The biggest tax mistake self-employed therapists make is putting off their taxes.

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More specifically, therapy practice owners run into trouble when they put off preparing for taxes. That is, doing the necessary, day-to-day paperwork that ensures they’re ready to file taxes when Tax Day rolls around. 

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Here’s what you can do to fight procrastination and make sure you’re ready to accurately file taxes for your therapy practice.

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Key takeaways:

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• The biggest tax mistake self-employed therapists make is putting off tax prep.
• Many tasks necessary for filing an accurate return—like bookkeeping—are also essential for the overall financial health of your business.
• Tax prep is a daily, weekly, monthly, quarterly, and annual activity—not just something you do at the end of the year.
• Tax procrastination is a common problem, and therapists don’t need to beat themselves up over it—the important thing is to be proactive!

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What happens when your therapy practice puts off tax prep?

Many tax-related tasks are also necessary for tracking your finances and managing your business, so procrastinating on them can have a negative impact on your practice overall. 

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If you put off filing taxes for your therapy practice, you’re liable to run into these seven problems:

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1. Inaccurate bookkeeping
2. Missing expense records
3. Haphazard investing
4. Missed deductions
5. Late quarterly payment penalties
6. A stressful tax season
7. Late filing penalties

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Read on to learn how each of these problems affects your business—and how to solve them.

Sidenote: Don’t beat yourself up for avoiding your finances

There are many reasons a self-employed therapist may put off preparing for taxes, or procrastinate when it comes to financial matters in general.

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For starters, it’s unlikely you were drawn into starting your own therapy practice for purely financial reasons. While running your own practice may benefit you financially compared to working for someone else, personal job satisfaction and the desire to help others also play important roles. If your attention is primarily focused on treating clients, it may be difficult finding the time and energy to deal with the financial side of your practice.

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On top of that, many therapists—like many people in general—have complex relationships with money. Your attitude towards money—which may be affected by early life experiences, and which may include feelings of anxiety or even shame—may make it difficult to confront your practice’s finances. Tax procrastination isn’t necessarily a sign of laziness; it may be a defense mechanism.

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The most important thing is not to beat yourself up over your practice’s financial admin. If you’re having trouble tackling it, there are professionals—bookkeepers, accountants, or the team at Heard—who can help. 

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By being proactive and tackling taxes one job at a time, you can help your practice succeed financially while becoming more comfortable with the dollars-and-cents side of the business.

Problem #1: Inaccurate bookkeeping

Bookkeeping is the practice of recording and categorizing transactions for your practice. Every time your practice earns money, it’s recorded on the books, and every time it spends money, it’s also recorded. 

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With the information recorded in your general ledger—the record at the heart of your bookkeeping system—you can generate financial statements that help you accurately file your taxes.

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If you tend to put off all your tax prep until the end of the year, however, your bookkeeping may not be up-to-date. For instance, many therapists are in the habit of waiting until the end of the year, then going back over records of their business transactions—incoming funds from clients, outgoing funds paying for expenses like rent and utilities—and preparing a rough set of books retroactively.

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That’s enough to give them their overall profits for the year, which they can then bring to an accountant who files their taxes.

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A few problems with this technique:

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• No up-to-date insights. Your general ledger and especially your financial reports give you information you can use to make financial decisions. If, for 90% of the year, you don’t bother with bookkeeping, you don’t have those insights, so any business decisions you make are bound to be less informed than they would be otherwise.
• Inaccuracies. When you treat bookkeeping as an end-of-year rush job, you’re more likely to make errors. That means your tax return could be inaccurate, too; you may end up overpaying or underpaying taxes, risking lowered cash flow or IRS penalties, respectively.
• Missed deductions. A rough accounting of your total expenses for the year won’t give you the information you need to fully claim your tax deductions. Day-to-day bookkeeping involves categorizing expenses. When your expenses are properly categorized, it’s easier to go claim deductions and reduce your total tax bill.

The fix: A bookkeeping solution

A bookkeeping solution tracks every transaction that goes through your practice, and categorizes each one. This gives you all the information you need to generate monthly and yearly financial reports, so you can file your taxes on time and accurately claim tax deductions.

Bookkeeping for a therapy practice typically takes the form of:

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• DIY bookkeeping, where you personally track all your transactions and generate statements using software.
• Outsourced bookkeeping, a professional bookkeeper (either solo or working for a firm) who tracks your statements for you using software
• Heard, which gives you the up-to-the-minute insights you get from doing your own bookkeeping along with the stress-free automation of outsourced bookkeeping. Plus quarterly tax estimates and annual tax filing.

