Office Hours: Mastering Quarterly Taxes For Your Therapy Practice with Andrew Riesen

Andrew Riesen [00:00:00]:

Ultimately, as a business owner or the therapist, you're responsible for making that judgment call. But at the end of the year, certainly as we work through quarterly tax payments, we'll add up all of those estimated tax payments and make sure that they're included on your tax return that we file for you or for you and your partner.

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Michael Fulwiler [00:00:16]:

This is Heard business school, where we sit down with private practice owners and industry experts to learn about the business of therapy together. I'm your host, Michael Fulwiler. Andrew Riesen, welcome to office hours.

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Andrew Riesen [00:00:33]:

Thank you for having me, Mister Fulwiler.

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Michael Fulwiler [00:00:35]:

Thanks for coming on the show. We really appreciate you making time. Thank you also for funding the show.

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Andrew Riesen [00:00:44]:

I'm so busy, Mike. There was no way I was going to be able to make it work. No, I'm excited. This has been a long time coming, so it's fun to get on here and jam with you.

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Michael Fulwiler [00:00:53]:

Absolutely. Today we're going to get super tactical about quarterly taxes, which is a topic of confusion for a lot of therapists, especially when they're first starting out in private practice. Can you explain, just in really simple language, what quarterly taxes are?

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Andrew Riesen [00:01:12]:

I will do my best to explain in very simple language what quarterly taxes are when you have a w two. Let's say you're working for a hospital, you're working for an agency, you're working for a group practice, and they're giving you a w two. What you get on your paycheck, what is removed from that is federal income tax, state income tax, your payroll taxes. And a part of the payroll taxes is Social Security, Medicare, unemployment taxes. And so when you have a w two job, all of that stuff is covered. But the minute that you become self employed. So let's imagine, Michael, you're a therapist, you start seeing five cash pay clients on the side. You do nothing else besides just see those clients.

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Andrew Riesen [00:01:56]:

All of a sudden you are now responsible for covering taxes that you wouldn't otherwise have been paying. And so what that means is that Michael, the therapist and Michael's therapy practice, because we don't have a better name for your therapy practice, is responsible now for paying federal income tax for yourself, state income tax, and then self employment taxes and self employment taxes is basically, think about it synonymously with payroll taxes that you might be paying if you were paying into a, or if you were getting paid aw too, rather. And so you're unfortunately responsible for covering the employer side and the employee side. And so unlike a w two, where you just have an additional 7.5%, you have nearly 15.3% in additional taxes that you're paying in self employment tax. Ergo the fun of quarterly taxes for self employed therapists.

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Michael Fulwiler [00:02:48]:

Why does the IR's want you to make quarterly payments instead of having, you know, you just pay at the end of the year when you file their taxes? Is there like a reason why the IR's needs that money during the year?

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Andrew Riesen [00:02:59]:

That is a great question, Michael. Thank you for asking. The reason that the IR's wants quarterly taxes to be paid in businesses are responsible for payroll reports on a quarterly basis. On an annual basis. And so my assumption, I actually don't know the direct reason why on a quarterly basis, but you're responsible for making those payments on a quarterly basis to cover that outstanding liability. And so the assumption that I'm going to go ahead and make here is that it is in lockstep or in alignment with the way that the IR's thinks about payroll reports from employers. But that is a good fact that I should know.

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Michael Fulwiler [00:03:36]:

That makes sense. So they probably want your money during the year too, not just all at once at the end of the year. So who has to pay quarterly taxes? Is it everyone who is self employed?

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Andrew Riesen [00:03:49]:

Great question. So who has to pay quarterly taxes is dependent on what type of business entity that you are. And so if you are self employed and you are a sole proprietor, if you are an LLC, if you're a PLLC, if you're an S corporation, you are responsible for paying into a partnership as well. You're responsible for paying into quarterly taxes on a quarterly basis. That is because you are treated as what is called a disregarded entity, which means that you will file a schedule C or a simple profit and loss on your personal tax return at the end of the year. And so you're responsible for covering the wages that you are earning against your individual income tax liability throughout the year. That is not being withheld against in a w two or a paycheck in an environment that you might have been in previously. Now, when you start to think about a C Corp, taxation gets a little bit different.

