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How to Read an S Corporation Tax Return for Your Therapy Practice

If your therapy practice is an S corporation, there are benefits to knowing how to read your S corporation tax return—even if someone else is filing it for you.

Once you have a grasp on the different parts of an S corporation tax return and what they do, it’s easier to communicate with your accountant (or the team at Heard) when you meet with them during tax season.

It also gives you insight into how your business is taxed, and may help you make smart business decisions in the future.

What type of therapy practice is this article for?

This article is a general guide to understanding a single member S corporation tax return for a typical therapy practice, providing instructions as though you were filing the tax return yourself.

It does not cover elements of the tax form relevant to more complex S corporations with multiple shareholders.

As always, the best way to make sure your tax return is accurate and reflects your particular circumstances is to hire an accountant or sign up for Heard.

Who needs to file Form 1120-S?

If you are registered in your state as a limited liability company (LLC) or another eligible entity, and you’re electing S corporation status by filing Form 2553, you’ll need to file your taxes as an S corporation.

S corporations file taxes using Form 1120-S. Depending on your business, you may need to file additional tax forms accompanying Form 1120-S, including:

Part of what differentiates filing as an S corporation from filing as a sole proprietor is the way you get paid. As an officer of your S corporation, you’re most likely paid as an employee, but may also be paid distributions based on the shares you own. To learn more, see our guide to S corporations for therapy practices.

How is filing as an S corporation different if you’re a therapist?

If Form 1120-S looks intimidating, there’s some good news: it’s unlikely all of it applies to your business. And if you’re the only owner of your company—that is, if you have a single-member S corporation—it’s even simpler.

The following sections of Form 1120-S, plus additional forms, are not typically relevant to therapy practices:

  • Schedule B of Form 1120-S, which has to do with stock in other corporations that your own corporation owns. (You may have to fill out a few lines if you hired contractors during the year, however—see the line-by-line breakdown below.)
  • Schedule K of Form 1120-S, which has to do with capital gains, real estate credits, foreign transactions, and other matters that don’t concern most therapy practices
  • Form 1125-A, Cost of Goods Sold, which you shouldn’t need unless your therapy practice has inventory items it sells to customers

Finally, Form 1125-E, Compensation of Officers, is only necessary if your company has revenue of $500,000 during the course of the year. Form 1125-E is not covered by this guide.

Keep in mind that, while some of the sections listed above can be left mostly empty by most therapy practices, that doesn’t mean you can ignore them completely. You and your accountant should still read through each section just in case some of the lines apply to you.

Form 1120-S for therapists, line by line

Form 1120-S

The first section of Form 1120-S is where you provide basic information about your business. In the outlined area, that includes your corporation’s name and address.

Box A. This is the election date you provided on Form 2553.

Box B. Enter your business activity code. For most therapists, it’s 621330 (“Offices of mental health practitioners (except physicians.)”)

Box C. You can skip this.

Box D. Enter your employer identification number (EIN). Learn more about getting an EIN.

Box E. Provide the date when you first incorporated. 

Box F. Enter your total assets at the end of the year. Typically, this is the amount entered on Schedule L of Form 1120S (“Balance Sheet”).

Box G. If it’s your first year electing S corporation status, check “Yes.” You’ll need to include a filled-in copy of Form 2553 when you file.

Box H. If you’re making changes to your S corporation—changing its name, shutting down the business, changing your address, making an amendment to a prior return, or ending your S corporation status—you can indicate so here.

Box I. Since you have a single-member S corporation—meaning, you’re the only one who owns any stock—you can indicate so here.

Box J. This section is not relevant to most therapy practices, and you can skip it unless your accountant tells you otherwise.

Form 1120-S

The rest of the first part of Form 1120-S is where you provide information on your income and expenses for the year, as well as tax payments you’ve made during the course of the year.

If you use Heard, this is where you’ll enter your business’s Profit & Loss.

Be sure to consult with an accountant or tax advisor before claiming any deductions you’re unsure of. 

Lines 1a, 1b, and 1c. On Line 1a you enter everything you’ve earned during the year. You only need to worry about Lines 1b and 1c if you paid out refunds to clients during the year—in which case, you subtract the refunds from the amount in 1a.

Line 2. This line is not relevant to most therapy practices. It’s where you report the cost of goods sold (COGS), the money you spent manufacturing products or stocking your inventory.

Line 3. For the majority of practices, the value on Line 3 will be the same as 1a., since you aren’t subtracting anything on Line 2.

Line 4. If you sold Section 179 property during the course of the year and earned income, you’ll enter the information here. This can get complicated, since it may involve dispensations (See Form 4797), and is best handled with help from an accountant.

Line 5. This is where you enter miscellaneous income coming from certain miscellaneous sources, most of which are not relevant to therapy practices. (You can find a complete list in the IRS instructions for Form 1120-S.)

Line 6. You list your total income here. For the majority of therapy practices, this will be the same value entered on Line 1a and Line 3.

Line 7. Here, you enter the total amount you paid officers of the company. Since you are the only officer, this is the total amount you paid yourself.

Line 8. If you have payroll staff, this is where you enter the total amount you paid them, minus any employment credits for which you are eligible.

Line 9. The total cost of any repairs or maintenance done on your office during the course of the year.

Line 10. The total of any Accounts Receivable you were unable to collect over the course of the year should be listed here. 

Line 11. The total cost of renting your office should be listed here. (If you are taking the home office deduction, leave this line blank.)

Line 12. Taxes you paid at the state or municipal level over the course of the year, as well as the cost of any licenses (such as business licenses) you had to purchase in order to operate, are deducted here.

Line 13. If you paid interest on money you borrowed to make a purchase relevant to your business, you report it here. Some interest can’t be deducted, such as interest on purchases or rental or investment properties. For more details, see the instructions for Form 1120-S.

Line 14. If you’re claiming depreciation on an expense that doesn’t qualify as COGS, list it here. You’ll need to include more information about the expense and how it’s being depreciated by attaching Form 4562.

Line 15. This line is only relevant to businesses in resource extraction industries.

Line 16. The total cost of advertising your business may include business cards or flyers, online ads, and other marketing efforts.