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Learn more with What Does a Bookkeeper Actually Do?

Problem #2: Missing expense records

Every deductible business expense you claim needs to be backed up by a record. That usually means a receipt or some other proof of purchase (including the date, the amount spent, and the item or service purchased) issued by a vendor.

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The IRS expects you to be able to prove every purchase you’ve made. Otherwise, it would be all too easy to claim expenses you never incurred and enjoy a reduced tax burden.

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In the event your practice is audited, the IRS may ask for records supporting every deduction you’ve claimed. They may review records up to three years into the past. If they review three years of your tax returns and—thanks to missing records or inaccuracies—determine you may have committed fraud, they may go back a total of six years.

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If you’re claiming deductions on your tax returns but you don’t have receipts to back them up, you’re skating on thin ice. If you’re audited, the best case scenario is that you end up owing the IRS the value of any unsupported claims. That’s the best case scenario.

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But even if you have receipts for your purchases, you need to make sure they’re organized. In the event the IRS comes knocking and you need to provide receipts, the process will be much more painful if all your receipts are stuffed in a metaphorical shoebox rather than neatly sorted according to date and expense type.

The fix: Everyday expense tracking

If you’ve put off keeping track of business receipts, the good news is that there are many tools to help you. Smartphone apps make it easy to take photos of receipts, store them in the cloud, and even automatically categorize them. 

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This can be a hard habit to get into. If you’re used to receiving a receipt every month for your business phone plan and leaving it sitting in your inbox, you’re going to have to get used to categorizing each email and storing it. But it pays off in the long run, and it’s an easy habit to fold into your other daily bookkeeping to-dos. 

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For more info, check out our guide to saving receipts for therapy practices.

Problem #3: Haphazard investing

When you’re a self-employed therapist, investing for the purpose of long term saving—whether with an IRA, a 401(k), an HSA, or another financial tool—is a smart move. Not only do investments like these help you prepare for future retirement or health expenses, but used strategically, they can reduce your tax burden in the present.

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The best strategy for building up long-term savings like these is to make small, frequent contributions. This allows you to make the most of the interest that accrues on your investments. Even if your income tends to spike up and down from one month (or week) to the next, it’s possible to steadily build long-term savings using this approach. Check out our article on how to invest when you have a variable income.

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But if you’re not tackling the tasks that go hand in hand with tax prep—bookkeeping, budgeting, and tracking your tax obligations—then steadily investing money is difficult. You may find yourself dumping big sums of cash into your accounts at year-end in order to lower your tax bill, in the meantime missing out on interest that would have accrued over the course of the month.

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Or you might miss the December 31st deadline altogether, leaving money on the table you could have saved by reducing your tax burden.

The fix: A monthly investing budget

Setting yourself a monthly investing budget is the biggest step you can take towards steadily building up long-term investments. And it has positive side effects: Budgeting for investing means budgeting for your other expenses, tracking your tax obligations, and making sure you have enough money in the bank to pay them.

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Once you’ve got the hang of budgeting for your therapy practice and investing with a variable income, tackling tax season comes easily.

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Problem #4: Missed deductions

When you aren’t carefully tracking expenses for your therapy practice, you’re missing out on tax deductions that could quite literally save you thousands of dollars each year.

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This goes beyond adding up all your office rent or utilities bills for the month and writing them off your taxes. Some deductible expenses require a little extra legwork if you want to make the most of them.

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For instance, there are two ways to deduct the cost of your home office: One is based on the square footage of your office, with a flat rate applied per square foot; the other is based on your total home expenses, including rent/mortgage, utilities, and other fees.

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In some cases, therapists with home offices can deduct twice as much from their tax bill depending which method they choose. But unless you’re tracking these expenses, you won’t know which will benefit you most.

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Besides that, there may be deductions that aren’t even on your radar yet. Many therapists are surprised to learn that, in most cases, they can deduct the cost of their own personal therapy treatments as business expenses. That could end up taking a big piece out of your tax bill if you properly track and report it.

The fix: Monthly and annual deduction reviews

The solution? First, review our complete list of tax deductions for therapists.

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Then put in place processes for tracking and reviewing your deductible expenses on a monthly and annual basis. If you take a little time each month to add up your deductible expenses for the period and make sure you have all the information (and records) on hand you need to deduct them on your tax return, your final end-of-year review will be a breeze. And your practice could save some serious cash.

