can number your invoices any way that works for you. The numbers are for your use internally, so you can keep track of the invoices you’ve sent; and for communications with clients, bookkeepers, and accountants, so it’s easy to refer to specific invoices.

Next, the line items. These are the meat of the invoice. There are spaces for:

  • The date the service was rendered
  • The CPT code (important if your client is being reimbursed by their insurance provider)
  • The type of service provided
  • The duration of the service
  • Your hourly rate
  • The total cost of each line item
  • The total cost, at the bottom, of all line items

Note that the template will automatically multiply the duration in each line item in hours by your hourly rate in dollars to arrive at the total.

Below, there’s space to fill in account and routing numbers so your client can pay you electronically or by check.

Then there’s a space for notes, in case you need to provide any extra contextual information about the invoice. 

Finally, there’s the issuer’s signature and the date.

Once you’ve saved a copy of the invoice template for yourself, it’s 100% editable. You’re free to add or remove sections as you see fit. The template is just a starting point, and the only limit to what you can do is how much time and energy you’re willing to invest.

Invoicing clients electronically? Learn more about HIPAA-compliant payment methods 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.

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Asian woman looking at bills on her laptop at home

When Should My Therapy Practice Become an S Corp?

Electing S corporation status for your therapy practice gives you more control over how your income is taxed. But not all businesses are in a position to benefit from becoming an S corp. 

Here are the signs to look out for before making the switch.

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A quick refresher on S corporations

By default, when you go into business for yourself, the IRS considers you a sole proprietor. You report all your business’s revenue and deductible expenses on your personal tax return. You pay income tax on all your income based on your personal tax bracket, as well as the 15.3% self-employment tax. 

When you elect S corporation status, you become a shareholder in your own corporation. (If you’re the only shareholder, you hold 100% of the shares.) 

You pay income tax on the S corp’s income, but not self-employment tax. Only the money you earn as wages as an employee of your own S corp is subject to additional taxes, in the form of payroll taxes.

You can also earn money from your S corp in the form of shareholder distributions, which are not subject to payroll taxes, and as tax-free benefits like a health reimbursement arrangement.

Most therapy practices that want to take advantage of S corp status first register as limited liability companies (LLCs) in the states where they do business. Then they elect S corp status by filing IRS Form 2553.

If you’re really new to the S corp concept, and all this talk about tax status and business entities has your head spinning, don’t worry: there’s a guide for that. Check out our Complete Guide to S Corporations for Therapists.

When it’s worth the extra effort to lower your tax bill

Electing S corp status for your therapy practice can come with serious tax benefits, but it will cost you time, money, and effort.

We’ll cover the money aspect in the next section. For now, just be aware that it takes time and effort to elect S corp status. You either need to put some work in reading up on S corp elections and filling out forms, or hire an accountant to do it for you.

You’ll also have to set up payroll for your therapy practice, and your annual tax filing will become more complicated.

So, why do therapy practices elect S corp status at all?

One major reason: tax savings.

S corporation tax savings by the numbers

To better understand how businesses benefit from S corp status, we’ll compare how sole proprietorships and S corps are taxed.

Example 1: Sole proprietorship

Your therapy practice is a sole proprietorship, and your income for the year is $100,000.

As a sole proprietorship, you pay income tax and self-employment tax on 100% of your income.

Assuming you take the standard deduction and don’t make any retirement plan contributions, you’ll pay an estimated $14,260 in federal income tax at an effective tax rate of 16.6%, in accordance with 2023-2024 federal income tax rates. 

But, since you’re self-employed, you must also pay self-employment tax. The self-employment tax rate is 15.3%, so you’ll owe roughly $15,300.

In total, you pay an estimated $29,560 in federal taxes. 

Example 2: S corporation

Now suppose your therapy practice is an S corp, and your income for the year is $100,000.

You pay income tax on 100% of that, so you’ll owe the IRS an estimated $14,260 (just as you would with a sole proprietorship).

But you don’t owe self-employment tax. Rather, the income you’re paid by your employer (the S corp) is subject to FICA, which comes to 15.3% of your wages. Half of FICA is paid by the S corp, and the other half is taken out of your paycheck.