Line 17. One this line, you can deduct the cost of any pension plans you provide employees.

Line 18. The cost of employee benefits plans—including health insurance, health spending accounts, etc.—can be deducted here.

Line 19. Here, you list the total value of all deductions that don’t fall into the categories covered in this section. Examples include the cost of utilities, business travel, office supplies, and insurance premiums. (See our complete guide to tax deductions for therapy practices.) Include details on each deduction on a separate form submitted along with Form 1120-S.

Line 20. Add up all the deductions you are reporting in this section to get your total deductions for the year.

Line 21. Subtract your total deductions from your income (as reported on Line 6) to determine your taxable income.

Line 22. This line deals with companies that were formerly C corporations, and is not relevant to most therapy practices.

Lines 24 – 27. These lines deal with tax extensions, underpayment of taxes, and underpayment of taxes, and how they affect the current year’s filing and the amount you owe the IRS. Generally, S corporations aren’t expected to owe federal taxes (even if there is a place to report them on this form.)

Schedule B for therapists (Form 1120-S)

Schedule B

Schedule B begins on page 2 of Form 1120-S, continuing to the beginning of page 3.

For most therapy practices, the majority of Schedule B is not relevant. Lines 3 – 10 have to do with corporations that either own other corporations (entirely; or partially, in the form of shares) or are themselves owned by other corporations (ie. if one of your S corporation members is a business or trust).

Here are the lines every therapy practice needs to fill out:

Line 1. Indicate whether you use accrual accounting or the cash basis method. If you’re not sure, check with your bookkeeper. Our article on cash vs. accrual for therapists may help as well.

Line 2. Here, you list what your business does, based on IRS categories. For most therapists, the business activity is either “Offices of Mental Health Practitioners (except Physicians)” or “Offices of Physicians, Mental Health Specialists.” For services, you may specify what type of therapy you provide (eg. private counseling, group counseling). 

Line 11. If your practice meets the two criteria listed here (earning less than $250,000 in revenue during the course of the year and holding less than $250,000 in assets), check “Yes.” If it doesn’t (and you check “No”) you’ll need to file Schedule L and Schedule M-1 (covered below.)

Schedule B

Line 12. If you had any debt canceled or forgiven during the course of the year, or if the terms of any debt you owed changed so that you owed less, mark it here.

Lines 14a and 14b. This is commonly the only “yes” checked off on Schedule B. If you paid a contractor during the course of the year, these lines are relevant. This is where you confirm that your payment qualifies for Form 1099-NEC, and where you confirm to the IRS that you’ll be submitting them Copy A of each Form 1099-NEC you’re filing. If this is new territory for you, check out our guide to hiring independent contractors for your therapy practice.

Schedule K for therapists (Form 1120-S)

Schedule K
Schedule K

Single member S corporations can skip most of Schedule K. 

The only exceptions are the lines listed below. These will be the same amounts you list on Schedule K-1 for your single-member S corporation.

Line 1. Enter your practice’s ordinary income business as it is listed on page 1, line 21.

Line 16c. Pay attention to this line if you are planning to deduct the cost of business meals. For most tax years, you are only able to deduct 50% of the cost of business meals. The 50% you are unable to deduct, you list here. (For the 2021 and 2022 tax years, businesses can take advantage of the enhanced business meal deduction, and deduct 100%.)

Schedule L for therapists (Form 1120-S)

Schedule L

If your business

  1. Earned less than $250,000 in revenue during the course of the year, AND
  2. Holds less than $250,000 in assets,

you can skip Schedule L.

Otherwise, you fill out Schedule L with information from your annual balance sheet. The information you provide won’t affect your deductions or any other part of your tax bill. It’s entered for informational purposes only.

Schedule M-1 and Schedule M-2 for therapists (Form 1120-S)

Schedule M-1

Filling out Schedule M-1 of Form 1120S, you reconcile the difference between your income (and losses) as reported in your books and your income (and losses) as reported on your tax return.

A few ways S corporation income on the books often differs from what’s reported on a tax return:

  • Federal tax expense. You report the cost of federal taxes as an expense on the books. You do not report it on your tax return itself.
  • Tax exempt income. Some types of income are non-taxable—PPP loans for COVID business relief is one common example. While that income shows up on the books, it won’t show up on the part of your tax return where you calculate your total taxable income; Schedule M-1 is where you reconcile this difference.
  • Travel and entertainment expenses. While 100% of the cost of business travel may be entered as an expense on the books, you may not be able to deduct 100% of it on your tax return.
  • Depreciation deductions. The way you depreciate assets on the books may differ from the way you depreciate them on your tax return.

Once you understand Schedule M-1’s purpose, completing each line item is fairly straightforward. But, if you run up against a wall, get help from your accountant or the team at Heard.

Schedule M-2

Filling out Schedule M-2 of Form 1120S allows you to calculate how much of your practice’s retained earnings you may pay yourself in the form of dividends. This process can be a bit tricky; if it’s your first time tackling it, get help from a qualified accountant.

If your S corporation therapy practice has more than one shareholder, it’s time to get help from an accountant. Learn more about how to hire 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 his or her 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.

Woman using an ATM

How to Choose a Checking Account for Your Therapy Practice

For many therapists who run their own practices, setting up a business checking account is the first serious step they take to getting their business off the ground.

Having a separate business bank account allows you to separate your personal and business finances, set up a bookkeeping system, and manage your finances. 

But with so many banks and other financial institutions offering business checking accounts, how do you choose where you open one? Here are the factors you need to take into, well, account. 

A quick disclaimer

This article helps you choose where to open an account. It doesn’t tell you, outright, where you ought to open one.

If we were going to recommend an option, it would be a business checking account from Bluevine. We’ve partnered with Bluevine to offer checking accounts with features we believe suit most therapy practices—including limitless transactions and no minimum opening deposit. Read the official announcement here.

However, if you don’t decide to go with Bluevine, read on to learn what matters most when choosing an account provider for your business.

Account minimums for business checking

Most checking accounts charge monthly fees. You can avoid those fees if, each month, you maintain the account minimum.