Problem #5: Late quarterly payment penalties

If you’re like most self-employed therapists, you’re required to pay federal taxes on a quarterly schedule. That’s not necessarily a bad thing, but it takes some planning and organization to manage. 

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Without up-to-date bookkeeping and a working budget, you may find yourself coming up short when it’s time to make a quarterly payment. And IRS penalties tend to accrue over time—meaning you end up paying significantly more in taxes than you would have otherwise.

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Plus, there’s a strategy to paying estimated quarterly taxes. The safe harbor rule allows you to avoid underpayment penalties for the year, provided you pay the same amount you paid for last year’s taxes. It takes some planning and budgeting to make sure you set aside enough income to cover those amounts. If you don’t—and if you miss quarterly payments—you could be on the line for some extra fees.

The fix: Quarterly tax estimates

Quarterly tax estimates are straightforward and fairly easy to make—provided you’ve completed last year’s tax return and have records of your expenses.

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Once you start filing behind on taxes, it becomes hard to make estimated payments for the current year and take advantage of the safe harbor rule. And if you don’t keep track of your current year’s income and expenses, any adjustments you may need to make along the way—like lowering or increasing your payments—becomes impossible.

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Check out our article on quarterly tax estimates for therapists to get started.

Problem #6: A stressful tax season

Many therapy practice owners dread tax season, and for good reason. Tax season is when you have to figure out how much your practice spent and earned over the course of the year, and track down records of all your business transactions. That applies whether you file your own taxes each year or hire an accountant to do it for you.

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Hint: If you take the DIY approach, one of the fastest fixes for tax-time stress is to hire an accountant ASAP. Or check out Heard.

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Even if you’ve been disciplined about saving all your receipts and tracking your income and expenses, you may have a hard time connecting all the moving pieces and figuring out just how much you earned. You need a way to bring all that information together and make it work for you.

The fix: Annual financial statements

Annual financial statements summarize your financial information for the year, and give you the essential information you need to file an accurate tax return.

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They include:

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• An annual profit and loss statement (P&L), which tells you your gross income, expenses, and net income for the year.
• An end-of-year balance sheet, which tells you all your business’s assets and liabilities at the end of the year.

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If you use the accrual method of accounting, you may also need a cash flow statement, which reconciles the income and expenses reported on the books (and your P&L) with the amount of cash you actually have on hand.

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So long as your books are accurate and up to date, you can use bookkeeping or accounting software to generate year-end financial statements for you. If you have a bookkeeper working for you, or if you use Heard, you’ll automatically get annual statements at the end of the year.

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Making sure you have annual financial statements on hand is the biggest step you can take towards a stress-free tax season.

Problem #7: Late filing penalties

Even with a bookkeeping system in place, even with year-end financial statements, you may find that, when the deadline for your tax return rolls around, you aren’t ready to file.

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That’s especially true if you’re trying to make up for an extended period of tax prep neglect by catching up on your bookkeeping, getting your receipts organized, and everything else.

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Late filing comes with penalties. The IRS will charge you 5% of your unpaid taxes, up to a 25% maximum, if you don’t file on time. Check out our article on IRS penalties for more information.

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On top of that, you may be adding to an already heavy workload. Trying to play catch-up and get last year’s taxes filed at the same time you’re dealing with daily bookkeeping, quarterly tax estimates, and other tasks just adds to the burden of paperwork you have to deal with.

The fix: Filing for an extension before it’s too late

If you don’t think you’ll be able to file your taxes on time—in fact, if you even suspect there’s a chance you could miss the filing deadline—file an extension ASAP.

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Filing a request for a tax extension costs nothing and incurs zero penalties. It gives you an extra six months to get your finances in order and prepare an accurate return. And it saves you from being charged penalties for late filing.

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That being said, an extension to file is not an extension to pay. Pay your total tax for the year—following the safe harbor rule—as soon as you can, in order to avoid late payment penalties.

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7 steps to avoid the biggest tax mistake therapists make:

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• Set up a daily bookkeeping solution
• Track expenses and save receipts
• Create a monthly investing/saving budget
• Review deductible expenses monthly and annually
• Make quarterly tax estimates based on last year’s return
• Generate year-end financial statements
• File for a tax extension before it’s too late

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Need help staying on top of your taxes? Check out our tax planning guide for therapists.

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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.

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

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