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Andrew Riesen [00:04:52]:

And it's treated differently because there's taxation as well at the business level. But all of those entities that I described as sole proprietorship, an LLC, a PLLC, and an S corporation, they are all pass through entities, meaning that all of the income that you earn in those businesses pass through back to you as the business owner.

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Michael Fulwiler [00:05:10]:

That's a really great point. I think that that is a source of confusion. If I'm operating as a sole proprietor or LLC, I'm generating income, it's going into my separate business bank account. Even if I don't take that money out of the business, I still have to report that as income. Whether it's in my business account or I've transferred it to my personal account, it's still money that I made as a taxpayer. Is there like a cutoff where you're responsible for paying quarterly taxes, or does, like, everyone have to make quarterly tax payments?

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Andrew Riesen [00:05:45]:

Yes, that's a great question, Michael. So the question was, is there a cutoff for who doesn't have to pay into quarterly taxes throughout the year? The answer to that question, it can be multifold. As an accountant would always say, it depends. But a good rule of thumb is that let's assume that your tax rate is 20% or 25%. Baseline assumption, if you're earning over $4,000 or $5,000 in total income from your practice throughout the year. So that means from the clients that you see, in total, you earn four or $5,000. In all likelihood, you're going to surpass the threshold or the floor that the IR's has set for who is responsible for paying in on a quarterly basis, and that amount is $1,000. Now, I say it's multifold or multifaceted because it may be that you have a w two job, or it may be that your partner has a w two job and you're already withholding more than enough so you don't actually need to pay in at that small of income or of that level of income, rather.

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Andrew Riesen [00:06:53]:

And so always talk to a professional when you're trying to figure out how much that you might owe. But, but just know that the threshold and the floor of when you might owe is at $1,000 in your total tax liability. And you get to that by multiplying your tax rate. Your effective tax rate times that taxable income.

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Michael Fulwiler [00:07:14]:

So you said if you expect to owe $1,000 or more in taxes annually, you're required to make these quarterly payments. Could you walk us through, like, how you would think about even calculating what that number is that you threw out, like, $4,000, you know, 20% to 25%. Could you just give us, like, a really simple example for someone who's trying to figure out, like, I don't know if I'm going to owe $1,000 or more? Like, how would I even come to that number?

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Andrew Riesen [00:07:43]:

So the best way to calculate and understand if you're going to be above the floor of how much you might need to pay in from a quarterly taxes standpoint, ultimately comes down to what I love to talk about bookkeeping. You need to keep track of your income and expenses throughout the year and get a good sense throughout the year as to what does my total income look like, what do my expenses look like, and what's left over after expenses. That's what we multiply the tax rate against to help understand what our anticipated tax liability is. And so let's imagine Michael in Michael's therapy practice, you earned $10,000 for 2023. You had $2,000 of expenses. So you paid for simple practice. You paid for psychology today. You paid to be, you know, to get your professional insurance, all that good stuff, what was left over.

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Andrew Riesen [00:08:39]:

So client sessions amounted to that $10,000. You had the $2,000 worth of expenses. What was left over after that was that $8,000 against that $8,000, you multiply based on what your effective tax rate is. Again, talk to a professional about that. You can also look at your prior year tax return. There's calculators online, but multiply that by the $8,000. So what's left over after expenses? That'll give you a rough ballpark, of course, notwithstanding any additional deductions. Separate.

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Michael Fulwiler [00:09:11]:

Something to clarify here, too, that I think is helpful is that these are called estimated payments, right? So it's not like you're getting a bill from the IR's every quarter. That's telling. That would be nice. Right? They told you how much to pay. You're not filing your taxes quarterly. Right. You file your taxes annually, just once a year. These are estimated payments that you're making towards what your estimated tax liability is at the end of the year.

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Michael Fulwiler [00:09:40]:

Could you talk about when you have to pay quarterly taxes, like what the deadlines are?

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Andrew Riesen [00:09:46]:

Yes, 100%. So it's important to remember that there are tax deadlines throughout the year of which quarterly tax estimates are due for quarter one. That is April 15. Sometimes. Again, I want to be very clear. Sometimes these deadlines just shift on when these dates fall. But on a year over year basis, you can generally take into consideration that on April 15, you'll pay for quarter one. On June 15.

