Many therapists, after starting their own practices, take the DIY approach to taxes by default. 

‍

After all, if you can file your personal tax return using a service like TurboTax, why shouldn’t you be able to file one for your business?

‍

But there are hidden costs to filing your own taxes, particularly as your practice grows in size and complexity. Here are the factors to consider when deciding whether you should file your own taxes this year, and how to choose the approach that best suits your practice.

‍

{{consult}}

Pros and cons of filing your own taxes as therapist

Before you file your own taxes as a self-employed therapist, take time to consider the pros and cons of the DIY approach.

Pros

• You could save money. If your practice is brand new and money is tight, self-filing may put less stress on your spending account than hiring an accountant. All the necessary forms are available for free from the IRS.
• It’s simple when your practice is small. When your client list still has lots of room to grow, and your expenses are minimal, there’s less information to track and report. That makes filing your taxes simpler.
• You might learn something. If you want a better understanding of how your tax return works, and want to get hands-on with tax deductions and tax credits, doing it yourself is a great way to learn—provided you can avoid making serious errors.

Cons

‍

• There are hidden costs. When you’re self-employed, time really is money. The hours you spend filing taxes may be hours when you could be seeing clients and earning income.
• Mistakes may be costly. A simple arithmetic error or a misunderstanding of tax return instructions could lead to steep penalties from the IRS.
• Tax season is stressful. So stressful, in fact, that psychologists study it. Be honest with yourself: do you have the resources to cope with more stress during tax season? How might added anxiety affect the rest of your practice?
• You could miss out on savings. When you hire a tax professional, you can get help taking advantage of business deductions and making other smart moves to reduce your financial burden. When you DIY, you’re on your own. Although our guide to tax deductions for therapists helps.
• DIY makes it easy to coast. When you self-file your taxes, there’s no pressure from an accountant to set up an organized bookkeeping solution. You can coast along using spreadsheets and software and filing your own taxes. Disorganized bookkeeping always costs in the end: either in the form of errors, or the price of having a bookkeeper go back and tidy up the books later on. If you want to get your financial back office in order, the place to start is with a professional tax preparer, who can help you choose a bookkeeping solution that works for you.

DIY tax filing vs. professional: a cost comparison

There are hidden costs to filing your own taxes. And there are very obvious, upfront costs to hiring someone to do it for you. Here’s how to anticipate what each approach is likely to cost you.

The cost of hiring an accountant

Accountants may work individually, on a freelance basis, or as employees of a firm. 

‍

The exact amount you pay to have your tax return prepared depends not only on who you hire but on the needs of your business. A more complex business structure—an S corporation as opposed to a sole proprietorship, for instance—typically requires a more complex (and expensive) tax filing.

‍

The NSA Income and Fees survey offers good guidelines for estimating the cost of filing. A sole proprietor filing a non-itemized return can expect to be charged somewhere in the neighborhood of $220 by an accountant. If they itemize deductions, that number climbs to around $320. And if their business is a more complex structure than a sole proprietorship, like a corporation, they can expect to pay upwards of $1,000.

The price of Heard  

When you sign up for Heard, our team handles your bookkeeping, tax prep, and even tax filing for you. There are no added costs for filing your taxes each year. You can view our transparent pricing here. Please note that we do not offer tax-only services.

The cost of doing your own tax filing

When you’re self-employed, every hour of your day is an hour you could be using to help grow your practice and increase your income. To understand how much doing your taxes (or any other admin task, for that matter) costs you, you need to apply an hourly rate. 

‍

Disclaimer: When time is more than money

The hours you spend living your life—doing everything from brushing your teeth, to going on vacation, to caring for those who depend on you—also have value. It’s value that defies being assigned an hourly rate. Remember to take that important, intangible time into account when considering ways to automate financial admin like taxes. There’s more to life as a business owner than numbers on a spreadsheet.  