Your salary is $40,000. (The other $60,000 in income is either held by the S corp as cash assets, paid out in shareholder distributions, or paid out as tax-free benefits.)

Now, only that $40,000 salary is subject to FICA. The S corp pays 7.65%, and you pay 7.65%.

Once the dust settles, you’ve paid roughly $6,120 in FICA contributions, and an estimated $20,380 total in federal taxes. 

Your total tax savings

Following these examples, you would pay $15,300 in self-employment tax as a sole prop. As an S corporation, you would pay $6,120 in total FICA contributions.

That’s a total savings of $9,180 for the year—nothing to sneeze at.  

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You can afford the extra costs

As you can see, electing S corp status can save you a considerable amount in taxes. But it comes at a cost.

In order to make money, in this case, you really do need to spend it. Electing and then maintaining S corp status requires extra services—like bookkeeping and payroll—that cost money to outsource. And it may open you up to extra fees or taxes at the state level.

Before electing S corp status, add up all the fees involved and make sure:

  1. You can afford them upfront, in the case of one-time payments, and
  2. It makes long-term financial sense (ie. you aren’t paying more in fees each month than you are saving in taxes)

Here’s a breakdown of the extra costs that come with running an S corp:

One-time accounting fees

If you’re good with numbers and you love filling out IRS forms, you can form an LLC and elect S corp status with no extra help.

Otherwise, be prepared to hire an accountant. Working with an accountant, you can expect the cost for converting your sole prop into an S corp to range near the $1,000 mark. 

Recurring accounting fees

The IRS pays closer attention to S corp tax filing than to sole proprietor tax filings, and S corps—in general—are more likely to be audited.

(That’s because many S corp owners try to take advantage of their business structure to underpay taxes.)

In order to avoid IRS trouble, you want your tax filing to be squeaky clean and correct. Typically, that means hiring an accountant to do it for you.

An accountant can also help you set a reasonable salary and plan shareholder distributions from your S corp.

For these services, expect to pay at least a few hundred dollars a year.

Bookkeeping

You can’t file taxes accurately unless you have accurate, up-to-date bookkeeping. 

When you’re a simple sole proprietorship, you may be able to get by with a homemade spreadsheet and some back-of-napkin calculations. But with an S corp the DIY approach just doesn’t cut it.

The cost of hiring a bookkeeper varies widely. For more info, learn why bookkeeping is important for therapists

LLC, PLLC, or other entity registration

In order to elect S corp status, you typically need to register as a business entity at the state level.

Not all states that allow businesses to form LLCs also allow therapists to form LLCs. In some states, therapists and others in medical fields must form professional LLCs (PLLCs) or professional corporations.

There’s usually a fee involved. For instance, in California, to register a professional corporation for your therapy practice costs a one-time fee of $200.

Local and state taxes

Depending on the state where you operate, registering a business entity may increase the amount you have to pay in local and state taxes.

For example, California charges businesses an $800-per-year franchise tax to maintain their professional corporation status.

Depending on local laws, you may also owe fees on the municipal or county level.

Insurance

Some types of business insurance for your therapy practice may increase their rates when your business structure changes. Also, different states have different laws about which types of insurance a registered business entity requires.

Payroll

Income tax and FICA withholding, reporting, and remittance add an extra layer of complexity to your month-to-month bookkeeping—even if you’re the only employee on payroll.

You’ll also need some form of employment agreement to make it official.

Many therapy practices outsource this work to a payroll provider. The monthly or annual cost of a payroll provider varies widely. As an example, for a company with just one employee on payroll, Heard’s partner Gusto charges $46 per month for payroll and benefits integration.

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You have the cash flow to cover it

Generally speaking, “cash flow” refers to the rate at which your business earns cash. The more frequently you’re paid by clients, the higher your cash flow.

In a more specific sense, it’s the rate at which your accounts receivable converts to cash—that is, how quickly clients who owe you money pay it.

In either case, your cash flow requirements are likely to change once you elect S corp status.

You now have new expenses to cover—like your own wage—on an ongoing basis. When your S corp doesn’t have the cash to cover those expenses, you’ll either need to dip into your savings or rely on credit.