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Andrew Riesen [00:10:12]:

I know, it's very weird. That's just two months. You'll pay for quarter two. On September 15, you'll pay for quarter three. And on January 15, you'll pay for quarter four. And that last quarter of payments is when you would think about doing what is called a true up. So let's say you made quarterly tax estimate payments throughout the year, and you are a little bit short or you a little bit over. So maybe you made consistent payments throughout the year.

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Andrew Riesen [00:10:37]:

That's a good time to build in and make sure that you're at least covering 90% of this year's current tax liability. Otherwise, you might be at risk for penalties and fees or accrue interest because you've made underpayments throughout the year.

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Michael Fulwiler [00:10:55]:

Couple of things there I just want to highlight. So the first quarter payment is due on April 15, which is also when your annual taxes are due for the previous year as well. Right. So I know for therapists who are in private practice for the first time, like, that can be a big shock where you're paying any outstanding tax liability from the previous year and on the same day because the IR's doesn't want to spread it out. For business owners, that's like due at the same time also. Yeah. Q two is only two months. Like, that doesn't really make a lot of sense, but that's just the way that it is.

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Michael Fulwiler [00:11:32]:

And then you mentioned this. But if that deadline falls over a weekend, it's the following business day. So that's why you get, like, sometimes it's the 17th instead of the 15th. When you're estimating your quarterly taxes for, you know, each of these deadlines, April 15, June 15, are you estimating them based on your income that you've earned during that time period, like within that quarter, or are you thinking about your entire annual income, and then you're just dividing it by four?

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Andrew Riesen [00:12:05]:

Great question, Michael. Your tax prowess is becoming quite strong, I must say. So, in order to calculate how much you owe on a quarter over quarter basis for your quarterly taxes, there's two different approaches that you can take, and I would take both into consideration. So there's the safe harbor approach. And so if you're working with a local accountant or, you know, an accountant in your city, in all likelihood, you're gonna file a return with them. If you're self employed, you're gonna file a return with them. They're gonna come back to you with stubs for estimated payments that you should be making for the following year. Michael, I'm sure given that you've been self employed for a period of time, was that how it was for you when you worked with a local accountant? Awesome.

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Michael Fulwiler [00:12:54]:

Yep. Yeah. They asked me if my income was going to be the same or not next year, and then just estimated based on that, basically.

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Andrew Riesen [00:13:00]:

Exactly. And so that's the important thing to take into consideration, because my assumption is that there's a lot of early career therapists that are listening to this to learn about how to make quarterly tax payments. That approach can be very helpful if you have a stable practice, if you don't have income outside of your practice, that is moving, because the important thing to take into consideration is that quarterly tax estimates are a representation of your full financial picture. And so you could earn $20,000 in your first year of practice and then $90,000 in the next year. And so the estimates that you received that are safe harbor estimates. So 100% or 110% of your prior year tax liability may have been good if you made $20,000 again, but you may show up to tax time with a $15,000 tax bill that you hadn't thought about because you weren't prepared for the additional income that was increased. And so the second way to look at it is on a quarter over quarter basis, which is something that we do at Heard on top of the safe harbor estimates is your business is right here, right now. This is where we anticipate your business to be at the end of the year.

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Andrew Riesen [00:14:07]:

Let's calculate a quarterly tax estimate based on where your business is anticipated to end, based on how it's growing. And so a more real time perspective. And so you want to take two looks. You want to look at the safe harbor estimate, make sure that you're paying that baseline estimation that's been provided. But then you also want to look at, how is my business changing over the course of the year? Am I setting aside. Based enough, based on where I'm actually at right now? Then I had alluded to the full financial picture. And so, in calculating those quarterly tax estimates, we're not just talking about Michael, your therapy practice, and the income that you've earned in your therapy practice. We're talking about your w two job, your income that you're receiving from the 25 real estate rentals that you and your partner are selling, and also your partner's income and your partner's earning, let's say, $500,000.

