5 Burning Questions for Tax Time

What Bodyworkers Need to Know

By Les Sweeney, NCTM, and Kristin Coverly, RMT
[Business Side]

Les Sweeney: Ahh, taxes—one of the few topics where people can universally agree on something. We don’t like paying them, we don’t like tracking them, we don’t like remembering to pay them … did I mention we don’t like paying them?

Some fun tax facts for you, Kristin (for starters, try saying, “fun tax facts” five times with a mouthful of potato chips):

• The first income tax in the United States was assessed in 1862 to pay for the costs of the Civil War, at a rate of 3 percent.
• The 16th Amendment to the US Constitution allows Congress to levy an income tax without apportioning it to the states or basing it on the US Census.
• The name Internal Revenue Service (IRS) was first used in 1918.
• There is a record label called IRS, cofounded by the brother of one of the members of The Police.
Another fun fact to note: Neither Kristin nor I are accountants or tax advisors; any tax information shared within this article should be considered as normal conversation between friends over a beer or coffee. For specific questions related to your tax situation, you are best served by seeking out a qualified tax professional.

Kristin Coverly: I knew we could count on you to not only make our tax talk fun, but to somehow create a connection between paying Uncle Sam and cool music!
Rather than assume we knew what our readers wanted to know about managing their finances, we asked for questions via our social media outlets. The majority of inquiries were about business expenses and tax deductions. For example, Donielle S. asks, “What are appropriate or legal tax deductions for massage therapists?”

The IRS answers the question “What Can I Deduct?” at www.irs.gov: “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. An expense does not have to be indispensable to be considered necessary.”

This means a valid business expense is anything you spend money on to run your practice. Legitimate expenses vary from profession to profession. For example, a musician wouldn’t have a laundry expense like we do. So, throughout the year, keep track of anything you pay for because you own a business. Think about it this way—if you didn’t have a practice, would you have incurred that expense in your personal life? If not, it’s a business expense. If you use something for both personal and business—like your cell phone—estimate how much of the item you use for business and claim that percentage of the cost as a business expense.

LS: Where small business owners get into trouble is when they get a little generous with what they claim as business expenses. You’ll occasionally see ads for continuing education on a cruise ship, claiming, “A vacation that doubles as a business expense!” Things that seem too good to be true sometimes end up being just that. Season tickets for the opera? Not a business expense. An example of something that is a little more complicated would be auto expenses. The IRS allows you to deduct these, based on either actual car expenses or a standard mileage rate. But you can’t buy a car and deduct the cost of purchasing it, unless you want to be a bit more aggressive and take steps to make the car an asset of your company. Even in that case, you’ll still need to keep track of your expenses and/or personal use.

KC: Right. I always think about it like this: if you’re audited and you’re sitting across the desk from the IRS agent, will you be nervous about defending what you’ve claimed? If the answer is yes, don’t claim it. It’s as simple as that. And keep in mind that you’re ultimately responsible for anything that’s on your tax return, even if you hire an accountant, so always read before you sign.

So now that we’ve wrapped our heads around what a valid business expense is, let’s talk about how we keep track of those expenses throughout the year. What happens between getting the receipt and filing your taxes? Katie V. asks, “How should massage therapists do their bookkeeping?” I’ve always kept it simple and created Excel spreadsheets to track my income and my expenses. On my income spreadsheet, I record the date, form of payment, client name, length of session, and amount paid. For expense tracking I record the date, how I paid, who I paid, what I spent money on, and the amount I spent. I organize the expenses into different categories—like supplies, equipment, phone, marketing, office rent, state licensing, etc.—that reflect the types of expenses I incur throughout the year.
LS: Kristin, your method is probably the one most commonly used by practitioners. The key to keeping track of your finances isn’t as much about the tools you use, but rather the approach you bring to it. The critical word to think about is organization. No matter what method you rely on—low-tech or high-tech—being organized will keep you on track.

In our discussion about technology resources over the last few issues, we identified a few apps that can help with financial management. Whether you use Excel, iBank, Mint, QuickBooks, Quicken, or a notebook, staying diligent is the key. You can have the best software around, but if you don’t log your expenses and revenues, you’re nowhere.
One suggestion for staying diligent is to schedule your time (which brings up time management—oh wait, that sounds like another article). Do you have specific available treatment times each week? Do you have an hour set aside for financial management each week? If the answer is no, you should think about changing that. Your bills won’t wait; that means balancing your checkbook shouldn’t either. Pick an hour one day a week that you know you’ll almost always have available, and plan to log all your expenses and receipts.

This goes for your personal financial management as well. Rule #1 for financial management: keep your personal and business accounts separate! Make sure you can easily identify business-related expenses; if you deduct them, you might have to identify them for the IRS (not the record label).

