In this webinar replay, Rachel Stas, CPA take the confusion out of preparing for tax season and help you with bookkeeping best practices in this free webinar for mental health professionals.
Speakers: Ani King, Rachel Stas
Ani King 0:10
Hi, folks, I see we’ve got quite a few people coming in and getting situated. My name is Ani King, I am the COO with allcounselors.com. And we’ll get started with Rachel steps in just a few minutes. So go ahead and get comfortable. And just for some housekeeping, if you have questions, we’re going to answer all of those at the end of the presentation. So in about the last 15, or 20 minutes, all you have to do to ask a question is just hit the raise hand button, or the q&a button down at the bottom of your zoom screen, and we will collect those and go through them towards the end.
Ani King 0:49
We will also have a replay up for anybody who is interested in watching this again, or sharing it with somebody you know who might need it by Monday afternoon at allcounselors.com. And just a quick shout out to our sponsor. Before we get started with Rachel. Integrative Life Center as our sponsor for this presentation, you can check them out at integrativeLifeCenter.com they offer trauma focused treatment options for all kinds of people who are looking for recovery support. And they really do a lot of great work in the mental health community. So we’ll take just a couple of seconds to let more folks get situated. Again, if you have any questions at all, feel free to hit that q&a or raise hand button down at the bottom of your zoom screen. And Rachel, while folks are coming in, you’re a licensed CPA, would you mind telling us a little bit about you and what you do?
Rachel Stas 1:46
Sure, yes. Like Ani said, I am a CPA tax accountant out of Fort Worth. And so I tell my clients, I have my own firm, and I focus mostly on self employed individuals. Funny, fun fact about CPAs we can’t actually say that we specialize specifically in anything because there isn’t like specialized licensing and stuff. But if I were able to like small business, self employed people, that’s kind of where my bread and butter is. And over the last few years, I’ve just picked up a lot of mental health professional clients and stuff. So I feel like I kind of have a special angle where I can help you guys just make your best decisions on how to structure your business and what you can do. And, you know, not pay more to the taxman than you have to.
Ani King 2:37
That’s fantastic. And I think one of the things we’ve discovered at allcounselors.com as we’re doing research is that a lot of therapists, counselors, other mental health professionals, they are self employed, or they are running smaller practices, where they potentially have, you know, other people who are splitting fees, or they have folks who are also self employed. So I know that that can get a little bit complicated and confusing. Not even just at tax season, but kind of all around in how to I structure my practice, how do I make really good decisions before tax season comes along. So I’m really thrilled to have you here to help us understand a little bit of this more.
Ani King 3:20
Before you get started, I just want to one disclaimer for everybody. Rachel is going to give you some really fantastic best practices and suggestions. But our number one suggestion for anybody who is working for themselves or in a small practice that they’re running is to have an accountant and to have an attorney so that anytime you go to make a decision that has a financial or legal impact on your business, you can get the best possible help in your state because things can really vary widely, depending on where you’re located. Yep. All right. I think we are ready to go. And again, everybody. If you’ve got questions, just feel free to raise your hands or hit that q&a button and we’ll be happy to answer them towards the end of the presentation.
Rachel Stas 4:06
Rachel Stas 4:07
Okay. Hi, everybody. Um, thank you so much for attending. I yes. Again, I’m a CPA out of Fort Worth, Texas. And so if you are nearby or near me, I am hoping that you are staying warm and have power and water because not a lot of people do. And but a little bit about myself is I’ve been active with bookkeeping since I was 16 years old, helping handle the books for my dad’s company. So I feel like I’ve been working with entrepreneurs for the vast majority of my life. I graduated from the University of Oklahoma with a master’s in accountancy in 2008. And then I passed the CPA licensing exam here in Texas in 2009. So I’ve worked with big accounting firms and small accounting firms, but I’ve always felt most at home, just working one on one with individuals and their small businesses. So it just kind of made sense to start a couple of my own.