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Andrew Riesen [00:15:04]:

Right. And so you look at the practice that you have, and then you look at that broader picture. Your practice may look very different than the BRoader picture. And so a lot of folks will be like, oh, it's 30% or 25%. But the reality is the picture looks Much DiFfErENt when you look at the full picture. And so make sure you look at the whole picture to understand how much to set aside.

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Michael Fulwiler [00:15:24]:

I'm glad you brought up the safe harbor idea, because that's something I was going to ask you. When you think about. If I was in private practice last year, I can look at what I made. I can just pay 100% of my previous year's tax liability and four equal payments. That sounds very straightforward. But if it's my first year in practice, how do I know how much I'm going to make? How do you think about that? Or how do you advise therapists when they're just getting started to project their income when they don't have any historical income?

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Andrew Riesen [00:15:58]:

So how do I know, if I am in my first year of practice, how to project the amount of income that I'm going to earn and then kind of work back into how much I might potentially owe? So everybody here has probably used a Google sheet before. That's going to be an assumption that I make. My recommendation to calculate this out is go to a Google sheet and imagine when your practice is full, whether it's in three months or six months, how many clients am I going to be seeing and what am I going to be charging? It's imperfect. You're going to have, you know, ten to 15% of your clients that don't show up that reschedule. But let's just look at the highest level possible. So let's imagine you're doing ten client sessions a week at $150 per session. Let's assume then you're going to earn $6,000 a month. And so that would be $72,000 for the year.

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Andrew Riesen [00:16:54]:

And so from that $72,000, we can then calculate, okay, this is how much I should think about setting aside when I am at $72,000. Now, we have to take into consideration the first quarter and the second quarter. The first quarter, it may be half of that or it may be even a quarter of that. The second quarter, it may be half of that or three quarters of that. So there is a ramp up time. And the thing that we see typically with providers that are moving into private practice is it's about six to nine months till you hit your full caseload and hit a full stride to where you have a wait list. So when a client leaves, they're coming back over. And so I would figure out how to take some percentage to reduce that because it's probably not $72,000 that first year.

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Andrew Riesen [00:17:36]:

But do the math based on sessions that you're going to see, amount that you're going to charge, and then from there you can use a tax calculator online or talk to an accounting professional. And we would love to help you calculate how much you might need to think about setting aside, but definitely think through what your business is going to look like. And there's really simple ways to back into that from a calculation standpoint.

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Michael Fulwiler [00:17:57]:

Are you saying that each quarter you can recalculate your estimate as well?

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Andrew Riesen [00:18:04]:

Yeah. So every quarter, let's imagine that you have a growing business. You should definitely be thinking about recalculating your quarterly tax estimate. Right. So in Michael's therapy practice, which is just the thread that's going through this entire conversation, his first quarter was five clients that he was seeing. His second quarter was ten clients that he was seeing. And so lets say that first quarter in Michaels therapy practice, you earned $5,000. And so the total income that you might anticipate earning for that year, 20,000.

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Andrew Riesen [00:18:34]:

But in the second quarter, you earned 10,000. Right. And so then you look at halfway through the year, youve earned $15,000. So you might anticipate that youre going to earn 30,000 or 35,000. And so think about how your income is going to grow and then calculate based on that growing income. One thing to note is that what often happens in your first year of practice when it's growing is that your liability in the third and fourth quarter is going to be a lot more than in the first and the second quarter. So just know that that is very normal. It will stabilize over time once you reach a practice that you feel great about, but it will take time to get there.

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Andrew Riesen [00:19:11]:

And so set aside money so you don't have surprises at the end of the year.

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Michael Fulwiler [00:19:16]:

Let's also acknowledge that as your business grows and you owe more in taxes, it also means that you're making more money, which is a good thing. I think that's a helpful reframe for folks like, oh, my gosh, I owe so much in taxes. Well, your business is doing really well. You know, it's a good thing. There's ways you can reduce your tax liability, which is a separate conversation, but I think it's a net positive. Right. It means your business is doing well. You're, you're making good money, which is why you're tax bill is going up, too.

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Andrew Riesen [00:19:45]:

Yes. As we like to say in the workshops that we do, Mike, when you have maximized the amount of savings that you can find in your practice, mo money, mo problems, when you make enough money in your practice and you've done everything that you can to minimize the tax liability, it's great. Just celebrate the awesome year that you had in your private practice. But I can promise you that we will do some conversations around how to minimize that tax liability if you're feeling the hurt.