The account minimum is usually calculated on a daily basis. For instance, you may need to have at least $300 in your account every day of the month in order to have your fees waived for that month. You can expect monthly fees to range from $5 to $15.

There’s another minimum you may need to meet: An opening balance. Some banks allow you to open an account without depositing any money at all. Others require an opening deposit in the range of $25 to $50.

Out of context, all this may seem like chump change. But account minimums are relevant if your business is just getting started, and you don’t have much in terms of retained earnings. 

And it could be the differentiating factor between two providers. For instance, everything else being equal, would you rather an account that charges you $15 every month if you dip below the minimum, or an account that charges you $5, but has no minimum? Your circumstances (and how you prefer to bank) will decide.

Online access to your therapy practice bank account

We often take for granted easy online access to memberships, subscriptions, and accounts. But, in some cases, banking hasn’t kept up. 

For instance, there are still many smaller local credit unions or state banks whose online interfaces are antiquated compared to national financial institutions, and who may not allow you to carry out as many tasks online. 

If you lose your debit card, are you okay with calling your bank and enduring call waiting before you can request a new one—or would you rather just request one online? Are you willing to pay a fee for electronic transfers, or will it make you grit your teeth every time you have to send money? 

Before you open an account with a smaller, local financial institution, see if one the bank’s representatives is able to give you a quick demo of the online experience. While you can assume major banks will offer state-of-the-art user interfaces, with smaller providers, that isn’t always the case.

ATM access to your checking account

A few reasons you may need to access your business checking account via ATM:

  • Withdrawing money to top up an office petty cash account
  • Paying yourself (withdrawing cash may be faster or more convenient than a bank transfer)
  • Depositing checks (for instance, if you work on a contractual basis for an organization that pays by check)

If you don’t think any of these are relevant to how you’re going to run your business, you may not need to worry about ATM availability. But if any of the above do apply to you—or if you just want the security of being able to quickly withdraw cash anytime you need it—you need to learn about your prospective business checking account’s ATM setup. 

Not all financial institutions are as easy to access from ATMs, and those that allow you to access them via competitors’ ATMs may charge hefty fees.

Insurance at your financial institution

Looking into your financial institution’s insurance coverage is more a best practice than an exercise in savvy shopping. You’re not comparing whether different banks are better insured—you’re just making sure they have insurance, period.

You have a lot of options when it comes to banking online with non-traditional financial institutions. While the odds are slim, there’s always the chance you could sign up with a fly-by-night operation that suddenly goes out of business after its CEO flees to the Cayman Islands.

Double check that any financial institution with which you open a checking account is insured either by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). In the event your institution shuts down, either type of insurance will cover the balance of your account up to a $250,000 limit.

Business checking fees for your therapy practice

Anywhere you consider opening an account, be sure to inquire about:

  • Monthly maintenance fees, which are often waived as long as you maintain a minimum daily balance during the month in question
  • Overdraft fees, charged when you don’t have enough money to cover a transfer, ATM withdrawal, or debit card purchase, but the bank allows your balance to cross over into a negative value
  • Non-sufficient fund (NSF) fees, when you write a check that bounces or attempt to make an ACH transfer your bank doesn’t cover
  • ATM fees, typically charged when you make a withdrawal from an ATM outside your financial institution’s network
  • Incoming or outgoing wire transfer fees, which are charged on a per-transfer basis
  • Card replacement fees, in case you lose your debit card and request to have it replaced 

In some cases, banks or other checking account providers may advertise $0 rates for some of the fees advertised above, while the fine print specifies that this applies only in certain situations (e.g. if you maintain a daily account minimum).

Checking account interest and rewards

Financial institutions sometimes offer high interest rates or rewards as a way to entice new customers. 

Checking account interest can be a great way to earn a modest amount of extra income without any exposure to risk. For instance, if you earn $2,500 or more per month in payments from clients and customers, Bluevine rewards you with 1.5% interest on your account balance.

Rewards often apply to specific types of purchases. You may be able to earn a few percentage points back every time you use your business checking account to pay a utility bill, or make purchases at qualifying stores.

Another kind of award to keep an eye out for: Account opening bonuses. Some banks will award you money if you open a checking account with them and set up direct deposit within a particular window of time. Don’t let yourself be distracted by the prospect of quick and easy cash, however; these rewards are only worthwhile if the account’s other features—such as monthly fees or account minimums—suit your needs as well.

Banking beyond your checking account

Besides opening a checking account, what are the other money moves you need to make to get your therapy practice up and running?

If you’re thinking about applying for a small business loan or line of credit, it may make more sense to do so at a financial institution where you already bank. Since you’ve already established a relationship with the institution, they could be more willing to lend you money or extend you credit than they would if you had just come in off the street.

Besides that, if you’re repaying loans, withdrawing money from a line of credit, or even making credit card payments, it’s simpler when you’re able to manage all your accounts from one point of access online.

Take some time, as you consider different options, to see what other types of financial services they offer. For instance, you may find you prefer to open a checking account with a bank that also offers business lines of credit with lower interest rates than their competitors. 

Or maybe the bank you’re considering also offers a business credit card with a rewards program that suits your needs.

As with most aspects of running your therapy practice, planning ahead works in your benefit. Considering what your banking needs will be in the future will help you make a decision now.

Budgeting is a key part of financial planning, and one to which many first time business owners take an overly casual approach. Get schooled in the fundamentals with our article on building a budget 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 his or her 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.

Handshake between two women at a table

How to Sell Your Therapy Practice

Selling your therapy practice may not only make sense financially, but be emotionally rewarding as well. 

You’ve invested effort, intent, and years of your life into building your practice. Giving up control and letting others take the steering wheel may be difficult, but many therapists who sell their businesses afterwards report feelings of achievement, freedom, and relief.

Here are the steps to selling your therapy practice. Selling a business can be incredibly complex—it’s best to proceed with the help of an accountant and lawyer.

Commit time to the sale

Preparing your practice for sale demands a major commitment of time and energy. Don’t let the work you’re doing to sell your business negatively affect how your business is run. Remember, your clients come first.