Sole prop vs. S corp cash flow requirements: an example

Here’s a quick comparison demonstrating how cash flow requirements may differ depending on whether your business is a sole prop or an S corp.

Sole proprietorship

Suppose your monthly recurring expenses look like this: 

Office rent $1,400
Utilities (phone, electricity) $200
Owner’s draw $3,400
Total $5,000

You can technically withdraw money from your business checking account any time you need it for personal use. For the sake of keeping your bookkeeping organized, however, it’s best to set an owner’s draw—a certain amount you withdraw every month to pay yourself.

With this (simplified) arrangement, you need to have $5,000 positive cash flow each month to cover operating expenses.

S corporation

For an S corporation with the same office expenses, paying the same amount as the owner’s draw above as salary to the owner, monthly expenses would look like this:

Rent $1,400
Utilities (phone, electricity) $200
Salary $3,400
FICA contribution $260
Payroll service (Gusto) $46
Total $5,286

Simply turning that $3,400 per month from owner’s draw to salary, and outsourcing your payroll, increases your cash flow requirements by $286.

That may not seem like much. But there’s an important difference between owner’s draw and salary: Your owner’s draw is optional. Your salary is not.

Suppose one month a few of your clients miss their appointments, and your revenue for the month is $300 short.

That’s alright—you can always reduce your owner’s draw by $300. There’s no law forcing you to take the same draw every month. 

While it’s good to stay consistent for the sake of planning and keeping your books organized, a $300 dip in owner’s draw for the month is no big deal.

Now suppose you’re $300 short in cash, and it’s time cut yourself a paycheck. Problem is, you can’t just reduce your salary. You need to be paid your full wage; if you don’t have cash to cover the full amount, you may be able to delay a few days, or carry forward the difference to your next paycheck—but that introduces all kinds of payroll and bookkeeping headaches.

At the end of the day, if you’ve hired yourself as an employee receiving a $40,800 salary, you need to pay yourself that salary. There’s no wiggle room.

The bottom line with cash flow 

Once you elect S corp status, everything about your accounting, bookkeeping, and tax filing becomes more complex. In some ways—like the need to cut yourself a regular paycheck—it becomes more rigid.

The potential long-term tax savings are significant, but you need to make certain you can cover your costs month to month.

You’re in business with your spouse

One final, possibly niche indication it’s time to elect S corp status: You’re planning to hire your spouse.

When your therapy practice is an S corporation and you hire your spouse, there are potential tax savings to be had by both your business and your significant other.

Federal law does not require you to pay your spouse minimum wage. Instead, you can compensate them with tax-free health benefits. Plus, because you’re married, you can transfer non-wage funds to them without being taxed.

There are a number of factors to take into account here—not least of which is how to pay your spouse a reasonable wage, even if you’re paying them in the form of health benefits. For a deeper dive, check out our guide to employing family members at your therapy practice.

Electing S corp status can net you serious savings on your tax bill provided you take into account the extra expenses involved. Before you make any major decisions, be sure to consult with a financial professional, and check out our Complete Guide to S Corporations 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.

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Can Therapists Deduct Start-up Costs From Their Taxes?

Starting your own therapy practice doesn’t come cheap. Luckily, the start-up expenses deduction for therapists can help you reduce costs. 

Here’s everything you need to know about the deduction and how you can claim it.

(Still in the planning stages? Check out our article, How Much Does it Cost to Start a Therapy Practice?)

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What is the start-up deduction for therapists?

The start-up expense deduction is available to all businesses that incur expenses before they become active. 

That means money you spend to create your practice—to turn it from an idea on paper into a real, operating business.

In the words of the IRS:

Start-up costs are amounts the business paid or incurred for creating an active trade or business, or investigating the creation or acquisition of an active trade or business.

Even if you incur startup expenses over multiple years prior to launching, you report them on the first tax return your business files.

Startup expenses in excess of $5,000 aren’t deducted immediately, but must be amortized, or deducted over multiple years. (More on that shortly.)

Which start-up expenses are deductible?

Start-up expenses are split into two categories:

  • Business start-up expenses, which includes costs associated with researching a new business opportunity and preparing for launch

  • Organizational costs, which includes the cost of forming a business entity

(For more about business entities, see How to Choose a Business Entity for your Therapy Practice.)