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Michael Fulwiler [00:20:11]:

So just really tactically, how do you make these payments? And we've talked about how to calculate them, when to pay them, how do you pay them?

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Andrew Riesen [00:20:19]:

The way that you go about making quarterly tax payments is, it's multifold. So the one thing that government websites, whether it's the IR's or it's the state, do really well. Minimal number of things that they do very well. The one thing that they do really well is direct payments. Whether you live in California and you're going to pay the franchise tax board the amount of, you know, income tax that you owe in California, or let's say you're an S corp and you have the franchise tax associated with that, or going to the IR's website. Most of these websites have a direct pay portal, shameless plug for Heard. Michael and his amazing content team have put together a state by state resource and a federal resource that you can leverage that show you on a step by step basis how to go and make those direct payments. If you are like somebody that is more old school and you want to write up a check and mail that in, or you want to give it to the pigeon and have them fly it over to the IR's, you can certainly do that as well.

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Andrew Riesen [00:21:21]:

But the IR's makes it pretty straightforward to go ahead and make those direct payments, as do most states. I will not claim that every state makes it easy, but most states do.

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Michael Fulwiler [00:21:31]:

We'll drop that in the show notes, the link to that state by state guide for paying those state taxes. And then what happens if you get to a quarterly tax deadline, say, June 15 is the next one that's coming up here at the time of this recording, and you haven't been setting aside 25, 30% for taxes. You can't afford to make the estimated payment. What should you do in that situation.

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Andrew Riesen [00:21:57]:

If you get to a quarterly tax deadline and you are unable to make the payment? So let's say June 15, because we have one coming up. Michael is listening to this podcast. He's, you know, this is his first year in practice. He's already feeling really overwhelmed. He's, you know, trying to figure out how to manage his clinical work. He's trying to figure out how to stay on top of his notes. He's learning how to get into the ebbs and flows of, you know, client acquisition and marketing. There's so much going on.

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Andrew Riesen [00:22:27]:

And, you know, he didn't even think about setting aside money for quarterly taxes. Totally fine, that is. Okay. I want to create the space here to acknowledge that there's a lot you have to learn how to do as a business owner, especially as a clinician. I'm working with clients and managing all of that. If you're getting to the second quarter and this is your first year in private practice and you haven't been able to make the payment, or you forgot to set aside money, the best time to start is now. And if you can make in any payments or cover 100% of your prior tax liability or 110% as a baseline, awesome. From there, at least as a baseline, you'll make sure that you're avoiding any sort of underpayments and penalties.

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Andrew Riesen [00:23:09]:

But from there, by the end of the year, your goal would just be to cover 90% of your tax liability. And so again, continuing throughout the course of the rest of the year, making some assumptions around how much I may make in total income, what my expenses are. This is what good bookkeeping enables you to do, is stay on top of what your income is, and thus stay on top of how much you need to set aside and just start that practice now. And it can be a spreadsheet. It certainly could be, you know, bookkeeping software could be using something like Heard to where somebody's going to help you get into the habit of tracking your income and expenses. And that's going to get you to a place where you have a clear understanding of where your business is at and thus how much to set aside. And if you don't have the money to work with an accountant, or, you know, you don't have the money to go have a conversation with a tax preparer to help understand. Again, 30% to 40% is a good baseline estimate.

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Andrew Riesen [00:24:03]:

To be sure, it may not be the right number for you, but it is better than setting aside nothing.

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Michael Fulwiler [00:24:09]:

Could you talk about that a little bit more? So the advice that we give to therapists is, you know, if you can't afford to make the full payment, it's better to pay something than to pay nothing. Can you explain why that is so?

