Win the Tax Game

By Laura Allen
[Business Side]

There are many negative perceptions about paying taxes. Old sayings like “born free, taxed to death” are the norm, and a lot of people look at the Internal Revenue Service and the state revenue department with anger, dread, or fear. But taxes are a necessary evil. The government couldn’t run without them; the infrastructure and the very fabric of our country are dependent on them.

It’s illegal to evade paying income tax, but it’s perfectly legal to avoid paying taxes by taking advantage of as many allowable deductions as possible. You don’t have to be an accountant in order to navigate the tax waters, but if you’re seriously mathematically challenged, or lack enough discipline to take care of documentation and keeping up with the due dates, you may want to hire one. When it comes to your money, you don’t want to be in denial about where your talents lie. If you feel you’re not financially savvy enough to maximize your income while minimizing your tax liability, it will be well worth it to you to pay a competent financial advisor or tax professional to help.

Different Strokes
for Different Folks

Different tax rules apply to different situations. Employees, employers, and independent contractors all have unique tax obligations and deductions.

An Employee

An employee should fill out a W-4, the Employee’s Withholding Allowance Certificate, as soon as you’re hired for the job. Your employer will deduct taxes from each paycheck; by February 2, your employer must provide you with a W-2, a Wage and Tax Statement, that shows how much you’ve earned and the amount of taxes that have been withheld from your earnings during the previous year.

Employees aren’t eligible for as many tax deductions as self-employed therapists, but don’t overlook the ones you’re still entitled to, including:

• Continuing education expenses.

• Home office expenses.

• Job-hunting expenses.

• Liability insurance, if your employer requires you to provide your own.

• Massage-related books and magazine subscriptions.

• Professional association dues.

• Travel expenses to attend continuing education and professional association meetings.

• Travel expenses for doing outcalls, if your employer does not reimburse you.

• Tax advice and preparation expenses.

• Work clothes and uniforms, if you’re required to provide your own.

Most miscellaneous tax deductions for employees are subject to the IRS’ “2 percent rule,” which means you can deduct the amount that’s left over after you subtract 2 percent of your adjusted gross income from the total of the deductions. Don’t forget that if your employer covers any of those expenses for you—such as paying for you to attend a seminar—you cannot deduct the expenses, too. 

The Independent Contractor

An independent contractor should fill out a Form W-9, Request for Taxpayer Identification Number and Certification. For all intents and tax purposes, an independent contractor is a self-employed person, and as such is entitled to the above tax deductions, as well as others. In addition to the tax deductions mentioned earlier, independent contractors can deduct the cost of printing and reproduction for business cards; any advertising they do on their own behalf; the cost of a cell phone if they work on an on-call basis and use it for business purposes (or a percentage of the cost, if used for personal as well as business use); legal fees related to your job; tools and supplies needed for your job; and travel, lodging, meals, and entertainment, if related to your job, among other things. Tax deductions and income received should be reported on Schedule C, Profit or Loss from a Business.

Independent contractors must pay self-employment tax, which is due every quarter, and is also known as quarterly estimated tax. Filing dates for quarterly estimated taxes are due April 15, June 15, September 15, and January 15 for the final payment of the preceding year.

The Self-Employed

Your tax liability and personal liability—for example in the event of bankruptcy—can be affected by the business structure you choose. There are four common types of business structures: sole proprietorships, partnerships, corporations, and limited liability companies (LLCs). Additionally, there are several different types of corporations. While your state laws can control the way your business should be set up, federal laws control how you are taxed. If you’re unsure of which structure you should choose when starting your business, it’s wise to consult a financial planner or tax advisor. Note: it’s difficult to change from one structure to another once you have chosen how to set up your business.

A sole proprietorship is the most common type of business organization, and is usually the easiest way to go for a one-person operation or a home-based business, although it can also work for businesses with lots of employees. Sole proprietors should report deductions and income on Schedule C, as mentioned above. One caveat to being a sole proprietor: protection of personal assets is not one of the perks of being in business. The owner is held personally liable for all obligations such as debts and taxes of the business. Just like an independent contractor, any self-employed person is responsible for his own self-employment tax and any additional income tax resulting from the profits of the business.

A partnership is a business arrangement between two or more partners. For tax purposes, the partnership as a company is not subject to tax; the profit or loss is passed on to the partners who are obligated to file a Schedule K-1, Partner’s Share of Income, Deductions, Credits. No tax is withheld from income distributions to partners, and each partner is liable for his own self-employment tax and any income taxes owed as a result of profits earned—just like other self-employed people. In the event the business is not profitable, the partners each have a share in the losses incurred. A partnership is often referred to as a “pass-through,” because the profit or loss is not the responsibility of the company itself, but of the partners who own the company.

There are several different types of corporations and different taxation rules may apply according to which one you choose. The main benefit to incorporating a business is that it offers a certain amount of protection for personal assets should your company become insolvent; should the corporation go bankrupt, a shareholder can only be held liable for the amount of money that was personally invested. All business expenses are tax-deductible.

The owners of a corporation are referred to as “shareholders.” You don’t have to have a big company to incorporate; a “close corporation” is a company that usually has 1–30 shareholders, while a “general corporation,” also referred to as a “C corporation,” may have an unlimited number. Unless you’re planning to open a major spa or be the next Massage Envy, these structures would probably not apply to you. These types of business structures are subject to double taxation; the corporation itself pays taxes, and the shareholders are liable for taxes on the dividends they have earned from the corporation’s activities.

Many small business owners choose to register as a subchapter S corporation. The primary distinction of an S corporation is that the owner(s) elect to be treated as a sole proprietorship or partnership for income tax purposes, thus avoiding the double taxation of the other structures.

An LLC, or limited liability company, blends the characteristics of a corporation and a partnership, with income passing through to the owner(s) for tax purposes. It is often incorrectly referred to as a limited liability corporation. An LLC does not quite provide the same protection of personal assets that a corporation does, particularly if the IRS rules there has been any impropriety in bookkeeping, and is not recognized in all states.

Don’t Be Afraid of the IRS

Contrary to popular belief, the Internal Revenue Service is not the big bad wolf. In fact, the best place to find clear, detailed, and accurate information on taxes—including the many legal deductions you can use to avoid paying them—is on the IRS website ( 

The worst thing you can do, if you don’t have the money on hand to pay your taxes, is to fail to file your tax return. The IRS will automatically approve a payment plan for you in order to help you become tax-compliant, as long as you owe them less than $100,000; they’ll charge you interest on the money you owe until your taxes are paid in full. However, fail to file your return, and the IRS will also slap on a big fat penalty; if you let it go long enough, you can be charged with tax evasion, risk having a lien attached to your assets, or have your wages garnished. File your return on time, even if you can’t pay what you owe, and submit a request for a payment plan. If you follow the rules, you won’t get into trouble.


Laura Allen is the author of Plain & Simple Guide to Therapeutic Massage and Bodywork Examinations (Lippincott Williams & Wilkins, 2009) and One Year to a Successful Massage Therapy Practice (Lippincott Williams & Wilkins, 2008). A third book, A Massage Therapist’s Guide to Business, will be published by Lippincott Williams & Wilkins. She is the owner of THERA-SSAGE, an alternative wellness clinic of more than a dozen practitioners of different disciplines, and continuing education facility, in Rutherfordton, North Carolina. Visit her website at