There are few certainties in this life, but taxes are one of them. If you’re feeling overwhelmed at the idea of sorting through all your receipts and doing your taxes this tax season, you’re not alone. I work with many private practice owners who feel the same way, and while I can’t turn back the clock to give you more time to file, I can help make your business life a little easier.
What You Need to Know About Doing Your Taxes
Over the years, I’ve seen business owners make the same mistakes each time tax season rolls around. Here are the six things I wish all private practice owners knew about doing their taxes, and how you can implement them in your own practice.
1. Know which tax forms you need and their deadlines. Tax forms and deadlines seem like simple concepts, but they’re a critical first step when you’re starting your taxes—and it’s easier than you think to make a mistake. First, let’s walk through how to make sure you’re using the right tax forms.
When you started your business, you most likely applied for an EIN and received it in a letter from the IRS. That letter will tell you exactly what form the IRS is expecting. Make sure that’s what you are filing. If you’re not sure where you stashed that letter with all that information, here’s a general guide.
If you still have questions about tax forms and deadlines as they apply to your practice, reach out to your accountant to make sure you’re doing it correctly.
2. An extension to file does not equal an extension to pay. A 6-month tax extension is available for both businesses and individuals. However, I’ve found that the word “extension” can be a little misleading. While an extension gives you additional time to file your taxes, it does not change the due date of your tax payment. See what I mean? Confusing!
When you file an extension, you still need to estimate your tax liability and pay any amount that’s due. So if you haven’t made quarterly estimated payments throughout the year, and you’re not making a payment with your extension, prepare to have interest and penalties assessed.
3. Take advantage of all the deductions you can. There may be tax deductions you can take that you previously overlooked. Maybe you didn’t even know they existed! Some examples of often overlooked deductions are continuing education courses, the licensing process, and even home office furnishings and improvements. Other things like business travel mileage and even contributions to your IRA and Health Savings Account can count as deductions as well.
These are only some examples of possible tax deductions you can take. Make sure you check with an accountant so you can maximize all deductions that apply to your practice. I think we can all agree that there’s no reason to pay more when tax season comes around than absolutely necessary.
4. Save for taxes every month. At the risk of sounding like your dad, I’m going to ask you a question. Have you been saving for taxes every month? Can you confidently and effortlessly pay taxes when the time comes? Tax season will feel a lot less stressful if you know you can pay what you owe without it drastically impacting your income.
Most business entities (except C Corporations) don’t pay taxes at the federal level, although some states do have a business tax. So how does a small business get taxed? The profit flows through to your personal tax return. So you’ll get taxed on the business profit whether you take the cash out of the business or not.
Depending on the legal entity of your business, some or most of the money you pay yourself hasn’t been taxed yet. If you’re a few years into private practice, you likely pay quarterly estimated taxes. If it’s your first year in business, you may not have paid Uncle Sam yet—and might be facing a pretty large tax bill. Either way, you should be saving money each month to pay for that inevitable tax bill. It might be too late for 2020, but you can get ahead of the 2021 tax season and start saving now.
In fact, the most common mistakes I see first-year practices make is not saving enough money (or not saving at all) for taxes. If you don’t know how much to save each month, reach out to your accountant and create a plan. With the money already saved, tax season can actually be stress-free.
5. Keep your business and your personal transactions completely separate. That means a totally separate bank account for your business. Most business-related expenses are deductible, but you have to track all of your transactions and keep all of the receipts. One of the number one reasons that practice owners don’t file their tax returns on time is because the financial records are a mess, or worse—they’re non-existent. Tracking your expenses on a monthly basis will make tax season so much easier, and will also give you valuable information about your business throughout the year. It’s a win-win!
6. Avoid expensive tax filing mistakes. Tax mistakes can cost you. Ironically, the main reason business owners DIY their taxes is to save money. But tax mistakes are much more expensive than just getting professional help in the first place. Get help if you’re in over your head. There’s no shame in getting the financial support you need—especially if it saves you money and valuable time in the long run.
Get the Support You Need This Tax Season
At least a few times each year, I see some pretty significant mistakes on self-prepared tax returns. And I’ve first-hand seen how stressful it can be for a private practice owner to get letters from the IRS or state tax authority. If you love the numbers and feel confident doing your own taxes, then by all means, keep at it. But if just the thought of taxes stresses you out, save yourself some time (and most likely some money) by getting the support you need for taxes and other financial concerns.
Disclaimer: This article is for educational purposes only, and should not be considered legal or tax advice. If you have questions about your taxes, consult with an accountant.
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