Finances can be a cause of anxiety for everyone, and therapists are no exception. When it comes to financial anxiety, taxes are probably at the top of the pile. Unfortunately, there are no grad school programs that include information on tax preparation, how to file taxes, or what can be deducted from your therapy expenses. There are four main categories for filing taxes that apply to private practice therapists, and these are C Corporations, Sole Proprietorships, S corporations, and Partnerships. Each one of these are taxed differently, so it’s important to talk to a qualified tax expert for tax advice to determine the best solution for your particular situation and practice. For the rest of this discussion, we will be talking in generalizations, with sole proprietorship as the main focus.
To begin with, documentation is essential. Keep track of all therapy expenses and deductions. When self-employed, it’s critical to make quarterly tax payments. This requires you to figure out your tax liability based on a number of factors. Are you the head of the household or not? Single income or dual income household? Do you have dependents? Consult a professional or use an online tax calculator to figure out what percentage of your income should be set aside for the quarterly payments. If this is the beginning of your career, or you've just recently switched to private practice and don't know how much income you’ll need to be planning for, a general guideline is to set aside around 25% of your monthly income to go towards these quarterly payments. Fees and penalties can be tacked on if payments aren't received, so be sure to mark the deadline for the quarterlies in your calendar.
Potential deductions abound for the therapist. As always, consult with a professional tax preparer or attorney when it comes to your deductible expense, but the following will provide a brief overview of available deductions, whether in a home or office setting.
A brief note about home-based practice. According to IRS guidelines, in order to qualify for home-based business deductions, your home must function “As your principal place of business for any of your trades or businesses” or “As a place of business used by your patients, clients, or customers to meet or deal with you in the normal course of your trade or business.” If you do meet these qualifications, there are two ways to calculate a home office deduction. A simplified method or a “regular” method. If using the simplified method, simply calculate the total number of square feet in the home that is used exclusively for business up to 300 sq ft. The IRS, or the Internal Revenue Service, allows a deduction of $5 per sq ft, so the maximum deduction utilizing the simplified method is $1,500 per year.
Home office supplies and expenses - If business is conducted at home, there are a number of tax deductions for therapists that can qualify. This can include straightforward things, such as office equipment such as computers and printing equipment, ink, office furniture, postage, and pens. Additionally, depending on how much of your home is used for conducting business vs. living, a percentage of mortgage payment or rent, property tax, and property maintenance can be deducted. This also includes utilities such as water and power. Phone lines or cell phone plans are also deductible as a business expense.
Office Rent & Utilities - If you conduct your therapy person out of an office, the rent, utilities, and any insurance on that office are deductible, as well as any supplies purchased for the business. Be sure to keep track of all purchases for office supplies, no matter how minor.
Travel Expenses & business meals - These become deductible if you’re out of town for a business reason for more than 24 hours. If that’s the case, hotel costs, air or train tickets, car rental fees, and tolls are all write-offs. Meals can usually be claimed at 50%, but for 2021 and 2022, President Biden is allowing 100% of restaurant meals to be written off.
Advertising and promotional materials - this category is a lot wider than many people realize. Of course, physical advertising, like business cards or mailers, are included, as well as web advertisements. But also SEO (search engine optimization) tools, website design and hosting costs, logo designs, and fees for online therapy directories listings. Also, sponsorship cost deductions fall into this category. A quick note: permanent signages, such as on a building or in front of an office, is not considered an advertisement (but rather an asset) and therefore is not tax deductible under this category.
Association and membership fees - memberships and subscriptions to professional associations and groups are another area of write-off that is sometimes overlooked. Even dues or memberships to local groups, such as the Chamber of Commerce or local business network, are tax deductible.
Registration and license fee - in a similar category to association fees, any fees paid for business or operating licenses or professional registration fees can all be deducted for tax purpose.
Bank charges and fees - monthly maintenance fees for a bank account, credit card processing fees,
Continuing Education - continuing education credits are a tax write-off. It is important to note, however, that student loan interest is not a business write-off. Books, journals, and subscriptions to magazines can count as continuing education and are eligible for deduction.