‍

Calculating the cost of your time

To understand how much doing your own taxes costs you and your therapy practice:

‍

1. Calculate how many hours you spend solely on tax prep and filing. Include in your calculation time spent researching. Even time spent reading this article.
2. Calculate your average hourly rate as a therapist (if you use a sliding scale or collect multiple types of insurance), or simply apply your current hourly rate (if every client pays the same).
3. Apply your hourly rate to the total number of hours you spend on taxes. That’s the cost of DIY tax filing.

‍

For example: You calculate how much time you spent filling out and filing your practice’s tax return last year, and the total comes to six hours.

‍

Now, suppose you don’t accept insurance and you charge all of your clients $150 per session.

‍

6 x 150 = 900

‍

That’s $900 you spent filing your taxes!

‍

Or, if you’d prefer a more conservative approach: It’s unlikely you spend 40 hours per week seeing clients. Most full-time, self-employed therapists spend 20 to 25 hours per week seeing clients. The remaining hours are spent on notes, business admin, and professional development.

‍

If you spend 25 hours with clients each week, at $150 per hour, your gross income per week is $3,750.

‍

Now, divide that amount across a forty hour work week:

‍

3,750 / 40 = $93.75

‍

You’re earning a gross income of $93.75 per hour.

‍

6 x 93.75 = $562.50

‍

Even taking this more conservative approach, it still costs you more than $500 to file your own taxes.

‍

DIY accounting is not tax deductible

One last note: any fees you pay a professional to file your taxes are 100% tax deductible as business expenses.

‍

The time you spend doing your own taxes is not tax deductible.

‍

{{consult}}

When should therapists file their own taxes?

At the end of the day, you’re the only individual qualified to decide whether hiring a tax professional is right for your therapy practice.

‍

But, as guidelines, here are some signs you can stick with the DIY approach for now.

‍

• Your practice is still part-time. If you’re only seeing clients 10 - 15 hours per week, your practice is small enough that you can probably do your own bookkeeping and tax filing without professional support. But be sure to check out our Tax Hub for guidance.
• Your expenses are minimal. Even if your client list is full, if your business expenses are few—meaning, there’s not much to list on Schedule C of Form 1040—you may be able to get away with filing your own taxes without losing out on any major tax deductions.
• You simply adore filing taxes. Or else you’ve run your own business before this, and you know Schedule C like the back of your hand. In that case, more power to you!

When should therapists hire a tax professional?

These are some signs your business is ready for professional tax prep.

‍

• You’re no longer a sole proprietor. If you’ve transitioned to an LLC, S corporation, or partnership business structure, your tax return has just become significantly more complicated. If you’re willing to invest the time and money in business formation, you ought to be ready to invest some cash in hiring an accountant. You’ll save yourself a lot of work and avoid mistakes.
• You’re full time and have lots of expenses to deduct. Once your client list is full and you’re deducting expenses like a work phone, home office, and professional development, it’s time to bring in a pro.
• You plan to expand your practice. If your client list is full and you’re making plans to hire other therapists to work for you—or to even just hire an admin assistant to manage your emails—you’ll benefit from hiring an accountant. Not only will they help you file your taxes, they can guide you in sustainably expanding your business.
• You’ve been charged penalties by the IRS for incorrect filing. If you made an error on a past tax filing and the IRS charged you penalties, it could be a sign your taxes are better left to the experts. 
• You need to start filing quarterly estimated taxes. Once you owe $1,000 or more in federal taxes, the IRS requires you to pay your taxes in advance in quarterly estimated payments. It can be tricky calculating those payments—if you underpay, you’ll be charged a penalty—and budgeting for the added cost. A qualified accountant should be able to help.
• It’s cheaper. If you’ve calculated the amount you pay to do your own taxes—based on your hourly income—and you find it’s greater than the cost of hiring an accountant, it’s time to take the plunge.

‍

—

‍

Accounting, bookkeeping, taxes—what’s the difference? They’re three separate but interrelated parts of your business’s financial admin, and getting them right is essential for building a sustainable private practice. Learn more from The Difference Between an Accountant, Bookkeeper, CPA, and EA for Therapists.

‍

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.

‍

Bryce Warnes is a West Coast writer specializing in small business finances.

‍

{{resource}}