Rachel Stas 5:01
So um, real quick, I want to go over the difference between a bookkeeper versus an accountant versus a CPA, there seems to be a little bit of like disconnect with that. a bookkeeper can range from, it doesn’t, they don’t come with licensing of any kind. Typically, they might have just taken a QuickBooks class online, it’s really means more like that they do the data entry for bookkeeper. But they might not for bookkeeping purposes, but they probably not probably, they might not know how to like read the financial statements that that bookkeeping does and stuff. So it’s more like the data entry part of stuff. Accountant is just a blanket term over anybody who has taken any kind of classes, they might have a bachelor’s degree in accounting in accounting, but it does not guarantee any kind of licensure. And then a CPA these days, in order to be a CPA, you have to have a master’s in accountancy, or maybe an MBA with extra courses and stuff and then pass a licensing exam, and also have continuing education, like I’m sure most of you do, to stay up to date with whatever side of being a CPA you are, and stuff. So to introduce myself, I’m a CPA, tax accountant, because I focus on taxes, but CPAs can be auditors, that kind of thing. And so there’s there’s specialized groups under CPA.
Rachel Stas 6:29
One thing I am not is a lawyer, or therapist like you guys, accountants do not have any kind of privilege, and actually can be compelled to tell about people’s financials in court. So a good rule of thumb is a Do not tell me something, you can’t tell the IRS. If you are really curious about playing in the gray or something like that, you can ask your lawyer to ask their accountant. But like, really just, there’s no kind of privilege with us. And so a lot of people tell me things that, just don’t do that. And so anyway, so today, we are going to walk through some basic bookkeeping tips and ideas, and then dive into taxes, some of the trickier deductions, as well as business structure issues that are best for my therapists. And then at the end, we’ll go a little bit over the COVID relief elements, because that has helped a few of the therapists that I’ve worked with. But in general, I’m not a magician, depending on your situation, you’re probably not going to be able to do your own tax return based off of this webinar, but you will be better suited to know if it’s time to hire a professional and what your professional is using, when they’re when you are providing them with financials and stuff. So Oh, I messed it up. Sorry.
Unknown Speaker 7:54
Rachel Stas 7:55
and what your professional is looking for things that would be helpful, and really being prepared so that maybe your bill might be cheaper at the end of the year, because you’ve done some of the legwork. Okay.
Rachel Stas 8:08
So if you’re at the point in your career, where you are being paid directly by clients, if you’re receiving 1099, if you’re using like a square account or something, and that’s where you’re swiping people’s cards and stuff. And this is when proper bookkeeping is essential. This bookkeeping is how you keep track of your income and your expenses. There are several software choices out there to choose from, but my favorite is QuickBooks, I do not get anything extra. For advertising for them, I just like them the most. I find them very, very user friendly. And basically, if you don’t go through and delete a bunch of stuff, you can’t hurt it, it can be fixed. And then a fun thing that they just added is you can add your tax documents or any documents to your QuickBooks file and invite your accountant to it. And they have everything right there for you. So I just I really like QuickBooks. But if you’re, you know, at the beginning of your practice, you don’t have a lot of transactions going on, you’re trying to save money, it’s a Google Sheets, and Excel, those things will work for you too. You just need to make sure that you’re keeping track and staying diligent as you’re going because as much as you think you’re going to remember this expense for business, and that you’ll keep track of it, you just won’t. There’s just so much going on. So and then at the very least if you’re like nope, I’m not going to write that down.
Rachel Stas 9:33
If you are making a substantial amount of money, I would say around the $5,000 mark, go get a business bank account or at least a segregated business bank account, the IRS doesn’t care if it’s business or not. And just have your business income and your business expenses below through that. Even if you transfer it to your personal account right afterwards. It just like that is a failsafe that you can create books at the end of the year or you can pay Count to do that, something. Um, one thing I do want to mention is, if you are invoicing, I haven’t seen this a lot with my therapists. But just in case, if you are invoicing your clients, you need to code those invoices so that they don’t have your client name on it if you’re going to outsource your bookkeeping, because your bookkeeper will have access to what those names are. So just a little asterisk on that fresh book and as low, they’re fine, zero, they’re fine bench will actually do the bookkeeping for you. But they’re pretty pricey. And you don’t get the same accountant using it every single time. It’s, they outsource it. And so you don’t have someone that you’re just talking to directly. It’s changes every month. So those are just my little rundown on bookkeeping.
