13 Common Tax Mistakes Made by Therapists And How to Avoid Them

Managing taxes as a therapist in private practice can be a daunting task. Between client appointments, managing administrative duties, and taking care of yourself, taxes can easily become an afterthought. However, improper tax management can lead to costly tax mistakes, penalties, and unnecessary stress. To help you stay compliant and stress-free, we’ve compiled a list of common tax mistakes made by therapists, and how to avoid them.

1. Failing to Separate Personal and Business Finances

One of the most common tax mistakes that therapists make is not separating their personal and business finances. Mixing personal and business expenses can lead to confusion and make it difficult to accurately track deductible business expenses. This can lead to missed deductions or errors in reporting that may raise red flags for the IRS.

How to Avoid This Mistake

• Open a Separate Business Bank Account: From day one, open a dedicated business bank account to keep all your practice-related income and expenses separate from your personal finances.
• Use a Business Credit Card: Utilize a business credit card for business expenses, making it easier to track purchases and simplify bookkeeping.
• Regular Reconciliation: Make sure to regularly reconcile your accounts, comparing your financial statements to your receipts and records. This helps you catch discrepancies early.

2. Not Keeping Adequate Records of Income and Expenses

Another common mistake therapists make is failing to maintain thorough records of income and expenses. Good record-keeping is crucial not only for tax filing purposes but also for audit protection. The IRS requires you to substantiate deductions with adequate records, so it’s important to document everything accurately.

How to Avoid This Mistake

• Use Accounting Software: Use accounting software such as QuickBooks, Xero, or Wave to automate the process of tracking income and expenses. These tools can generate reports, making tax filing easier.
• Keep Receipts and Documentation: Store receipts for all business expenses, either physically or digitally. Receipt scanning apps like Expensify or Dext can help digitize and organize your receipts, ensuring you never lose important documentation.
• Log All Income: Track all income received, whether from clients, insurance companies, or therapy platforms. Accurate income logging is crucial to avoid underreporting, which can lead to penalties. It’s important to take the necessary steps to avoid making tax mistakes.

3. Misclassifying Employees as Independent Contractors

If you hire additional help for your practice, such as administrative staff or other therapists, misclassifying them as independent contractors rather than employees can lead to tax troubles. The IRS has strict guidelines on what constitutes an employee versus an independent contractor, and misclassification can lead to fines and back taxes.

How to Avoid This Mistake

• Understand IRS Guidelines: The IRS provides specific criteria for determining whether someone is an employee or an independent contractor. Generally, if you control how, when, and where the work is done, the worker is likely an employee.
• Consult with a Tax Professional: If you’re unsure how to classify workers, consult with a tax professional or an employment attorney. Getting expert guidance can help you avoid costly tax mistakes.
• Use Proper Forms: Ensure that independent contractors complete Form W-9, and issue Form 1099-NEC for payments over $600 in a year. For employees, use Form W-2 to report wages and withhold appropriate taxes.

4. Not Paying Estimated Quarterly Taxes

Therapists who are self-employed or operate as independent contractors are required to pay estimated taxes quarterly. Many therapists make the mistake of waiting until the end of the year to pay their taxes, which can lead to penalties and interest on unpaid taxes.

How to Avoid This Mistake

• Set Reminders: Mark your calendar for the quarterly due dates April 15, June 15, September 15, and January 15. Set reminders to ensure you don’t miss these deadlines.
• Calculate Properly: Use your prior year’s tax return as a basis for calculating your estimated tax payments. Alternatively, work with a tax professional to determine how much you should set aside and pay each quarter.
• Save for Taxes: Set aside a percentage of your income each month (usually 20-35%) to cover your quarterly tax payments. Keeping this money in a separate savings account can help you ensure you have enough to cover your tax obligations.

5. Forgetting About Self-Employment Taxes

Self-employed therapists are responsible for paying self-employment taxes, which cover Social Security and Medicare. Many new therapists overlook these taxes, which can lead to a substantial tax bill at the end of the year.

How to Avoid This Mistake

• Understand Self-Employment Tax Rates: Self-employment tax is currently 15.3%, which consists of 12.4% for Social Security and 2.9% for Medicare. Make sure to factor this into your estimated tax payments.
• Consider Electing S-Corp Status: If your practice is generating substantial profits, electing S-Corp status for your LLC can help you reduce self-employment taxes. With an S-Corp, you can take a reasonable salary (subject to payroll taxes) and receive the remaining profit as distributions, which are not subject to self-employment tax.
• Work with a Professional: A tax professional can help you calculate self-employment taxes and explore strategies to minimize your tax liability.

6. Missing Out on Deductions

Many therapists fail to take advantage of all the tax deductions available to them, either due to lack of knowledge or poor record-keeping. Missing deductions can result in paying more taxes than necessary.

How to Avoid This Mistake

• Home Office Deduction: If you use part of your home exclusively for business, you can take the home office deduction. This includes a portion of your rent or mortgage, utilities, and other expenses.
• Professional Development: Workshops, conferences, courses, and books related to your professional development are deductible.
• Mileage and Travel: Keep track of business-related mileage and travel expenses. Use apps like MileIQ to log your mileage accurately.
• Hire a Tax Professional: A tax professional who specializes in working with therapists can help identify all the deductions you’re eligible for, ensuring you don’t miss any opportunities to reduce your tax liability and avoid making costly tax mistakes.