KC: Having a regularly updated tracking system in place significantly reduces panic come tax time. I’ve talked to way too many therapists as they’re sitting down with a shoebox full of receipts in April, and it’s not pretty!
When it comes time to do your taxes, all of the different categories of expenses you’ve kept track of will be placed into the categories on the Schedule C “Profit or Loss From Business, Sole Proprietorship” tax form. You can take a look at the form on the IRS website at www.irs.gov. If you have expenses that don’t quite fit into those pre-set categories, you can list them in the Other Expenses section—things like association dues, laundry, and continuing education. Your total business expenses will then be deducted from the gross revenue you earned throughout the year to calculate your taxable income; your tax owed will be a percentage of this figure.

If your stress level is rising as you work your way through this column, don’t worry, you can always hire an accountant to help you (and claim that expense on next year’s taxes). On that note, Lauren B. asks, “How does a massage therapist go about finding an accountant?” What’s your advice, Les?

LS: My first comment is, “You are not alone.” There are almost 22 million firms with no payroll, according to the US Census Bureau. A firm with no payroll essentially means self-employed individuals. So there are lots of folks in the same boat as you trying to find professional assistance. And there are more than 1.7 million accountants (again, thank you Census Bureau) out there as well.

I think the key is to look for an accountant who specializes in helping small businesses, and if you can narrow it a bit further, service businesses and/or professional practitioners. It might be too much to ask to find an accountant who has experience working with massage and bodywork professionals, but your odds will increase if you broaden your filter to include chiropractors, doctors, estheticians, hair stylists, physical therapists, etc.

I would start with my client list; maybe an accountant is among them. Or perhaps a client can refer you to one. Other research avenues could include your local Chamber of Commerce, small business development center, or other business organizations (Rotary, etc.). Also, you can search your state society of accountants. Do it like many clients find you—word of mouth.

KC: If you’d like referrals for accountants from other therapists in your area, don’t forget about your online community of therapists and bodyworkers at www.massageprofessionals.com.

Les, Angela L. asks, “What percentage of a private practitioner’s income should be saved to pay taxes without stress?”

LS: Hmm … Angela, the fact that you have stipulated “without stress” makes this question extremely challenging! Everything is variable—including factors not directly related to your business, like whether you have a wealthy spouse, or four children, or donate heavily to charity. There are many factors that contribute to your tax responsibility. First and foremost is your income level. The United States has a progressive tax system—that means the more you make, the larger percentage you pay. If you will owe more than $1,000 in taxes (that will not be collected by withholding) during the year, you are obligated to pay quarterly estimated taxes. Uncle Sam wants to be paid during the year, not just at the end.

How much you should pay quarterly again depends on your income level, as well as what you think your taxable income will be, meaning your income less your deductible expenses. Once you have an estimate of what your taxable income will be, you can determine your tax responsibility. There are several ways to do that—using the tax tables, calculators, and worksheets at www.irs.gov; using a tax planner; or using tax preparation software, such as TurboTax.

It sounds a bit complicated, but it’s not too bad.

KC: Once you come up with an estimate of the amount you’ll owe, put a percentage of every deposit aside so you’re not scrambling to come up with your quarterly or annual payment the day before it’s due. Some therapists employ the out-of-sight, out-of-mind method and open a separate account so they’re not as tempted to spend that money.
Here’s a question that affects our readers who work for someone else. Marie C. asks, “As an employee, should I try to get as large a refund as I can?”

LS: No. Absolutely not. And by that I mean no! Refunds feel good, and are better than owing, for sure, but the object of the game should be to get to zero. If you owe nothing, and receive nothing, that means you had the right amount of tax withheld. Don’t let the government keep your money all year! You earned it—you keep it. Conversely, don’t keep the government’s money all year! You owe it; spread it out so April isn’t too painful.

KC: The key thing to remember is that taxes don’t have to be intimidating or scary. They’re just a regular part of running a business. Once you learn what to track and put a system in place to record the information throughout the year, it becomes just one more—very doable—part of being a business owner.

LS: Agreed. Not a big deal. Just part of life. IRS Records? Now that’s a big deal—R.E.M., The Go-Gos, The English Beat, Camper Van Beethoven …

Les Sweeney is ABMP’s president and resident blogger. Contact him at les@abmp.com and read his blog on www.abmp.com. Kristin Coverly, kristin@abmp.com, is an ABMP education facilitator who teaches workshops for therapists and instructors across the country. Both are massage therapists with business degrees who care about you and your practice. Want more? Check out their ABMP BizFit video tips on www.abmptv.com.

Sidebar: Some business expenses are straightforward. If you buy massage lotion, the full cost of the lotion is a valid business expense. Here’s a guide to a few of the trickier expense categories:

Mileage: Keep track of all the miles you drive for business purposes throughout the year—to a continuing education class, to the store to buy supplies, etc. Calculate your deductible cost using the standard mileage rate set each year by the IRS. Driving to and from your office, or to work if you’re an employee, is considered commuting and is not deductible, sorry.

Laundry: Rather than tracking water use, detergent expense, etc., and dividing costs between business and personal use, many accountants recommend calculating a per-session laundry expense. We’ve heard a range of $1–$2 per session from various accountants, so check with yours to choose a figure that works for you.

Shared items: Some things are used for both business and personal reasons, like your cell phone, Internet connection, and printer. In these cases, estimate how much of the item you use for business and take that percentage of the cost as a business expense.

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