Rachel Stas 10:48
Why do you want to keep track? Well, there are a lot of reasons. One is are you profitable? Is it worth your effort to work those 40 hours a week or 80? or however long? I know my self employed people we’d never at 40 hours? Are you charging enough? Should you be increasing those prices are your expenses too high is rent eating your lunch, like it’s really things to look at. And then are you able to hire help? Should you hire help have an assistant or if you’re looking to expand your practice to bring other therapists in, these are all good reasons to keep track. Also, if you want to set a realistic budget, having the background knowledge of like what you’ve done the last couple months, really helps or years really helps setting that budget to where it’s not just pie in the sky, you can actually do something with it. And then my favorite reason, taxes at some point, someone’s going to need this information. So you might as well keep it going during through the year as opposed to all at once at the end of the year. So that you can make some managerial decisions and go, Hey, I, you know, I should have found a cheaper place. Or I could have hired helper you know, that kind of thing. At the end, there’s not a whole lot you can do. So real quick. Accounting uses a very normal language which can be deceiving. Because the word and accounting doesn’t necessarily mean what it means in the real world.
Rachel Stas 12:14
So I just want to really quickly touch on some basic accounting language, so that we’re all on the same page as we go forward. So first, revenue is the same as sales, gross receipts, that kind of thing. These are the total, this is the total amount of income generated by your goods or your services. So anything that other people brought in, this is not money that you put in yourself, to get your practice off the ground. This does not include loans, anything that has to be paid back, that is not included, it is money that gets that comes to you and stays with you.
Rachel Stas 12:52
Cost of Goods Sold doesn’t really apply to a lot of my mental health professionals. But if you but if you’re selling books, or if you have workbooks or seminars that you’re giving, that can fall under cost of goods sold, but it’s one thing that you sell, that leaves with the client. So that’s what falls under cost of goods sold, again, not going to apply to everybody, and then subtracting that from your gross. Subtracting that from your revenue equals your gross profit. If your gross profit is negative, this is a hard stop, something has to change, nothing’s going to magically make you profitable if you can’t get your gross profit to be positive. And then after that, that’s when you want to do the rest of your business expenses. So your rent your advertising website, that kind of thing. There’s a handout coming up at some point i’m not sure when he’s doing that has some basic therapists deductions that you that you should be looking for. And then after you subtract that from your gross profit, you end up with your net profit. net profit is the bread and butter. This is what we are going to be talking about as we go through this what the IRS cares the most about. So we definitely want to make sure net profit, that that we get that number. for tax purposes, it’s fun for tax purposes, you want this to be as low as possible. But for like real life purposes, you want it to be as high as possible. So that’s my fun job of navigating, which is best and like how to do that.
Ani King 14:27
So do you mind if I ask you a quick question that came in? Because I think it’s very relevant right here. Patricia was asking is cost of goods sold an expense?
Rachel Stas 14:39
Yes, yes. The cost of goods sold is the actual cost. So if you were selling like a book, that $20 that comes in for the book will fall under revenue, but if it costs you $5, to print the book to have it made and stuff, that $5 is going to fall under cost of goods sold. And so then you Subtract that out and you have, you know, your $15 worth of gross profit from that. Good. So yes, cost of goods sold is definitely an expense. It’s just not one I see a ton with therapists, but it’s hard to get to where gross profit is without talking about a little bit. And then and just for the record, I we are focused on mental health professionals right now. But all of this applies to general small businesses. Anyway, the IRS itself just isn’t really that specific. So we good with that?
Ani King 15:33
Yeah, terrific. Thank you. Okay.
Rachel Stas 15:36
Okay, so then we’re going to move on. So you’ve maintained your budget, and your books, and you’re starting to see that positive net income, positive profit, and now we’re at our scariest part, taxes. So if you’re self employment net income, which is that net profit that we just talked about, if it is over $400, you are required to file a tax return with the IRS. Regardless, if you have any other money, any other income showing there, you have to file. Also, if you receive $600, from the same client, and they turned 99. You I know some schools possibly do that if you go in doing some counseling sessions that way.Even if you had$600 on a 1099. And then you had all these expenses, so you only netted, you know, $200, you still have to file the tax return, because you have to show the IRS your expenses and that you didn’t clear that 400. And so you Yeah, you’re required at $600, one client, or if you have self employment over $400, you’re required to file.
