What is a sole proprietorship?
Sole proprietorships are the most simple business structure, and the typical business structure for most individual therapists. If you start a business, and do not incorporate, you are a sole proprietor.
How are sole proprietorships taxed?
As a sole proprietor, you are taxed as an individual. You report all income and expenses on your personal tax return. The only difference between filing as an individual as opposed to a sole proprietor is that you must complete a Schedule C with your Form 1040.
As a sole proprietor, your income tax bracket can be found by looking at the tax table. Your business income is your personal income.
What is a Schedule C?
As mentioned, you will need to file a Schedule C, Profit or Loss from Business, which is a basic two-page schedule.
What information do I need to fill out a Schedule C?
Sole proprietors will need to have the following information to complete the Schedule C:
- IRS instructions
- Social Security Number
- Employer Identification Number
- Financial Statements, and specifically, income statements showing earnings and expenses.
- Records and receipts for planned tax write-offs
- Mileage records, if you plan to take business vehicle deductions
How do I fill out the Schedule C?
There are five distinct parts that need to be filled out to complete your Schedule C, of which four relate to your private practice:
- Income is where you report all of your practice earnings for the year. This can be found on your financial statements.
- Expenses is where you include all of your practice expenses for the year. This can be found on your financial statements.
- Information on your Vehicle is for sole proprietors who want to account for the Business Use of Vehicle deduction.
- Other expenses are for any other expenses that you would like to report that you couldn’t find a location for in the above sections, namely the expenses section.
As a private practice owner, you are selling your services and not physical goods, and as such, you do not maintain inventory on hand. This means you do not need to complete the Cost of Goods Sold section.
Do I need to file more than one Schedule C?
If you run multiple, non-related businesses, then you need to complete a separate Schedule C. Be sure to talk to your accountant or the Heard team if you have separate, distinct forms of income.
How do I file self-employment taxes?
If you are a sole proprietor and earned more than $400 this year, you will have to report and pay into Social Security and Medicare. You will use Schedule SE to complete this.
In order to calculate the amount you owe, you must determine your self-employment income on your Schedule C before completing Schedule SE. If you only made income from your sole proprietorship, you can use Short Schedule SE.
If you made self-employment income, but also worked for someone else, you should use the Long Schedule E to ensure you are not overpaying self-employment tax.
Can I deduct self-employment taxes?
You can deduct 50% of your self-employment taxes. This is not a business deduction on Schedule C, but one that is accounted for as an Adjustment to Income on Schedule 1.
I am a single-member LLC. Do I file as a sole-proprietor?
In short, yes. Unless you are single-member LLC that has opted into filing as an S corporation, you will be taxed just like a sole proprietor. However, if you have multiple owners in the LLC, you will be taxed as a partnership, and will need to complete Schedule K-1.
Do I qualify for the Qualified Business Income deduction?
Unfortunately, as a mental health professional, you are considered a “Specified Service Business”, which means that you are limited in your ability to apply the advantageous deduction. As a Specified Service Business, the 20% deduction begins to phase out at an income of $157,000, becoming completely inapplicable at $207,000 in annual income.
What are estimated tax payments?
If you are self-employed, and will owe more than $1,000 in taxes, you are required to pay your taxes four times a year in estimated payments. This estimated tax payment is a calculation based on assumptions around income tax, self-employment tax and any other tax you might be subject to as a practice owner.
Who needs to make estimated payments?
If you are a sole-proprietor, S corporation, or self-employed mental health professional, you will need to make quarterly estimated payments when you owe taxes of $1,000 or more.
Who doesn’t have to make estimated tax payments?
If you are an employee you don’t have to make estimated tax payments. If you are a special case, and meet three conditions, you didn’t owe taxes in the previous tax year, and did not file a return, you were a US citizen and your tax year was 12 months long.
How do I calculate estimated tax payments?
In order to calculate estimated tax payments, you will add up your tax liability for the year and divide by four. The IRS has a worksheet called Estimated Tax Worksheet found in Form 1040-ES or Form 1120-W for corporations that helps you make these calculations in detail.
You can use Heard’s estimated tax calculator here.
When are estimated tax payments due?
You must pay quarterly tax payments on the dates below for the associated business periods:
- For January 1st through March 31st; April 15th
- For April 1st through May 31st; June 15th
- For the period June 1st to August 31st; September 15th
- For the period September 1st to December 31st; January 15th of following year
Where do I make estimated tax payments?
You can simply submit the Form 1040-ES with a check to the IRS or you can pay estimated taxes online or by phone via the IRS Payments Gateway. For corporations, you must file through the Electronic Federal Tax Payment System.
What is the Safe Harbor rule? Does it apply to my practice?
Regardless of your income in the current tax year, you can avoid penalties if you pay 100% of the taxes paid in the prior tax year. However, you will still have to make up the difference in tax payments at year-end.
If you make more than $150,000, then you must pay 110% of what you paid in taxes.
IRA Contributions
For SEP IRA contributions, as a self-employed individual, the SEP deduction is calculated based on your "net" self-employment earnings. There is a separate IRA worksheet to help you calculate. For Traditional IRA contributions, you can deduct up to $7,000, but if you have highenough income, that may not be deductible.
Similar to the Student Loan Payment, there is a phase out. If you are married, filing jointly and making less than $196,000, you can deduct the whole amount. If you are making $196,000 to $206,000, there is a partial phase out. If you are making above $206,000, you cannot deduct any amount.