Why am I writing about taxes in July? Because it’s always a good time to talk about why it is important to set aside money to pay your federal taxes. Really. I promise.
One of my favorite mistakes I made as a new therapist was not setting aside money for taxes. I became a school teacher when I graduated from college, and before that I worked in restaurants and orchestras. I had no idea when I started my private practice that there was no ‘cosmic central office’ magically making sure I was putting aside money for taxes and retirement. So, my first year was a BIG surprise. Luckily I didn’t make much profit so it was a mistake I could, and did, recover from. In this blog I’m going to show you the charts, teach you the math, then give you a shortcut so taxes don’t become your big mistake.
The takeaway? You must always set aside money.
First, let’s define profit. When you take money from your clients for counseling services, that is your income. When you write a check for rent, that is a business expense. Ideally your income will be greater than your expenses.
When your business makes just enough income to pay expenses, we say that it is ‘breaking even.’ There is no profit and so, you may not have any taxes to pay.
When you make income that exceeds the amount you need to pay your expenses, then you have made a profit. This is the amount that will be considered when you are figuring out how much to pay in taxes.
Here’s how you find your tax bracket and federal tax payments:
- Determine your profit (you just learned how to do that)
- Google ‘IRS tax bracket ______(insert year).’ Lots of helpful websites will pop up including the IRS site. I found this site really helpful for figuring out my tax bracket:
- Determine your filing status (single, married, etc.) and add your partner’s profit/income (or not)
- Now do the math!
The US government has seven tax brackets. Your profit will probably fall over more than one bracket. Here are three of those seven for a single person in 2016:
Bracket 3. $37651 – $91150 = 25%
Bracket 2. $9276 – $37650 = 15%
Bracket 1. $0 – $9275 = 10%
As you can see, If you are single and your profit was $9000 last year then your tax bracket will be 10% and you will pay $900 in taxes. Easy peasy.
If you are single and you made $19,000 then we need to a little bit of math.
According to our chart above, if you made $19000 in profit, some of your profit falls in the 15% tax bracket and some of it falls int the 10%.
Here’s how it works:
10% of your first $9275 = $927.50
Subtract $9275 from $19000 and you get $9725. This is the amount in the 15% tax bracket.
15% of $9725 = $1458.75
$1458.75 + $927.5 = $2386.25 is what you will pay in taxes
about 13% of your profit.
My shortcut? I always put aside about 15% – 20% of my income every month. So for every $100 my clients pay me, I put $20 in a regular savings account. When I figure out my profit later on (remember, this will be lower than my income due to business expenses), I will be able to draw out enough to pay my taxes AND put money into a SEP IRA retirement plan. This lowers my taxes even more!
Sounds like another blog post to me….