Software services - any programs used for the business, including video chat, automatic scheduling, and note-taking software.
Insurance - Generally, all insurance is tax deductible. This can include health and dental, liability, and homeowners insurance for home-based offices, among others.
Legal and professional fees - this can include most professionals that you hire to help run your business. Accountants, tax specialists, consultants, or lawyers are just an example of the type of professional service fees that can be deducted.
Start-up costs - if this is your first year in private practice, some of the costs associated with starting the business can be deducted. Creating a business plan, advertising strategies, research, location scouting, and loan fees can all be included in start-up cost deductions.
Depreciation expenses - as this applies to purchases that were originally over $2,500 dollars, it usually applies to things such as office furniture and electronics.
Bank fees - make sure to keep separate accounts for business and personal use. By doing this, not only will tracking practice financials be a lot easier for your tax return, but it will also allow you to write off bank fees such as overdraft fees and monthly account maintenance fees.
Mileage - commuting to work is not a vehicle use that is deductible. However, if you’re driving somewhere other than your normal place of business - i.e., to do contract work or sponsored sessions for a non-profit, then the mileage is deductible. Other instances where mileage can be deduced include driving to a conference, participating in an event such as a panel or lecture, or giving talks in a professional capacity. In these instances, it's critical to keep track of actual mileage. Then, there are two ways to calculate your deduction. The basic rate model and the actual cost model. For the basic rate, the miles you've logged are then multiplied by the IRS’s mileage rate for that year. For 2021 the rate was $.56 a mile, for 2022, it’s $.585. For the actual expenses model, you’ll need to keep track of all vehicle-related expenses, including maintenance, fuel, tires, registration, insurance, and depreciation. Figure out the number percentage of miles the vehicle was used for business purposes. For example, if you put 20,000 miles on your car in the last year, and 1,500 of those miles were for business purposes, then 7.5% of the car’s use was towards business, and you can therefore write off 7.5% of all those accrued vehicle expenses.
When it comes to items that are used for both business and personal use - such as a cell phone, laptop, or other items, those items will be deducted as a percentage rather than at the full amount for an itemized deduction.
Being a therapist is an extremely difficult job. Your own mental health is absolutely critical to being able to provide patients with good care. One of the ways in which a therapist can maintain their own mental health is by utilizing a personal therapist. Psychotherapy services are 100% tax deductible for self-employed therapists. The only exception to this rule is if the therapy is covered by insurance;, then it is not deductible.
Finding - and consistently using - a good accounting software program or spreadsheet is the best way to track all the various expenses that go with maintaining a private practice. This could be as simple as a spreadsheet that is updated and saved, but a more inclusive tax or accounting software program can assist in other areas beyond just tracking expenses. Some programs can track income as well as expenses, which can be helpful when it’s time to make quarterly tax payments. It can also give you an up-to-the-minute idea of your practice’s finances and help you decide if you need to adjust, say, adding to your client load or adjusting your fee schedule. The good news is that the software you use to help prepare taxes and track finances is a tax deduction.
Taxes are incredibly confusing for most people, especially self-employed and freelance workers. The extra steps mean there are extra layers of calculation, and a significant amount of bookkeeping needs to be done in order to acquire a tax return.
The good news is with modern, easy-to-use accounting and tax software, a lot of the work has been taken care of so that you don't have to spend time collecting information over the past tax year. It is critical to keep track of expenses, but doing so doesn’t need to be a huge chore. Keep up on it, rather than have a stack of receipts and invoices to try and sort through at the end of the year. Keep a system in place for regularly logging those expenses. Make sure to adequately plan for and make quarterly tax payments to avoid charges and fees. Utilize your tax software or a tax professional to maximize all the myriad deductions available to therapists. Maximizing deductions will not only help you keep some of your money, but allow you to reinvest more into your practice to keep it strong and successful for years to come.
For practices looking for additional therapy resources to assist with their operations, Advekit is here to help. We cover a wide variety of topics to help you, whether it be how to deal with self-doubt as a therapist, the advantages of electronic scheduling, how to become a financial therapist, how to effectively run an online therapy practice, and more.