7. Filing Late or Not Filing at All

Procrastination can lead to serious tax issues. Filing your taxes late or failing to file altogether can result in significant penalties and interest, adding unnecessary financial stress to your life.

How to Avoid This Mistake

• Set a Filing Deadline Reminder: Tax returns are generally due on April 15 each year. Set multiple reminders leading up to the deadline to ensure you’re prepared.
• File for an Extension If Needed: If you’re unable to file your taxes by the due date, file for an extension using Form 4868. An extension will give you until October 15 to file your return, but keep in mind that any taxes owed are still due by the original deadline.
• Stay Organized: Keeping your records organized throughout the year will make it easier to file your taxes on time. Avoid the last-minute scramble by dedicating time each week or month to keep your financial records up to date.

8. Not Understanding State Tax Obligations

Each state has its own tax laws, and many therapists overlook their state tax obligations, leading to unexpected tax bills or penalties. This is especially important for therapists who move states or provide telehealth services to clients in multiple states.

How to Avoid This Mistake

• Research State Requirements: Understand your state’s income tax rates, sales tax obligations, and licensing fees. If you provide telehealth services across state lines, research the tax obligations in those states as well.
• Register in Your State: Make sure your business is properly registered in the state where you operate, and be aware of any state-specific taxes that may apply to your practice.
• Consult with a Professional: Tax obligations vary by state, and consulting with a tax professional can help you stay compliant and avoid surprises.

9. Overlooking Health Insurance Deductions

If you’re self-employed and pay for your own health insurance, you may be eligible to deduct the cost of your premiums. Many therapists miss out on this valuable deduction, leading to higher taxable income.

How to Avoid This Mistake

• Deduct Self-Employed Health Insurance: You can deduct the cost of health insurance premiums for yourself, your spouse, and your dependents, as long as you’re not eligible for coverage through an employer or spouse’s employer.
• Work with an Accountant: An accountant can help you determine if you qualify for the health insurance deduction and ensure it’s properly claimed on your return.

10. Not Planning for Retirement

Many therapists neglect retirement planning, which not only affects their future but also causes them to miss out on tax-saving opportunities. Contributions to retirement accounts are often tax-deductible and can help reduce your taxable income.

How to Avoid This Mistake

• Set Up a Retirement Account: Consider opening a Solo 401(k) or SEP IRA if you’re self-employed. Contributions to these accounts are tax-deductible, allowing you to save for retirement while reducing your tax liability.
• Contribute Regularly: Set up automatic contributions to your retirement account to ensure you’re consistently saving. Even small contributions can add up over time and provide valuable tax savings.
• Consult a Financial Advisor: A financial advisor can help you determine which retirement plan is best for your needs and guide you on how much to contribute for maximum tax benefits.

11. Ignoring Depreciation

If you’ve purchased assets for your practice, such as office furniture, computers, or other equipment, you may be eligible to deduct depreciation. Many therapists overlook depreciation, which can lead to missed tax savings.

How to Avoid This Mistake

• Understand Depreciation Rules: Depreciation allows you to deduct the cost of certain assets over their useful life. Learn which assets qualify and the appropriate schedule for depreciation.
• Section 179 Deduction: Under Section 179, you may be able to deduct the full cost of qualifying assets in the year they are purchased, rather than spreading the deduction over several years.
• Use Accounting Software: Many accounting software programs can help you track and calculate depreciation, ensuring that you don’t miss out on this deduction.

12. Failing to Hire Professional Help

Attempting to manage your taxes without professional assistance can lead to tax mistakes, missed deductions, and increased stress. Hiring a tax professional can help you stay compliant, reduce your tax liability, and free up your time to focus on your practice.

How to Avoid This Mistake

• Hire a CPA or Tax Professional: Look for a CPA or tax professional who specializes in working with therapists. They will be familiar with the unique tax considerations of your profession and can help you navigate the complexities of tax law.
• Ask Questions: Don’t be afraid to ask questions and seek clarification from your tax professional. Understanding your tax obligations can help you make better decisions for your practice.
• Schedule Regular Check-Ins: Schedule regular check-ins with your tax professional throughout the year, not just at tax time. This will help you stay on track and avoid surprises.

13. Neglecting to Keep Up with Tax Law Changes

Tax laws change frequently, and staying informed is crucial for avoiding tax mistakes and ensuring compliance. Many therapists overlook changes in tax law, which can lead to missed opportunities or inadvertent non-compliance.

How to Avoid This Mistake

• Stay Informed: Subscribe to newsletters or follow trusted tax and financial websites to stay updated on changes that could affect your tax obligations.
• Consult a Tax Professional: Tax professionals stay informed about changes in tax laws. Consulting with them regularly can help ensure that you’re always in compliance and taking advantage of available benefits.
• Attend Tax Seminars: Consider attending tax workshops or seminars geared toward small business owners and therapists. These events can provide valuable insights into changes in tax law and how they may impact your practice.

Final Thoughts About These Tax Mistakes

Taxes are a necessary part of running a successful therapy practice, but they don’t have to be overwhelming. By avoiding these common tax mistakes and following the tips provided, you can simplify the tax process, stay compliant, and potentially save money. Remember, the key to avoiding tax troubles is staying organized, planning ahead, and seeking professional help when needed.

If you need assistance navigating the complexities of taxes for your therapy practice, consider partnering with Helpful CPA. We specialize in providing accounting and tax services tailored specifically for therapists, helping you stay compliant and maximize your deductions, so you can focus on providing quality care to your clients. Schedule a free consultation