Business start-up expenses

Before you launch your own therapy practice, it’s a good idea to do some research and create a business plan. You’ll want to make sure your new business will be profitable—that there’s demand for your services, and that your revenue will exceed your profits.

The costs associated with doing this research are deductible. Qualified expenses include:

  • Fees for consulting with lawyers or accountants
  • The cost of hiring business or market research consultants
  • Costs associated with doing your own market research (access to publications and periodicals)
  • Expenses associated with finding an office space and leasing it
  • The cost of furniture and other items (work computer, HIPAA-compliant records storage) for your office
  • Wages or salaries you pay to any staff members (eg. an admin assistant) while you train them
  • Advertising you run prior to opening your practice

Organizational costs

By default, when you go into business for yourself and become self-employed, the IRS considers you a sole proprietor.

But there are benefits—greater liability protection, and potential tax savings—to forming a different business entity for your therapy practice. For instance, many therapists launching their own practices choose to form a limited liability company (LLC).

Forming a business entity often costs money, and the expense is deductible. Examples include fees associated with:

  • Registering an LLC at the state level
  • Filing articles of incorporation 
  • Registering a doing business as (DBA) name
  • Consulting with lawyers, accountants, or other professionals, or hiring them to fill out forms and file them on your behalf
  • Holding meetings with partners or stakeholders in your new entity

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Which start-up expenses are not deductible?

Any costs you incur once you start practicing as a self-employed therapist are no longer start-up expenses, but regular deductible expenses.

But there are also some costs that don’t qualify as start-up expenses even if you incur them before going into business. 

Namely, any real estate taxes you need to pay, or any fees associated with transferring capital (cash or other assets) to your new business entity are non-deductible.

It’s a good idea, before claiming any startup expenses, to run them by an accountant and get their approval.

How much can you deduct from your start-up expenses?

There’s a hard limit on how much you can deduct as startup expenses your first year in business. You’ll need to amortize—gradually deduct—any expenses over that limit.

So long as you’re deducting $50,000 or less in startup expenses, you can write off up to $5,000 your first year in business. The remaining expense must be amortized.

Amortization takes place over a period of 180 months (15 years). Meaning, for your first 15 years in business, every year you’ll deduct a fraction of your initial startup expenses.

If all these details have your head spinning, don’t worry. It’s easier to understand with an example. 

  • Suppose you incur $20,000 in deductible start-up expenses before your practice goes into business.
  • Your first year in business, you can deduct $5,000 of your start-up expenses all at once. That leaves $15,000 in depreciable expenses.
  • Over the next 15 years, you deduct a fraction of the remaining $15,000 each year. (At a rate of $83.33 per month.)

Calculating amortization can be a bit tricky. This is only a simplified example. 

That’s why, if you incur more than $5,000 in start-up expenses, it’s a good idea to talk to an accountant before you file.

Claiming start-up expenses over $50,000

If you plan to deduct over $50,000 in startup expenses, the amount you can claim your first year as one lump sum (rather than as an amortized expense) is reduced.

Specifically, for every $1.00 you claim over the $50,000 limit, you are able to claim $1.00 less than $5,000.

For example:

  • Suppose you plan to claim $52,000 in start-up expenses
  • Since $52,000 is $2,000 more than $50,000, you can only claim $3,000 your first year in business. (Because $5,000 - $2,000 = $3,000.)
  • Once you claim that $3,000 lump sum, you’ll have $49,000 left to amortize. (Because $52,000 - $3,000 = $49,000.)
  • You write off the remaining amount over fifteen years at a rate of $272.22 per month. (Because $49,000 divided by 180 is $272.22.)

Again, this is a simplified example. Before paying off any start-up expenses on an amortization schedule, consult with an accountant.

How to claim the start-up expense deduction

If you’re a sole proprietor or single-member LLC, you report your startup expense deduction in Part V of Schedule C, Form 1040.

If you’re amortizing some of that expense, you’ll need to fill out and file Form 4562 (Depreciation and Amortization) along with your first year’s tax filing.

Looking for more ways to reduce your tax bill your first year in business? 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.

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Resources

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