If you’ve been putting together your weekly schedule on an ad hoc basis, now is the time to create something more concrete. Do your best to determine exactly how many hours per week you need for client sessions, extra work outside of sessions (organizing and reviewing notes), and administrative tasks (emails, billing, finances.) 

Once you’ve done that, you should be able to see how many hours per week you can feasibly devote to selling your business.

Hire professional help

It’s essential to have an accountant and a lawyer working for you when you sell your business. In addition, you may want to hire an appraiser or a broker to help with the sale.

An accountant will ensure you have all the information you need—like financial reports and forecasts—when you approach buyers. They may also be able to advise you on steps you can take to make your practice more attractive to buyers from a financial perspective.

A lawyer will draw up contracts for the sale of your business, the transfer of assets, and any provisions included in the sale—such as non-disclosure agreements (NDAs), or contracts specifying which staff will stay on after the sale, and their roles.

Besides these two professionals, you may also hire a business appraiser or a business broker.

A business appraiser determines the value of your business based on seller’s discretionary earnings (SDE) (more on that below). Because of their familiarity with the market and their understanding of what buyers are looking for, they can help you set a price that will appeal to buyers without putting you at a disadvantage. After an appraiser has appraised your business, it’s up to you to find buyers and negotiate the sale.

A business broker does the work of an appraiser—helping you set a price on your business—but also helps you market your business, connect with buyers, and complete the sale. They may be able to advise you on tax matters and other technical aspects of the sale.

A business broker may be a huge help selling your business, but they don’t come cheap. Expect to pay your business broker 5% - 10% the value of the sale.

Keep it quiet

If you’re planning on selling your therapy practice—or even just considering it—try to keep the matter to yourself, or between a few people. You should only discuss it with your accountant and lawyer, other professionals you hire, and close friends and colleagues until you have identified a path forward.

Word travels quickly, and there are three groups of people you don’t want knowing you’re selling your practice until the timing is right:

  • Competitors
  • Clients
  • Employees

You may not think of your practice having competitors. But it’s possible a larger practice—or a business operating on a different model, like a therapy app—could learn you’re preparing to sell, and use the information to their advantage.

Perhaps more importantly, you might not want your clients to know just yet. They may worry that their fees will increase, that you will stop being their therapist, or that you’re no longer committed to your role. Even if none of these is true, there are many fears and insecurities clients can bring to bear on the situation. They may feel betrayed or abandoned. It’s better not to have a discussion with clients until the sale is finalized and you have identified the best way to address it with them.

Finally, any employees you have may worry about their job security in the event you sell. They may believe they’ll be laid off by new business owners, have their hours cut, or face other difficulties. Or, they may worry you’ll let them go before the sale, in order to increase the bottom line. Until the terms of the sale are finalized and you can tell employees definitively what they can expect, you may want to keep your plans to yourself.

Consider who you will sell your practice to

Before you even begin the process of listing your business for sale, you may ask yourself: Who buys a therapy practice, anyway?

Generally:

  • Another practice. A larger practice looking to expand may buy yours, or you may sell it to another practice as part of the conditions of a merger, with you becoming a shareholder in the other practice.

  • Hospitals and employee assistance programs (EAPs). These typically buy therapy practices and subsume them under their own, larger firms.

  • Venture capitalists (VCs), either individuals or a VC firm. Typically, VCs buy private practices at a low rate when the owners are preparing to retire. 

  • Equity firms. Recently, equity firms have begun buying medical and dental practices, and “corporatizing” them. Some equity firms have begun buying therapy practices, as well.

  • Employees. In some cases—particularly when the owner retires—employees may buy a business, becoming partners or shareholders. Typically, the price you sell your business to employees for will be less than you would ask from another business.

If you hire a business broker, they’ll be able to identify the best market for your private 

practice, and help you sell it to the right people.

Make your private practice sellable

Here are some steps you can take, before selling your practice, to make it more appealing to buyers.

Increase cash flow

By tightening up your billing cycle, taking care to quickly follow up unpaid bills, and favoring payment processors that get money to you ASAP, you can improve your private practice’s cash flow. Learn more about cash flow for private practices.

Cut unnecessary expenses

By reviewing your therapy practice’s budget, and identifying expenses you can reduce (or cut entirely), you may be able to grow your bottom line. Not only does that make your business more profitable, but any buyers examining your books will be able to see you run a tight ship.

Expand secondary revenue streams

Your secondary revenue sources—after your main client list—may include online classes, writing and speaking gigs, or group therapy sessions or workshops held offsite. Increasing the time and energy you devote to these secondary sources makes your income more diverse. That’s a good thing for buyers looking for a resilient business with the potential to expand.

Get your financial back office organized

When your financials are organized, it means you’ve put in place systems to manage:

  • Day-to-day bookkeeping 
  • Budgeting
  • Financial reporting 
  • End-of-year accounting
  • Recordkeeping, and 
  • Tax filing

Without those, you’ll run into three problems selling your business:

  • You won’t have the data you need (financial reports, past tax filings) to prove your business is profitable and has the potential to grow
  • Your practice will seem disorganized and poorly managed, which buyers don’t like
  • Due diligence will take longer (more on that below)

If your finances are a mess, the first step to take is finding a bookkeeping and accounting solution that can get you caught up and all your data in order. Learn more about what bookkeepers and accountants can do for your practice.

Put a price on your practice

You will put a price on your business based on your seller’s discretionary earnings (SDE). 

Your private practice’s SDE consists of:

  • Its net annual income, before taxes
  • Your personal earnings (a salary or owner’s draw)
  • Any depreciation or amortization of business assets
  • Income you may earn on investments
  • Non-recurring expenses

Essentially, it’s what your business earns in a year, minus the cost of paying you, the owner, plus the cost of taxes.

The price of your business will be a multiple of your SDE—typically one to four times your SDE. 

Some businesses can refer to an index to determine their SDE multiple. For businesses that rely heavily on the owner’s and employees’ expertise, experience, and reputations, an index won’t suffice; there are too many variables in play. In that case, it’s necessary to hire a business appraiser or broker. 

Therapy practices typically fall under this category. An appraiser or broker can help you put a price on your practice.

