Tax time can be stressful for just about everyone, but it can be downright terrifying for you, the self-employed massage therapist, if you’re unprepared. As the tax deadline approaches, we offer some suggestions for keeping excellent business records, preparing receipts, understanding allowable deductions, and knowing options for tax preparation.
Keeping Accurate Records
Keeping accurate and detailed records of your income and expenses is an important key to building a successful massage therapy or bodywork business. Accurate and up-to-date records will also make it easier to prepare your taxes and will give you a realistic view of your net income—the income you’ll ultimately pay taxes on.
Figuring your net income for the year is an easy process if you are prepared. First, you’ll need an accurate accounting of the total amount of money paid to you for massage and bodywork during the calendar year—your gross receipts. You can determine your gross receipts by looking at your client logs, adding up the total number of sessions you did during the year, and computing the total fees you earned, including tips.
Next, you’ll want to figure out your business expenses—what it costs you to run your business for a year. Your business expenses help you lower your gross receipts and help you calculate your net profit.
An easy way to keep an accurate account of your business expenses for the year is to save all of your receipts for goods and services in a manila envelope and keep a running list of expenses on the outside of the envelope. Each description should include the date, which company or person received the money, what the expense was, and how much was paid. By keeping track of your expenses this way, it will be easy to tally up your receipts for tax time.
It’s OK if you didn’t maintain good records during the year, but it will take you a little longer to gather your documentation and tally up your total business expenses for the year. Start by gathering all of your receipts, cancelled checks, and any credit and/or debit card records you can find pertaining to your business. Next, make a list of categories, with an additional “miscellaneous” category, so you’ll have a place to park expense receipts if you don’t know what to do with them right away.
Now, using a separate sheet of paper for each category (linens, paper goods, continuing education fees, etc.), list all of your expenses from the receipts, cancelled checks, and credit/debit cards. Total each list. You are now prepared to answer questions from your accountant or tax preparation software pertaining to your business expenses.
Filing Forms
The Internal Revenue Service (IRS) says that if you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor, you should consider yourself a self-employed individual and must file a Schedule C or a Schedule CZ. Also, as a self-employed individual (with net earnings of $400 or more), you are required to pay self-employment tax by filing Schedule SE, in addition to your 1040 and Schedule C-EZ. Additionally, if you had a tax liability for 2008, you may have to pay estimated tax for 2009.
The IRS requires all businesses to pay quarterly estimates of profits, if both of the following apply:
• You expect to owe at least $1,000 in tax for 2009 after subtracting your withholding and credits.
• You expect your withholding and credits to be less than the smaller of 90 percent of the tax to be shown on your 2009 tax return, or 100 percent of the tax shown on your 2008 tax return. Your 2008 tax return must cover all 12 months.
If quarterly payments are not made, a penalty and/or interest charge might be owed, and though the penalty might not be a serious problem, the business owner who delays making adequate estimated payments might be shocked to see what they owe on April 15. Tax estimates are due April 15, June 15, September 15, and January 15. (See IRS Publication 505, Tax Withholding and Estimated Tax, for more details. This and other publications are available at www.irs.gov.) To streamline the process, set up automated payments online through the Electronic Federal Tax Payment System (www.eftps.gov). Payments can be set up in advance to be withdrawn from a bank or credit union account. The service is free and can save you from last-minute running to the post office.
Sorting Personal and Business Expenses
It is important for MTs to realize that business expenses may be deducted only if they are ordinary and necessary for the business of massage and bodywork. With that in mind, personal, family, and living expenses are not deductible under any circumstances, except when something is used partly for business and partly for personal purposes, according to the IRS. In this case, you can divide the total cost between the business and personal parts. For example, if you borrow money and use 70 percent of it for business and the other 30 percent for a family vacation, you generally can deduct 70 percent of the interest as a business expense. The remaining 30 percent is personal and generally is not deductible. (See IRS Publication 535, Business Expenses, for more information.)
Claiming Business Expenses
The IRS tells us that “to be deductible, a business expense must be both ordinary and necessary.” An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. So, what are ordinary and necessary business expenses for the MT?
