Top Tax Questions – Answered!
What’s a four letter word that actually only has three letters? Tax. The word itself can have a debilitating effect on many people. Why? It can feel foreign and unknown and downright scary at times! I thought I’d break down some general tax questions for you in “English” to shed some light on the scary tax monster’s shadows.
Q: How can I reduce my tax liability?
A: There are a few simple ways to save yourself some moolah. Our first recommendation? Selecting the right legal entity. Your legal entity can have an enormous effect on your taxes! Other ways to catch tax breaks include tracking your business mileage (may sound tedious, but it can pay off!) and saving for retirement (win now, win later too!). If you would like more ideas and information, check out an article with more ways to reduce your tax bill here (link). https://www.greenoakaccounting.com/post/6-ways-therapists-can-reduce-their-tax-bill
On to question #2!
Q: What financial data should I be tracking?
A: All of it! I know, I know, this may not be the answer you were hoping for… but good financial records truly are your best asset. Unless your business is itty-bitty, you’re doing yourself a HUGE disservice if you don’t use accounting software. Most softwares will allow you to connect your business bank account directly - which ensures that ALL your income and expenses are captured. Easy as pie! Under-reporting income could mean a “love letter” from the IRS. Yikes. Under-reporting your expenses won’t get you in trouble, but you’ll miss out on a deduction and over-pay in taxes. Double yikes. Moral of the story: you love records!
Q: Do I have to pay quarterly estimated taxes or can I just pay at the end of the year? A: You should pay quarterly taxes OR increase your payroll withholdings (if you are an S corp owner) to meet safe harbor. Here’s why: First– paying once/year means that you’ll likely owe penalties and interest. (No, thanks!) Second– paying quarterly allows you to budget for taxes and means you’re not “accidentally” spending the $$$ on something else. Moral of the story: it ends up being less painful for you if you just manage the quarterly payments.
Q: Will I owe Self Employment Taxes?
A: Probably! If your business is an S Corp you should be on payroll, so your FICA taxes (SS and medicare) are being remitted each pay period. If you are a sole proprietor, LLC, or partnership, you aren’t on payroll–so you will owe payroll taxes on the net income of the business (+ Guaranteed payments if applicable). This amount gets rolled into your quarterly estimated tax payment. Q: What expenses are deductible? A: To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. i.e. you don’t HAVE to run ads to operate your business–in fact you could run a business without ever advertising! But it’s a common practice because it increases your business revenue and is 100% deductible. What about you? Does the word “taxes” make you want to run for the hills? If there are any questions that this didn’t answer for you, don’t hesitate to reach out! We are nerdy about taxes here at GreenOak Accounting and would love to help in any way we can.
This article is designed to provide information only and should not be considered legal or tax advice. Because of the complexity of the law and the variables in your own personal tax situation, you can’t rely on our advice specifically related to your unique circumstances. In order to get the best tax savings and legal advice available to you, you should consult with your own accountant, attorney or advisor regarding your particular facts and circumstances. GreenOak Accounting is an accounting firm that specializes in working with counselors and therapists in private practice. We provide monthly accounting & bookkeeping services, 1-time services and online courses. For more information on our specialized services for therapists please visit https://www.greenoakaccounting.com