Work with your lawyer to prepare the paperwork

Your lawyer will draw up all the necessary contracts for selling your business.

The biggest and most important document to prepare is your asset purchase agreement. Some of its contents are based on your financial records, so you may need to consult with your accountant to make sure you have all the information you need.

The asset purchase agreement lays out everything that will be transferred from you to the buyer during the course of the sale. It will also specify your role in the business after the sale, and whether you will stay on as a therapist working at the practice for a limited or indefinite amount of time.

One of the assets included in the asset purchase agreement is “goodwill.” This is the reputation your business has built up. The agreement will include clauses meant to prevent you from damaging this goodwill, typically summed up in a non-compete clause.

Create a selling memo for your therapy practice

Your selling memo is kind of like a really long, comprehensive sales brochure. It’s the document you give to potential buyers so they can learn about your business and decide whether they may be interested in buying it.

If you hire a broker, they’ll create a selling memo for your practice. It will include:

  • Business description, including your history, who owns it, and how it operates
  • Location, including information on your lease if you have one
  • Strengths, or the factors that set your business apart from others and provide opportunities for future growth
  • Competitive overview, a look at the status of your industry and the general features of your competition
  • Services, more or less what your practice does to make money
  • Operations, how your practice is organized and operates day-to-day
  • Marketing, including industry trends, marketing opportunities, and profiles of your client base
  • Employees, including credentials, experience, compensation, and benefits
  • Financial plans, including growth projections
  • Potential buyer concerns, anything buyers should take into account when considering your business
  • Financial information covering the past three years
  • Offering price, and the terms of the sale

Your selling memo will also include an appendix with additional information supplementing each of the topics above.

List your business 

One of the benefits of having a broker is that they’ll reach out through their network to find potential buyers for your practice. 

If you don’t have a broker, you may decide to sell your practice using an online directory like BizBuySell.

Negotiate the sale

If a buyer decides to make an offer, they’ll submit a letter of intent.

You may choose to accept the offer in the letter of intent, or negotiate for a different price or different terms of sale. If you decide to do so, and you don’t have a broker working for you, it’s a good idea to contact your lawyer. They can help walk you through the process of negotiation.

Finalize the sale

Once you and the buyer have agreed on a price, selling your business is not so simple as signing a few forms and getting a check. 

First, the buyer needs to complete due diligence. The amount of time this takes varies, but plan to budget a few months. 

During due diligence, the buyer will take a deep dive into your financials and your business operations. This is their chance to make any last minute business moves before purchasing your practice, including hiring additional staff, borrowing money, or making plans for when they take over.

Once due diligence is complete, you and the buyer sign the asset purchase agreement, and any supporting documents that come with it. Then, the buyer transfers you the price you agreed upon.

Finally, give yourself a pat on the back. Congratulations! You just sold your private practice.

Buyers are looking for a business that turns a good profit. Even if you’re years away from selling your private practice, you can take steps now to invest in your business and improve its profitability. Learn more about how to build a profitable 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 his or her 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.

Group of therapists gathered in a circle

How Much Does It Cost to Start a Group Therapy Practice?

The cost of starting a group therapy practice depends upon two factors: Personnel and location.

More therapists working at your practice means more payroll tasks to manage, and more financial admin in general. A larger practice also typically demands a more complex business structure.

Your location—whether your therapy practice is based in an office or (as is increasingly the case) 100% remote—will determine costs like rent or HIPAA-compliant telemedicine services.

Here’s a breakdown of what you can expect to pay launching your group therapy practice.

Note: This article covers all major expenses involved in launching a group practice specifically. It doesn’t cover expenses common to all practices, for instance web hosting and business licenses. For those, see our article How Much Does It Cost to Start a Therapy Practice?

Office expenses for a group therapy practice

Renting an office for a group practice is different from renting one for a solo practice. When you’re going it alone, you may be able to sublet another therapist’s space, or even set up a home-based office. 

When you have multiple therapists working at your practice, however, you’ll likely need to be able to provide more than one office for appointments. Having more than one office also means you need a reception and waiting area. For a group practice, you can expect rent to be your biggest expense.

Rent for a large therapy office space

In September 2022, the national average office space rent was $38.70 per square foot

The rent you specifically pay will depend upon your location. Prices range from relatively low ($23.53 per square foot in Orlando, for the period listed above) to relatively high ($66.52 per square foot in San Francisco). 

These rates are based on the cost of a full service lease, as opposed to a triple net lease. Each type of lease charges rent differently: Full service requires the tenant to pay only the cost of using the space, while the landlord covers operating costs, taxes, etc. for the building as a whole. Triple net requires the tenant to cover base rent (the rent for their particular space), plus a fraction of the building’s upkeep and property taxes. Learn more about full service vs. triple net rent.

When renting office space, be prepared to pay first and last months’ rent upfront, as well as a damage deposit (half of one month’s rent).

Front desk administrator

Whether you need a waiting room staffed by a front desk administrator who checks patients in and out, receives calls, etc. will depend upon the size of your practice, your therapists’ schedules, and personal preference.

For instance, a group practice with one office and a waiting area, with two therapists who share the office and each clock about 25 hours of clinical practice per week, may not require a front desk admin.

On the other hand, suppose your group practice has five therapists working full time, sharing three different offices and a waiting area. You may not only need a front desk admin to greet patients and monitor the waiting area for you, but also to schedule how the office is shared by different therapists.

The costs of hiring a front desk admin for your group practice include:

  • Salary. According to Zippia, the average salary for a front desk administrator in the USA is $34,479. That does not include benefits. 

  • Job posting. Many job boards allow you to post open positions for free. Depending on the job market, you may choose to pay to sponsor your post and potentially increase your number of applicants. As an example, sponsored posts on Indeed.com range from $5 – $499 per day.

  • Computer. Be prepared to spend about $1000 for a new budget office PC with keyboard, mouse, and monitor.

  • Furniture. At minimum, your front desk admin will need a desk, chair, and possibly a filing cabinet. Costs for furniture range widely. Second hand items in good condition may cost a few hundred dollars, total; top-of-the-line new furniture could run you in the thousands.