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Andrew Riesen [00:24:23]:

The reason that it's better to pay something instead of nothing is that the penalties, the fees, the interest they accrue on the outstanding liability or the amount that hasn't been paid in throughout the year. And so the higher the amount of liability that hasn't been reduced by the estimated payments, the higher the penalties, the interest, et cetera, that you're going to see at the end of the year. Ultimately, you could talk to some accountants or tax professionals and they would say, just wait until the end of the year and eat the penalties and fees. It's pretty clear from the IR's what the codification and guidelines are as to who is responsible for making those payments. So trust who you would like, but make those payments ahead of the end of the year. When penalties and fees and interest really starts to accrue is after April 15 or the filing deadline. And so if you can't make any payments ahead of April 15, just know that that April 15, April 15 deadline is where those, those penalties, the fees, the interest, that's really going to start to accrue. On top of that, when people hear.

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Michael Fulwiler [00:25:27]:

Penalties, interest, fees, it feels pretty scary. Can you put into context, like how much that percentage is or what the penalty is if you don't pay or underpay?

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Andrew Riesen [00:25:41]:

Yeah. So the penalties and fees associated with underpayment or late payment go from about 0.5% up to 25%. It's based on your total tax liability. And so the more money that you earn, the more they will be. And the time frame or when you pay, it obviously has a massive influence on how much they're going to be as well. Right. Cause if you don't make a, let's say you file an extension at the tax extension at the end of the year because you were unable to make payments, and then you don't file anything until, let's say, June or July, and you haven't made any payments whatsoever, you're going to see some pretty steep fees. But if you go ahead and, you know, file in the amount that you need to by April 15, or the tax deadline, or what your total tax liability is, chances are that the penalties, the fees, the interest will be quite low, but you will still be responsible for paying them, and they will still be influenced by your total tax liability.

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Michael Fulwiler [00:26:40]:

When you're self employed, you owe federal income tax, which is part of your estimated tax payments you're making. If you live in a state and practice in a state that has state income tax, you're responsible for paying into that as well. What happens if you're seeing clients virtually who live in other states? How do multistate quarterly taxes work?

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Andrew Riesen [00:27:06]:

Multistate quarterly taxes, especially in the age of telehealth, driven by the pandemic and things like PSI Pact and the counseling pact and all of these agreements at the licensure level of ease, of ability to operate in multiple states. I want to be very clear, I am very, very in support of multistate licensing and the ability to see folks in additional states. I think it's great, especially for states that don't have a high density of providers. But the reality is, from a tax standpoint, for tax nerds like us, this is an ever changing thing that is kind of ever evolving. Like the big, big accounting firms are constantly talking about this concept of Nexus. So what is the actual taxability event that has taken place in a given state? And so let's imagine, Mike, that you're in one state, you're seeing ten of your clients. In another state, you're seeing five of the clients. Under the concept of nexus, every state has their own.

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Andrew Riesen [00:28:11]:

There's a crossover of a number of different types of nexus, but every state has their own kind of rule of thumb as to what creates a taxability event. One state could be physical presence. So you might need to go to that state four times throughout the year, and then at that point you're going to be responsible for paying taxes. Some states have economic thresholds. You need to earn x amount of money in this state. Some states have source of income threshold. So if the income is sourced in that state versus sourced in the state that you're operating from, you might owe taxes in that state. And so all of this to say multistate taxation is very complex.

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Andrew Riesen [00:28:48]:

I would 100% talk to an Accounting professional or a tax professional. Even if you are of the DIY do it yourself varietal, have a conversation with a professional to get a baseline understanding of where you might owe taxes. Or this could come through the conversation with your Accountant at the end of the year and they could help you prepare for that. Certainly a complex topic. It's ever evolving. Hopefully there is some sort of consistency over time at the state level. Certain states have reciprocal agreements and other agreements in place that make it easier to manage this process. But it is a taxing process.

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Michael Fulwiler [00:29:26]:

Nice. The recommendation that we give folks as well is to contact their secretary of state's office, right? Like typically there'll be a phone number or an email you know you can contact, and someone should be able to tell you what kind of the unique nexus rules are in your state and provide some guidance. Are there other resources therapists could use.

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Andrew Riesen [00:29:48]:

So far as understanding if you owe tax in a given state? If you're operating in a given state, typically there is a department of finance or department of taxation that you can reach out to the secretary of state. Michael, to your point, is a great place to start. As well, because they're going to help you understand if, based on your business and the way that you're operating, you need to perform a foreign state qualification or an out of state registration in that given state. And typically when you register your business in a given state is when you'll be subject to additional events within that given state or potential liabilities.