Examples of ordinary and necessary expenses for the MT might include educational training; equipment and supplies; an office write-off (such as a debt you know the client isn’t going to pay); office furnishings; advertising, promotion, printing, and postage; utilities; laundry expenses; gifts to clients and meals to promote your business; travel costs (for educational training); and the business use of your vehicle. (Review IRS Publication 334, Tax Guide for Small Business, for more information.)
Writing Off a Home Office
You may be able to deduct expenses for the portion of your home’s expenses used for business. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. To qualify to claim expenses for the business use of your home, you must meet both of the following tests:
• The business part of your home must be used exclusively and regularly for your business.
• The business part of your home must be your principal place of business, or a place where you meet or deal with clients, or a separate structure (not attached to your home) used in connection with your trade or business.
The IRS defines “exclusive use” as a specific area of the home used only for trade or business. “Regular use” means the area is used regularly for trade or business. Incidental or occasional business use is not regular use, but the storage of inventory or product samples generally does not have to meet the “exclusive use test” for the part of your home regularly used for these purposes. (These requirements are discussed in greater detail in IRS Publication 587, Business Use of Your Home.)
The IRS encourages taxpayers to familiarize themselves with the requirements before taking a home office deduction and to keep complete and accurate records to substantiate those deductions. A common error, according to the IRS, is to deduct expenses for a portion of the home that is not used regularly and exclusively for business.
Calculating a Home Office Deduction
Generally, the amount of your home office deduction depends on the percentage of the home that is used for business. The IRS says a taxpayer can use any reasonable method to compute the business percentage of home use. Two common methods include:
• Dividing the area of the home used for business by the total area of the home (square feet).
• Dividing the number of rooms used for business by the total number of rooms in the home if all rooms in the home are about the same size.
The IRS warns, though, that taxpayers may not deduct expenses for any portion of the year that there was no business use of the home. And, if the gross income from business use of the home is less than the total business expenses, the deduction for certain expenses is limited. (IRS Publication 587 includes examples, worksheets, and additional information on computing the allowable deduction.)
Deducting Use of Your Car
You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees when your vehicle is used for business purposes. But, instead of using actual expenses, you may be able to use the standard mileage rate to figure your deduction. The standard mileage rate is 50.5 cents per mile from January 1–June 30, 2008; the rate increased to 58.5 cents per mile for the period from July 1–December 31, 2008.
Whether or not you claim the standard mileage rate, as a self-employed MT you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls. Keep in mind, though, that if you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. (For more information on car expenses and the rules for using the standard mileage rate, see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.)
Preparing Your Own Taxes
At this point you’re probably feeling a little more comfortable with the tax filing process. You know how to maintain complete and accurate records, you know what your deductible expenses may be, you’ve divided your receipts into the appropriate categories, and you have a pretty good idea about how much income you’ve made this year. Now you just need to decide how you want to handle the filing of your tax forms.
One option is to take all your newly organized receipts, deduction category sheets, and income logs to your accountant or other tax professional to have your tax returns completed for you. Though you’ll spend a little more money using this option, you’ll have the satisfaction of having a professional do the work for you, plus your accounting and tax preparation fees will be deductible for 2009.
Another option is to do your taxes yourself. Though preparing and filing your own taxes was difficult in the past, there are tax software programs available today to help you do the job quite easily. Two highly rated programs are Intuit’s Turbo Tax and TaxACT. The basic format of these programs is a Q&A session, with the programs asking you every conceivable tax-related question. You’ll answer questions (on your computer) typical of those that your accountant would ask you. Once your questions have been answered and your forms are completed, your chosen tax software program will walk you through the filing process making it relatively painless. The costs for these programs vary, but most versions are less than $100 and the expense is also tax deductible.
If your adjusted gross income for the year is less than $54,000, you may qualify for the IRS’s Free File Program. The program uses the same question and answer platform as the “pay for use” tax-filing programs already mentioned, but there’s no fee. To use this option, access the IRS website at www.irs.gov and complete your taxes online.
No one enjoys the tax season or the paperwork it requires. But with some prior planning and organization, you can make the process less painful and a whole lot more efficient.
Lisa Bakewell is a full-time freelance writer in the Chicagoland area. Her areas of expertise include profile pieces, as well as articles in the areas of health and exercise, parenting, business “how-to” articles, and money-saving tips. For more information, visit www.writerlisabakewell.com.