Online expenses for a group therapy practice

Whether therapists at your group practice exclusively offer their clients remote sessions, or offer them in addition to in-office sessions, telemedicine introduces a few additional expenses.

HIPAA compliant telemedicine service

Regular video conferencing apps don’t cut it when it comes to HIPAA compliance. Luckily, many of them offer HIPAA compliant versions of their regular apps.

These are typically charged monthly or yearly on a per-user basis. The more therapists who work at your practice, the more you can expect telemedicine software to cost.

As an example, Zoom for Healthcare starts at $149.90 per year, per user.

Electronic Health Record (EHR) service

A centralized EHR service shared by all your therapists can help you manage records and bill clients in a standardized format, without depending on each provider to come up with their own solution. 

EHR services may range widely in price, but to get a sense of the cost for a group practice, TherapyNotes group pricing starts at $59 per month for the first practitioner, and charges $30 for each additional practitioner.

Custom domain emails

For the sake of legitimizing both your practice and each individual provider, give every one of your therapists an email address customized to your domain name. It can either function as its own inbox, or forward inbound mail to a different account.

Keep in mind that, for the sake of patient confidentiality, your email provider must be HIPAA-compliant.

For a Business Starter package, Google Workspace charges $6 per user per month. That includes a domain name customized to one you’ve already registered (you can also purchase a domain name through Google for an additional cost). It’s HIPAA-compliant, too.

Admin expenses for a group therapy practice

Expect your administrative costs to go up if you’re transitioning from running a solo therapy practice to running a group practice. Not only do you have more people to manage (and pay), but your business is more complex. 

Incorporation or business entity formation

When you have multiple therapists working for you, forming a distinct business entity—as opposed to operating as a sole proprietor—is smart. Most accountants will recommend you do so. 

A separate business entity can reduce your financial and legal liability, protecting your personal assets from collection and your legal person from being sued. It may also offer tax benefits.

One route many therapy practices take is to form an LLC. You do this by registering at the state level. 

At the federal level, an LLC lets you choose to file your business taxes as a partnership, S corporation, or C corporation.

To form an LLC typically costs a one-time formation fee ranging from $35 – $500. And you’ll need to pay an annual fee to keep your LLC in operation; this amount also varies widely, from $15 (Kentucky) to $800+ (California). 

Payroll

If the therapists at your practice are your employees, you need to set up payroll.

Payroll is the system you use to:

  • Track employees’ work hours and earnings
  • Pay employees
  • Generate pay stubs
  • Withhold taxes from paychecks
  • File quarterly Form 941s with the IRS
  • Store employee information

Unless you’re willing to hire someone to your staff to handle payroll for your business, you’ll need to outsource it to a third party service or platform.

Gusto is a popular choice for small businesses. The online payroll and HR service starts at $40 per month, plus $6 per employee.

Learn how to set up payroll for your therapy practice.

Bookkeeping and accounting

When you have multiple practitioners depending on you to run a financially stable, organized business, you can’t afford to do the bookkeeping yourself.

In one sense, you can’t afford it because there is so much at risk. If you make an error in your bookkeeping, it could affect your ability to pay your employees or even stay in business.

In another sense, doing bookkeeping and accounting for a group therapy practice is more complex than doing bookkeeping for your own solo venture. If you try to tackle it on your own, it will eat up your time and energy. That’s time and energy that could be much more profitably directed towards managing the rest of your practice and taking care of your patients.

A bookkeeper records day-to-day transactions and generates financial statements that tell you how your practice is performing. An accountant helps you file your taxes, take advantage of tax deductions, and navigate processes like incorporating your business, creating financial projections, or selling your practice.

Learn more from our guide to bookkeepers vs. accountants.

For yearly tax filing, an accountant can cost your practice $500 or more, depending on the complexity of your business..  

The total cost of launching a group therapy practice

If you’ve read through this entire article, you likely recognize by now that the cost of starting a group practice varies widely. 

Average office rent in different states can differ in price by 100% (Orlando vs. San Francisco). The cost of forming an LLC can differ by close to 500% (see Kentucky vs. California). Other expenses, like business licenses and insurance (covered in our article on the cost of starting a therapy practice), also vary widely.

These are just location-specific expenses. Others will vary according to how many therapists you have working at your therapy practice, and how they do their jobs. A brick-and-mortar office of eight therapists will have different expenses from a two person, 100% remote practice.

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.

Bryce Warnes is a West Coast writer specializing in small business finances.

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HIPAA-Compliant Payment Methods for Therapists

If your therapy practice is going to accept electronic payments from clients, you need to do so with a HIPAA-compliant payment system.

Here’s what you need to know to accept payments from clients quickly and easily, while ensuring you’re doing everything required by HIPAA to protect their information.

HIPAA compliance: a quick refresher

The Health Insurance Portability and Accountability Act (HIPAA) was enacted into law by Congress in 1996. Its purpose is to protect patients’ privacy by setting standards for how their information is shared and stored.

Since it was enacted, HIPAA has proven essential for:

  • Reducing healthcare fraud
  • Allowing workers to transfer and continue their health insurance when they lose their jobs
  • Mandating standards that ensure electronic systems for billing and other healthcare related tasks function without putting patients at risk

At the core of HIPAA is the protection of patient health information (PHI). When it comes to determining whether your transactions with clients are HIPAA-compliant, it’s important to understand the difference between PHI and payment information.

What is PHI?

PHI is information that can be used to identify a patient. According to Yale’s Clinician’s Guide to HIPAA Privacy and Security 8-2019:

Protected Health Information Protected Health Information (PHI) under HIPAA means any information that identifies an individual and relates to at least one of the following:

  • The individual’s past, present or future physical or mental health.
  • The provision of health care to the individual.
  • The past, present or future payment for health care.