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Michael Fulwiler [00:30:26]:

Yeah, I think we could have a whole separate conversation on multistate quarterly taxes, but I think that's a helpful overview. Essentially what I'm hearing you say is every state is different. Consult with a tax professional. Reach out to your state governing body as well for for guidance. I want to talk about quarterly taxes for S corps. So for folks who are listening or watching this on YouTube, if their business is taxed as an S corp instead of a sole proprietorship, are they still responsible for paying quarterly taxes?

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Andrew Riesen [00:31:02]:

S corps, despite what you might hear in your communities or Facebook groups, are still responsible for paying quarterly taxes. So when you become an S corp, you become the owner of the business and employee of the business. So the owner of the business earns income from the business, the employee of the business earns income in the business, and so the employee of the business will receive you. In this example, Michael's therapy practice has now become an S corp. The evolution of your practice throughout this conversation is fantastic. So Michael's therapy practice has now become an S corp. And so Michael is responsible for paying himself a reasonable salary against that reasonable salary that he pays himself. He will pay federal income tax, state income tax and payroll taxes as well.

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Andrew Riesen [00:31:53]:

And the business will pay the other side of the payroll taxes. Again, think synonymously with self employment taxes. What is left over of the income after the expenses in the practice and his wages is considered to be a tax free dividend or a tax free distribution. And so that tax free dividend or that tax free distribution, you are still responsible for paying federal income tax and state income tax. The savings in becoming an S corp is that you're reducing or removing the self employment tax on that tax free dividend or that tax free distribution. So that income that's left over in your s corp that passes through back to you as the owner at the end of the year is treated differently from a tax perspective than traditional sole proprietorship or income that is derived from a disregarded entity. And so what that means is, yes, you still have to pay taxes. The rate of which you will apply against that total income is going to be much lower because you won't have that 15.3% as well.

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Michael Fulwiler [00:32:54]:

Do you still make estimated tax payments at the same deadlines as an S corp because I know S corps have a different filing deadline, right? It's March 15 instead of April 15. But are the estimated payment dates the.

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Andrew Riesen [00:33:06]:

Same for your individual income tax liability that you accrue as the owner of an S corporation, you are responsible for making those payments on the same exact deadline schedule that you would as a sole proprietor. Again, why? Because this is your individual income tax liability. And so this relates to the income that you are individually earning. So the income that is passed through back to you, an S corp, you are not taxed at the business level. Now, there are certain circumstances where certain states have a tax on the S Corp itself. California, New York has a couple of examples. That would be a franchise tax on the business that is separate from the individual income tax and the quarterly estimated tax payments that you're responsible for paying. So do get a sense of am I in a state if I am an S corp where I might have an additional tax levied against the business? But separate those two things, because individual income tax that you're earning, the income that you're earning from the S corp, that's related to that total financial picture for you or you and your partner.

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Michael Fulwiler [00:34:10]:

If you miss a deadline or underpay on your quarterly taxes. So say you were paying your prior year tax liability when you filed your tax return on April 15. You just didn't have enough cash in the bank to make a payment for your first quarter estimated tax payment. Do you start accruing interest as of April 15, or is it just when you go to file your taxes at the end of the year? If you've underpaid during the year, then there's interest that you have to pay on that. Does that make sense?

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Andrew Riesen [00:34:48]:

So the question is, do you start accruing interest on your quarterly estimated tax payments if they are missed throughout the year, as opposed to making one time payment? So, generally speaking, in the rules of the IR's or the codification, the guidance, as we would call it, it's like our big book that we look at to make ourselves feel important. You are generally responsible for making four quarterly installments. And so if you miss an installment or miss two installments, you will typically see penalties and fees start to accrue on top of that, or penalties start to accrue, underpayment penalties to be be specific. However, if you do cover up to 90% or 290% of your current year tax liability or 100% of your prior tax liability, it's unlikely you will be assessed penalties on your tax return at the end of the year. So best practice is to make those payments. The reality is that you may have uneven payments that you need to make throughout the year because you have a growing practice, or maybe you're going on paternity leave or maternity leave and taking time off, and so there's extenuating circumstances. And so, best practice, make those payments on a quarterly basis. Try to cover 90% of current year or at least 100% of the prior year.

