Let's just start by saying I am not a tax expert. I'm not a CPA, or an accountant, or a bookkeeper. I'm a therapist, consultant, and small business owner. I don't have a degree in business, so I learned a few lessons the hard way. This particular lesson wasn't painful per se, but it was important- so I'm excited to share it with you.
You need to plan for your taxes
Simple right? For those of you dutifully filing your quarterly taxes and feeling smug right now- stick with me for a moment- because you may or may not be actually "planning for taxes." For those of you who haven't been filing quarterly taxes whose stomachs feel ill just thinking about the word taxes- don't worry- we are going to break this down!
Here is your 6 step plan to planning for taxes in your private practice:
1. Create a fee that integrates the taxes you will need to pay later in the year. Sit down and talk to your tax person. Don't have a tax person quite yet? Do some research (and consider chatting with one- but minimum you should probably plan for 30% of your fee going to taxes. Yep- that $100/hr just got knocked down to $70 (yes math geeks that is way over-simplified but stick with me!) Getting paid $65/hr by insurance? Carve out $19.50 for taxes.
2. Have a system for setting aside money for your taxes. Some therapists in private practice have a separate savings account that they transfer money into for taxes, emergencies, and other things not related to regular monthly expenses and their take home pay.
3. Put quarterly taxes in your calendar with a reminder that pops up 2 weeks prior to the time you need to send them. The check you write isn't random, it is based on your income this year- take a moment to look at where your income is at and adjust accordingly.
4. Here is the important one- the one that MANY business owners miss. Sit down before the end of the tax year (but close to the end) and calculate what your adjusted gross income is to date. Do your best to guestimate what it will be on the last day of the year.
5. Determine what tax bracket you are in. If you file taxes with a spouse, you will need to look at the income as a whole. Talk to a CPA, or do some fancy exploring to see if spending money at the close of the year might save you money. Yes, you heard me right- if you are on the cusp of a tax bracket- there are expenses that you might be putting off that might save you money to apply them to this tax year. Unfortunately, you can't apply expenses after the fact. Once January 1st comes- you are done!
6. As your business profit starts to creep up, make sure to budget to talk to a CPA (even if you are a DIY tax person) to explore whether there are other options to reduce your tax liability- like filing as a S-corp. That topic is a bit too technical for this purposes of this blog. Find someone who really understands the therapy profession and the specific regulations that apply in your state. (This is another reason why spending a few hundreds once a year to talk to a professional is worth it).
While I learned pretty quickly to put tax time on a calendar and send in those checks, it took me YEARS to really talk to a CPA. Somehow I was fearful- I felt like it was something I could do myself, I felt less than... I don't know all the reasons. But, what I can say is that I handed over more money to the IRS by not using a CPA and planning for how to minimize taxes as my business flourished.
I've also talked to hundreds of therapists who got into uncomfortable situations with the IRS because they didn't take the time to plan for taxes. And yes, that planning starts with planning for your income goal, setting your fee, and deciding which (if any) insurance contracts to sign.
Feel empowered? Yay! Feel terrified- definitely schedule a consult with a CPA- you can get more confident!
Tax homework for therapists
Spend a few hours really getting to know your numbers. I know you'd rather ignore this issue until after the holidays- but knowing where your business is at can make your whole year much better!
In our Business School Bootcamp, we cover how to get your financial plan locked down for your private practice. Understanding your numbers is one of the biggest contributing factors to feeling confident when you run a business. Click below to get details on the largest training system for private practice owners.