  

The Clinician’s Guide includes 18 pieces of data that may be used to identify a patient:

  • Their name
  • Their address, or “all geographic subdivisions smaller than state, including street address, city, county, ZIP code”
  • Elements (not including years) related to dates having to do with the individual,  “including birth date, admission date, discharge date, date of death and exact age if over 89”
  • Phone numbers
  • Fax numbers
  • E-mail addresses
  • Social Security numbers
  • Medical record numbers
  • Health plan beneficiary numbers
  • Account numbers
  • Certificate/license numbers
  • Serial numbers for vehicles or other devices
  • Other numbers used to identify devices
  • URLs
  • Internet Protocol (IP) address numbers
  • Fingerprints or voice recordings
  • Photos
  • “Any other characteristic that could uniquely identify the individual”

If you’re trying to determine whether the information you’re receiving from a client is PHI, ask yourself: Could a bad guy use this information to hurt them?

“Bad guy,” in this case, refers to a scammer, identity thief, or even someone in your client’s personal life who intends to cause them harm. 

A single piece of PHI, such as your client’s name, may not seem important at first glance. But in some cases, simply the fact an individual is seeing a therapist counts as critical personal information that could be used to hurt them—for instance, in the workplace, or within a family dispute.

Even an emailed receipt from an online payment provider including your client’s name and the name of your practice may qualify as PHI.

Are Venmo, Paypal, Zelle, or Apple Pay HIPAA-compliant?

In a word: No.

Popular apps for sending funds such as Venmo, Paypal, Zelle, and Apple Pay are not HIPAA-compliant. Using them to receive payments from clients opens you up to HIPAA penalties and puts the client’s personal information at risk. On top of that, many of these payment providers sell user data to third parties.

Any third party application you use to send and receive information about a client—including online banking or credit card payments—must be certified as HIPAA-compliant. That means they’re willing to enter into a business associate agreement (BAA) with you.

Business associate agreements (BAAs) and payment for therapy

A BAA is an agreement between a healthcare provider (you) and a third party (a payment provider) for the transfer of your client’s PHI.

Any payment provider you use to receive money from clients must be able and willing to sign a BAA with you in order to be HIPAA-compliant. 

Broadly speaking, online payment providers are not in the practice of signing BAAs with therapists.

How to receive HIPAA-compliant payments

In order to be paid by clients while complying with HIPAA regulations, you should either use an online payment method that is explicitly HIPAA compliant, or a traditional method of getting paid (e.g. credit card, ACH, cash)

Whatever method you use, be sure to stick to HIPAA guidelines for sending and storing information. More on that in the next section.

Electronic health record (EHR) systems

If your EHR system (e.g. SimplePractice) allows you to bill clients and receive payments from them, you can safely assume it’s HIPAA-compliant.

Stripe

So long as you use Stripe exclusively to collect payments from clients (and not for invoicing or other activities involving client information), it’s HIPAA-compliant. 

Ivy Pay

Ivy Pay is 100% HIPAA-compliant payment method designed for licensed therapists. It allows you to collect no-swipe credit card payments at a flat rate of 2.75% per charge.

Credit card

Credit card payments using a traditional POS terminal are typically HIPAA-compliant. Be sure to consult with the POS provider about a BAA.

ACH payments

ACH payments are managed by the National Automated Clearing House Association (Nacha). Their Healthcare Electronic Funds Transfer (EFT) is HIPAA-compliant, sending client information and the information for transferring funds together in one secure package.

Cash

While cash is probably the most anonymous (and thus secure) means of receiving payment from a client, you still need to follow HIPAA best practices when it comes to recording the transaction. If you store the client’s name on file, you must use a HIPAA-compliant system to do so.

Checks

In most cases, a check is a HIPAA-compliant means of receiving payment.

HIPAA best practices for therapy payments

The HIPAA Journal has an article listing some best overall practices for HIPAA compliance.

When it comes to payments in particular, follow these guidelines.

Do not:

  • Include any information about a client’s treatment or care when processing information
  • Send receipts or invoices using unencrypted email (or use a provider that sends them this way)
  • Store unencrypted payment card information in any way

Do:

  • Make sure any healthcare payment provider is payment card industry (PCI) compliant, and follows the PCI data security standards (PCI DSS)
  • Use a POS with up-to-date encryption technology
  • Ensure any card reader you use is EMV chip card compatible

It may cost you slightly more to use a HIPAA-compliant payment method, rather than an everyday service like Venmo. But it’s worth it—both for the security of your clients’ information, and so you don’t get penalized for breaking HIPAA rules.

As you plan to put a HIPAA-compliant payment system in place, be sure to include any related fees in your therapy practice’s budget.

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.

Bryce Warnes is a West Coast writer specializing in small business finances.

How to Pay Quarterly Estimated Taxes for Your Therapy Practice

If you run your own therapy practice, there’s a very good chance you need to pay quarterly taxes. This means that, rather than paying the IRS all the taxes you owe them in one lump sum at the end of the year, you pay it to them gradually, in quarterly installments. 

Never paid quarterly taxes before? You’ll need to figure out how to estimate the taxes you owe, and factor quarterly payments into your budget. 

Luckily, with a little planning, paying quarterly taxes becomes just another routine part of running your own therapy practice.

Note: This article covers quarterly tax payments to the IRS—that is, at the federal level. For laws regarding state-level quarterly tax payments, consult your local tax authority.

What are quarterly tax payments?

Whether you’re self-employed or you work for someone else, you’re required to pay taxes on your income as you earn it. If you’re an employee, your employer withholds and remits taxes from your pay. If you’re self-employed, you pay taxes on your quarterly income. 

One exception: If you earn less than $1000 in taxes for the year, you may be able to pay them as a lump sum rather than quarterly installments.

Important distinction: When you pay quarterly taxes, you are paying taxes for the current year’s earnings, not the previous year’s.

If you qualify to pay your taxes as a lump sum, rather than on a quarterly basis, you will file your taxes after the year ends, and pay the amount owed. So, for the 2022 tax year, you’d file your taxes—and then pay them—early in 2023.

On the other hand, if you qualify to pay quarterly estimated amounts, you’ll pay the taxes you owe for 2022 at various points during the year 2022. 

This is where a lot of new business owners get confused. The amount of tax you owe for the year is determined by how much income you earned. If the year isn’t over yet, and you still don’t know what your total income will be, how can you know how much to pay?

At this point, we turn to the estimated part of quarterly estimated payments. It’s up to you to estimate how much you will owe, and pay it within a reasonable degree of accuracy. The methods for doing so are covered below. 

