5. Tax Time Tips & What to Expect

Now that you are a big shot operating under your own business entity, there are a few things you can do to ensure tax time is a breeze. Plus, your new business entity gives you access to some new, fancy tax write-offs.

New entity, same old taxes

Legally, your LLC or PLLC is viewed as its own separate entity. Almost like a separate person; shielding you from certain risks and liabilities. But, from a tax standpoint, as a single member LLC or PLLC, the government views your business income as ‘pass-through’, and calculates your taxes based on your income alone. If you filed as a corporation, for example, they would tax the corporation’s income, then tax your personal income as well. And would require a separate tax return for each. Since they are only taxing your income, tax time won’t look much different than what you’re used to. What changes is how you set aside your own money to pay taxes and the tax write-offs you now have access to.

How much to set aside for taxes

When a traditional, W-2 employee is paid, their employer will take all the necessary taxes out of their paycheck automatically. As a contractor, however, those taxes won’t be deducted. It’s up to you to set that money aside each paycheck. A simple way to do this is to open a business checking and savings account. Each time Psychology House pays you for the psychology services you are providing, that money should go directly into your business checking account. From there, you will want to move 30% of that paycheck into your business savings account. That 30% accounts for the taxes that would normally have been withheld by your employer. If you do this for each paycheck, you will have all of the money owed to the IRS already set aside come tax time.

For example: If Psychology House pays your business $8,000, you would want to transfer $2,400 to your business savings account (8,000 x 0.3) for taxes. The remaining $5,600 (8,000 x 0.7) can be transferred into your personal checking account. Essentially, that’s your business paying you for your work.

Common psychologist tax write-offs

Although your new business entity is taxed the same as you were individually, you now have the advantage of accessing business tax write-offs. A tax write-off is a business expense that lowers the amount of money you owe in taxes. Take health insurance, for example. Your monthly health insurance premiums can now be written off as a business expense, which reduces your taxable income. Below is a list of other common tax write-offs a psychologist can use when operating under as a business entity:

Professional Services:

• Insurance: Professional liability (malpractice) insurance, health insurance, and other related premiums

• Legal and Accounting Fees: Fees paid to lawyers, accountants, and other professionals for services related to your practice

• Continuing Education: Costs for seminars, workshops, courses, and other continuing education necessary to maintain your license

Travel and Transportation:

• Mileage: Deduct mileage for business-related travel using the standard mileage rate or actual expenses

• Travel Expenses: Costs for business-related travel, including airfare, lodging, meals, and transportation

Professional Development and Memberships:

• Licensing Fees: State licensing fees and renewal costs

• Professional Memberships: Dues for professional associations and organizations like the American Psychological Association (APA)

Client-Related Expenses:

• Client Gifts: Gifts to clients, with a limit of $25 per client per year

• Books and Subscriptions: Professional journals, books, and subscription services relevant to your practice

Home Office Deduction:

• Home Office: If you have a dedicated space in your home used exclusively for business, you can take a home office deduction. This can include a portion of your mortgage/rent, utilities, and other related expenses

Naturally, we would recommend working with an accountant to ensure you are properly utilizing these deductions. They may even have other tips and tricks to help you save more. Plus, as listed above, accounting services are a tax write-off. If a fancy accountant is not up your alley, another option is to use a service like H&R Block. They’ll have you upload the information they need, then they’ll do the rest.

If you are setting aside money each paycheck, tax time should be easy. And, if you’re properly utilizing your deductions, you may even have money left over after your taxes are paid.