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Michael Fulwiler [00:36:02]:

We've talked about underpayment or no payment. What happens if you overpay your quarterly taxes?

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Andrew Riesen [00:36:11]:

If you overpay your quarterly taxes, the IR's is keeping the money. No, I'm only kidding. So if you overpay your quarterly taxes, you will receive a refund at the end of the year. And so let's imagine that, Mike, you were a w two. Well, Mike, you are a w two. So this is not Michael's therapy practice. This is Michael in current state. Let's imagine Michael set up his withholdings.

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Andrew Riesen [00:36:36]:

He over withheld at the end of the year. You're probably used to getting a refund. Same thing goes for estimated tax payments. And so Michael's therapy practice, he was very thoughtful and proactive and set aside 40%, but he really only needed to set aside 30% or 32%. And so he got a nice little bonus back at the end of the year in the order of, let's say, $2,000 for his therapy practice. And so what him and his partner did was immediately decide that they were going to take an awesome, long weekend and celebrate the fact that they had a great year of their private practice.

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Michael Fulwiler [00:37:10]:

It's a good problem to have. And also recognizing, if you're overpaying those estimated payments, it also cuts into your cash flow. Right. So if you can avoid that nuanced question here, but it's something I did want to ask. This has come up in questions from the community at Heard. If I am a full time w two employee, my employer is withholding taxes from my Paycheck, and I also have a part time private practice. Can I have my employer just withhold more to cover this? You know, these quarterly payments? Or is it just two separate things that I need to be thinking about?

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Andrew Riesen [00:37:56]:

If you have a w two job, and let's say a full time w two job, and then you're straddling building into a private practice on the side, which is a very common thing that we see while you're kind of working up the process or the caseload to move into a full time practice. If you have a w two job, you can certainly withhold additional money on your paycheck to pay into federal income tax, state income tax, all of that good stuff. And so yes, that is a process that some people do take to make sure that they're covering in the additional tax liability. Typically what we see with providers, it's easier to kind of like separate those two things. But everybody has their own process and that process is totally fine. And the IR's has a worksheet. We can link it in the show notes that helps you understand if you do want to Michael, in this example, go to your partner and have her increase withholdings on her w two on her job so that you can cover that outstanding liability.

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Michael Fulwiler [00:38:54]:

There's a lot of nuance when it comes to figuring out how to pay quarterly taxes. Can you talk about how Heard helps therapists navigate this process?

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Andrew Riesen [00:39:05]:

There is a lot of nuance to learning how to pay quarterly taxes, especially when you have a growing practice or especially when you have a full caseload and you're trying to manage all this stuff the way that Heard approaches it. So Heard for context, of course, you know this. We support you with tracking your income and expenses throughout the year. We help you figure out how to pay yourself on a monthly basis and set aside money for taxes. And so month over month will help you understand how much you should set aside every quarter. We'll provide you the safe harbor estimate, of course, from the prior year tax return, but also an up to date estimate or a real time estimate to just get a good sense of based on where you're at, what is the conservative amount that you should be paying. Ultimately, as a business owner or the therapist, you're responsible for making that judgment call. But at the end of the year, certainly as we work through quarterly tax payments, we'll add up all of those estimated tax payments and make sure that they're included on your tax return that we file for you or for you and your partner.

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Michael Fulwiler [00:40:02]:

Well, thank you, Andrew, so much for coming on the show. This has been a very dense conversation but very helpful. And you know, we'd love to have you back on soon.

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Andrew Riesen [00:40:13]:

Thanks so much for having me, Mike. I am ceaselessly amazed at how good your tax knowledge has become over our time of working together, and I hope this is helpful to the therapists that are out there. As always, give us feedback. We are looking to learn and grow.

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Michael Fulwiler [00:40:30]:

Thanks for listening to this office hours episode of Heard Business School brought to you by Heard the financial back office for therapists. For downloadable tools and guides, visit our resource hub at joinheard.com. and don't forget to subscribe on YouTube, Apple, Spotify or wherever you get your podcasts.