It's time Counselor – prepare for tax season or prepare for stress. I know that sounds dire, but private practice bookkeeping is no joke. The fear may be real, but so are the solutions. In this episode I talk about five things you can do in the month of March (no it's not too late) so you can confidently file your taxes in April.
TCCBB #21 Five Things Counselors Must Prepare for Tax Season
- Profit and loss report
- Track expenses
- Itemize expenses
- Determine your tax bracket
- Call a professional
How do I file taxes for private practice?
For practice owners, the most essential part of private practice bookkeeping is keeping track of your profit and expenses (also called loss). Whether you choose to do this with a paper spreadsheet, Excel, or fancy accounting software, a profit and loss report (or statement) will tell you how to file your taxes. How? By telling you whether or not your practice made a profit.
Client income, is not the same as profit. Your annual taxes are based on your profit because this is what becomes your household income. A good accounting system will help you add up your client income and then subtract what you spent to operate your practice (expenses or loss). This number is called your profit. Generating a profit and loss statement or report (also called your P and L Report) is essential in order to determine what you owe in annual taxes.
How do I keep track of my tax-deductible expenses as a therapist?
P and L is not complicated, but you must be diligent and consistent about entering and classifying those amounts on a regular basis. It’s like balancing a checkbook. Each month you make sure your client income and all of your expenses have been accounted for (I like software like Quickbooks that automatically downloads this information from your connected bank account) and categorized correctly.
If you have not created a dedicated bank account for your business like I recommend for all practice owners, or you mix household and business money, then you are going to have a long day ahead of you. You must go through each expense and determine if it is a legitimate write off (internet for your office) or not (manicure before your big speaking gig). When you use accounting software, this tracking feature is built in and the system creates a rule and applies it to transactions every time. So when your software sees, ‘ATT Internet' it automatically classifies it as a business expense and puts it in the right place on your P and L report.
How do I determine my tax bracket?
Now that you have a picture-perfect P and L, it's time to see how much you need to set aside to pay in taxes. It's easy to do, just use the Google machine and search ‘what is my tax bracket for [year].' You'll see a chart with some choices like ‘single,' or ‘married filing jointly,' and others. Once you have determined that, just follow the numbers in the chart.
The important thing to remember is that in the US we have a progressive tax system. So if it looks like you are in the 22 percent tax bracket, that doesn't mean your entire household income (that is, your practice profit added to any other 1099 or w-2 income you bring into your household) is taxed at 22 percent. Go back to your chart. Look at the range of income that’s taxed at 10 percent. Then if you make one dollar over that range, it’s only that dollar that is taxed at the 22 percent. Add those two amounts together to find the total that you owe.
Now do you see why number 5 on our private practice bookkeeping list is, “call a professional?”
As counselors prepare for tax season, there may be mistakes. Perhaps you overlooked classifying all of your expenses. Maybe you mixed client cash with your grocery money. Nobody is perfect and goodness knows I've made my share of bookkeeping SNAFUS! The point is, there is a way through and you don't have to do it alone.
Blog post by Kate Walker Ph.D., LPC/LMFT Supervisor