A sole proprietorship is the most basic and informal way to conduct a business.
You don’t need permission to start doing business as a sole proprietorship. You don’t need to maintain any records other than what is minimally necessary to show your income and expenses on your tax return.
If you wish to use an artificial business name, you’ll need to file a DBA ("doing-business-as") certificate with your county.
As a sole proprietor, you have the ultimate freedom to operate your business in the manner you see fit. And if you decide to close or wind down your business for any reason, a sole proprietorship is the least cumbersome entity to end.
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Starting a sole proprietorship
No taxable event
If you’re starting out as a sole proprietorship, you will likely start by dedicating personal assets or purchasing assets required to get things off the ground.
It’s helpful to know that you can transfer property to the sole proprietorship without tax consequences since the sole proprietorship is not a separate entity for federal tax purposes.
Hiring and EIN
Despite not being a separate legal entity, your business may need to apply for its own Employer Identification Number (EIN) if you anticipate hiring employees. See below for withholding rules.
Setting up payroll
Once hired, you must collect information about the employees' withholding exemptions, withhold income taxes from the employees' salaries based on these withholding exemptions, and remit the income taxes withheld at the appropriate times.
The proprietor must withhold the employees' portion of FICA taxes and pay the employer's portion of FICA, FUTA and state unemployment taxes and workers' compensation premiums. If the sole proprietor has common-law employees, he or she must file Form SS-4 with the IRS to get an EIN.
Read our article on how to set up payroll for your therapy practice.
Decide on tax year and accounting method
You must also choose the tax year and the accounting method you will use, although sole proprietorships must use the tax year of its owner, which will usually be a calendar year.
Read our article on the difference between cash and accrual accounting.
Personal liability for your business
The biggest drawback of operating as a sole proprietorship is that it does not provide any asset protection, leaving you exposed to liabilities of the business and other litigious claims.
If you’re averse to this level of risk, consider purchasing liability insurance.
Alternatively, you can convert your sole proprietorship to an LLC, PLLC, or certain corporations without any tax consequences.
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Taxing a sole proprietorship
Whether you, as the sole proprietor, withdraw the profits or place them back into the business, any income you make as a therapist should be reported as taxable income on Schedule C of Form 1040, your individual income tax return.
Self-employment tax
Your business profits also constitute self-employment income, which is subject to self-employment tax (computed on Schedule SE of Form 1040).
Since there is no employer to share the burden, you can expect to pay Social Security tax at the higher, self-employed rate.
Filing your tax return
As mentioned above, the income from your sole proprietorship ultimately flows to your Individual Income Tax Return (Form 1040).
Even if your therapy practice is small, tax season can feel hectic. It’s never too early to start preparing. Check off the applicable items below and track everything you need for you or your accountant to file your taxes.
Basic Information
- Your full legal name and date of birth
- Your social security number (SSN)
- Your Employer Identification Number (EIN)
- Last year’s tax return*
- Last year’s total adjusted gross income
- Your IRS Self-Select Pin from last year’s filing
- Total amount paid in quarterly taxes during 2021
- Bank account information: account and routing numbers
Tax forms
- Form W-2 (if you are an employee as well as a business owner)
- Schedule K-1 (if you are a member of a partnership or S corporation)
- Form 1099 (if you paid a contractor during the year)
- Form 1095 (Health Insurance Marketplace statement)
- Form 1098 (Mortgage Interest Statement)
Financial statements
Receipts and financial records
- Advertising and marketing
- Accounting and bookkeeping services
- Business meals
- Business trips
- Bank fees
- Vehicle use (mileage rate or actual expenses)
- Membership fees
- Continuing education
- Office rent (including home office)
- Office supplies
- Books and therapeutic aids
- Personal therapy
- Square, Stripe, and other payment processor fees
- Booking and billing software
You or your accountant will use these to add up all your tax deductible expenses for the year. They must be kept after you file taxes, to back up your claims in the event of an IRS audit.
For more details on how to deduct these expenses on your tax return, see our complete list of tax deductions for therapists.
Helpful articles from Heard
- The Complete List of Tax Deductions for Therapists
- Tax Deadlines for Therapists
- Tax Basics for Sole Proprietors
- Tax Brackets for Therapists
- Is Going to Therapy Tax Deductible?
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One of the best ways to prepare for tax season is to pay your estimated quarterly taxes accurately and on time. When you join Heard, we’ll let you know how much to pay to the IRS and your state each quarter. Schedule a free 15-min consult.
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.
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