by Christie Raymond and Ann Reese
Paying Taxes – Don’t Be Shocked!
For therapists who are new to working as independent contractors, it may come as a huge shock when tax-time comes around and you owe a year’s worth of FICA and income taxes. With a regular job, the employer automatically pays half of your FICA taxes and deducts your portion of the FICA tax and estimated income tax out of each paycheck. As an independent contractor, no taxes are taken out of early intervention payments. To best prepare for this, it is a good idea to keep receipts throughout the year to maximize your tax deductions and set aside at least 20% of all earnings to pay your taxes. In short, treat yourself like an employee and prepare throughout the year.
How to Organize Receipts
There are many ways you can keep your tax receipts organized. The most basic way to organize is the shoe-box method. Keep a box next to your desk and toss all paper receipts that are related to your business into the box throughout the year. At the end of the year (or periodically), go through them all (yes, this may be a bit time-consuming), and sort them according to category. You can instead use a filing system with file folders that are labeled with the business categories and file-as-you-go throughout the year. An accordion file container works well for this method. You can even find a multitude of apps / software that allow you to scan receipts and store them digitally. Personally, I have found that scanning receipts is a bit cumbersome and requires constant scanning throughout the year. The easiest method for me is a hybrid paper/digital storage method. I keep all paper receipts in one box and also keep a file on my computer for that tax year for all receipts received digitally. Once you have all the receipts organized by category, tally each category and write in the amount on the tally-sheet. A helpful tip is to only keep receipts that are needed for taxes (i.e., there is no need to save gas receipts if you write off mileage). I used to keep ALL receipts which was just more to filter through, requiring even more time and effort. If you use a separate bank account, your monthly statements are your deductions. The money you transfer to your personal account is your actual income (the amount you will owe income tax on), of which you should save at least 20% to cover your FICA and income tax burden. If you are diligent with using one bank account as a dedicated business account, it has all deductions listed and you don’t need to add up receipts – just use the monthly statements to tally your expenses.
Keeping Money Separate
It is a good idea to keep your personal and business-related expenses completely separate. Use one credit card / bank account for all business purchases. If you have your business set up as an LLC, keeping business money separate from personal money is especially important because co-mingling funds eliminates personal liability protection offered by the LLC. As previously stated, this will also make it much easier to find all business-related expenses when you are ready to file taxes.
Things to Consider about Creating an LLC
The most common misconception is that an LLC will help reduce the amount you pay in taxes. This is generally untrue. The exact same deductions are available both with and without. The main reason most business owners create an LLC is to protect personal assets from business debts, lawsuits, and liabilities. As stated earlier, if you co-mingle business funds with personal money, your LLC protection could be lost. For therapists, obtaining an inexpensive professional liability policy offers the same protection. Another misconception is that you need an LLC to hire assistants or other therapists. An independent contractor can hire assistants/therapists without an LLC. Creating an LLC may require you to use a separate tax return, which will cost more if you use a CPA. Plus, if you are already established as an independent contractor with EarlySteps, you will have to complete the entire enrollment paperwork again to switch to an LLC (you will need all new authorizations for each client). All-in-all, there are no huge benefits to creating an LLC, unless you want to brand yourself with a company name and logo.
Disclaimer: This article shouldn’t be regarded as financial advice. We recommend you meet with an accountant or tax professional to help you make these decisions.
Comments