Who needs to pay quarterly taxes?

Self-employed business owners usually need to pay quarterly estimated taxes. This applies even in cases where the self-employed person is also an employee. 

For instance, if you work for a therapy practice as an employee, but you also earn income from a life coaching business you run on the side, you’ll need to file quarterly taxes for your life coaching business.  

When you work for someone else, your income tax is automatically withheld from every paycheck, and remitted to the IRS. When you’re self-employed, you pay tax on your business’s income. 

If you’re on the payroll for a company you own, and receive a salary, as many therapists who have formed S corporations are, your company will withhold and remit income tax from your paychecks.

When it comes to making quarterly estimated payments, there are a few exceptions:

  • If you are self-employed and unincorporated, and the taxes you owe total less than $1,000 for the year, you don’t need to pay quarterly taxes. (For context, a single filer who earned $10,000 self-employment income in 2021 would owe $1,870 in federal taxes.)
  • If you are incorporated, and your corporation owes less than $500 in taxes for the year, it does not need to file quarterly taxes.

Also, there are provisions for individuals who did not earn any taxable income in the prior tax year. You’re exempt from quarterly tax payments if all three of the following apply:

  1. You did not owe any taxes the year before, and weren’t required to file a tax return
  2. You were a US citizen or resident for the entire course of the year
  3. Your tax year was 12 months in duration

If none of the above apply, you should prepare to pay quarterly taxes. But first, you’ll need to estimate them. More on that in a moment.

Penalties for underpaying or overpaying quarterly taxes

The IRS, in their infinite mercy, recognizes that you are probably unable to precisely calculate the exact amount of income tax you will owe at the end of the year. 

If you pay too little, the IRS charges interest on the outstanding amount. (In the eyes of the IRS, paying too late is as bad as paying too little—so, if you’re late making a payment, expect to pay interest on the amount you owe.)

If you pay too much, the IRS will return your money as a tax refund.

Note that, generally speaking, getting a tax refund isn’t necessarily a good thing. Psychologically, getting money back from the IRS may feel rewarding; you’ve already assumed the money was gone, so it seems like a windfall.

But any money of yours the IRS holds onto is money you could be reinvesting in your business, or using to pay your bills. And while the IRS charges interest on money you owe them, they do not pay interest on money they owe you. 

Overpaying your taxes means putting a dent in your cash flow, and tying up some of your business assets until the IRS pays you back. It’s in your best interest to estimate and pay your taxes as accurately as possible.

How to estimate quarterly tax payments for your therapy practice

If you use Heard, your financial team will estimate your quarterly taxes for you, and help make sure you pay them on time.

If you don’t use Heard, there are two methods you can use to estimate your quarterly tax payments as accurately as possible, while protecting yourself from IRS penalties: With a financial projection, and with the safe harbor rule.

Estimating quarterly tax payments with a financial projection

If you can accurately project how much you’re going to earn during the course of the year, you can use that projection to estimate what you owe in quarterly estimated taxes.

This method works best if you have steady, recurring income month to month. For instance:

  • You have a stable list of long term clients who you see regularly 
  • You’re working your maximum clinical hours per week and have a long waitlist; when clients are done treatment, you are able to quickly fill their spots in your calendar
  • You contract with a treatment facility or other organization, and have a regular weekly time commitment that makes up the majority of your billable hours

On the other hand, if your income is irregular and hard to predict, you may be better off using the safe harbor rule (covered below).

Using one or several months as an example, project your income for the entire year (for instance, multiplying one month by twelve). Then, use Form 1040-ES to calculate your tax owed. 

Divide your total estimated tax owed by four. That’s how much you pay for each quarterly payment.

Estimating quarterly tax payments using the safe harbor rule

Instead of creating a projection for this year’s income, you may choose to use last year’s income to estimate your quarterly tax payments.

So long as your estimate is based on last year’s income, you will not be penalized by the IRS if you underpay. This is referred to as the safe harbor rule.

Simply take your tax bill from the previous year, and divide it by four. That’s what you’ll pay in quarterly taxes this year.

As the year progresses, keep an eye on your monthly income by reading your profit and loss statements (P&Ls) and, if possible, comparing them with last year’s P&Ls. If you’re earning more income than you did last year, it means the amount you owe in tax will be larger. 

Even though the safe harbor rule protects you from being penalized, you’ll still owe the IRS additional tax if you underpay. It’s better to be aware of that now, and put aside some extra money to cover it, than being surprised when tax season arrives.

Quarterly tax deadlines for therapists

The 2022 quarterly tax deadlines for therapists are:

  • April 18, 2022: Deadline for Q1 estimated tax payments
  • June 15, 2022: Deadline for Q2 estimated tax payments
  • September 15, 2022: Deadline for Q3 estimated tax payments
  • January 16, 2023: Deadline for Q4 estimated tax payments

Note that tax payments carry into the next year. So, on January 16, 2023 you’ll pay estimated taxes for the fourth quarter of 2022.

How to pay quarterly taxes for your therapy practice online

The easiest way to pay your quarterly taxes online, and to make sure you never miss a payment date, is to enroll in the Electronic Federal Tax Payment System (EFTPS).

Your EFTPS account allows you to pay your federal taxes online. Importantly, it lets you schedule your quarterly payments in advance—so the money is automatically transferred from your bank account to the IRS on the due date.

To enroll in EFTPS, you’ll need:

You can learn more from the EFTPS website.

If you pay quarterly taxes, you need to have enough cash on hand to cover them every three months. The best way to make that happen is by creating a budget 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 his or her 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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Transparent plans for your practice

We offer two annual plan options for solo and group practices, billed monthly or annually.

  • Talk to an accountant who knows your practice
  • Track your practice's financial health
  • Get your federal and state income taxes done right
  • Tax-deductible and pays for itself within months
  • Quarterly and yearly reviews with a CPA
Solo Practice
Group Practice

$199

/mo

$169

/mo

$299

/mo

$255

/mo

BILLED MONTHLY
BILLED ANNUALLY
That’s
$360
$528
in annual savings
*Up to 10 therapists

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