Rachel Stas 16:48
And so the question I get asked a lot is, well, when do I call a professional Can I just do it myself. If you are a therapist working for a hospital or treatment center, and they are paying you with a paycheck that’s having taxes taken out each week, and stuff, and you just have that and some student loan interest, you’re fine to do it by yourself, you might even be able to do it for free on the irs.gov website, or TurboTax. Fine. These forms are almost like they’re nearing color coding them. So by all means, you don’t need to be calling a CPA and paying double like it’s unnecessary. However, if you start that side hustle, or if your main gig is becoming self employed, it’s and you know, making over that $600 and stuff, it is time to call it professional. Why? Because we are aware of the income that you need to be reporting and the expenses that you need to be reporting. tax law changes every year. And I have yet to find anybody who isn’t an accountant wanting to keep track of that as it goes on. And the big one is we’re aware of audit red flags, when we know what the IRS is looking for.
Rachel Stas 18:00
The Turbo Tax audit review is awful. That $40 is not worth it. I had a client who they weren’t previous before they were my client, they did their own tax return. And they were self employed. They were not therapists. And she was a little worried that maybe it was kind of outside her reach to do but she had already done the tax return. And so you know, just for next year, you know, can I have you on board, and within a month and a half of her filing her own return through TurboTax. She was super audited. And she spent them $40 for the TurboTax audit review. And they said you were a Okay, when I got my hands on the return, it was everything you could possibly do to flag an audit she had done. And so when we go over some of the trickier deductions, I will be bringing this client up again a few times because all of this stuff was on her return. And then if it’s not for the love of the work, and if you’re able to outsource it, who needs to have this weighing on them more than just, you know, here, here’s my forms go. Um, and then real quick.
Rachel Stas 19:08
I just wanted to talk about the difference between a CPA and a tax preparer. Just because someone’s a tax preparer does not mean that they are a CPA. And if they are waving signs, with the Statue of Liberty, trying to encourage you to get your taxes done, they’re most likely you’re not dealing with a CPA, you might be dealing with someone who was reviewed by a CPA or supervised not even reviewed supervised, but they I’ve dealt with some of the people that work there, and they take a class over the weekend. And they are just filling those forms. So you’re it’s essentially the same, they don’t have special knowledge and stuff. So they’re filling it out as best they can. But you could do the same thing. There they seem to charge more than most CPAs do in my opinion. And there’s Very little recourse that you can do. The IRS is on the side of the CPA or the tax preparer 95% of the time. So if your return is done incorrectly, when you sign it, you’re signing, that you reviewed it, and that you agree with it. And so they’re going to go after you, they’re not going to go after that tax preparer. There is very little recourse that you can have there, at least with a CPA, you there’s a board that you can report them to there, there’s a difference in expectation of like how they’re supposed to handle themselves. And so the CPA actually could get in trouble. If someone has EA, a Nexus letters next to their name, that’s an enrolled agent at doesn’t mean that they have a Master’s or that they’ve had, but they do have some IRS licensing. So there’s still better but it’s not with self employed, I really I would recommend the CPA, a lot of letters being after it. So be wary of tax preparers. And just because their tax being a tax preparer does not mean they’re a CPA, I’ve had people go I’ve lost my CPA, I don’t know where they went, and I get their prior year return. And they weren’t. And so it’s easy to kind of fall off the grid that way. So there, I’ll get off my soapbox.
Rachel Stas 21:15
So why is why are taxes so bad for my self employed people, we’re going to break down this a little bit. If you have filed your returns in the past with w two wages, even if it was last summer job or something like that, you’re used to you most likely you’re used to getting a refund, taxes are kind of non event, some people like them, because it’s like they get their savings account for the year. And then then it’s your first year and you’re getting 1099, whether it be from a client or your square account, and stuff, and you’re in for a nasty surprise, that first year of taxes. And the main reason is because there’s 15.3% of social is Social Security and Medicare tax, that everybody gets that it hits everybody. When you’re a W two paycheck employee, every paycheck, 7.65% gets pulled out, and then your employer pays the other half of it. So it’s lower than already, but then it’s continually throughout the year, little by little is being taken out. Plus you’re having federal withholding taken out and stuff. So it’s just not as impactful, then you file your taxes, everything’s golden. If you’re 10, nine, nine, you’re the employer and the employee. So it all falls to you. If you haven’t set yourself up with quarterly taxes, which your first year you probably have not, and you don’t have to you get about a year, you get to pay that 15.3% on that net profit that we discussed all at once it hits you all at once, and that is on top of your income tax rate. Now your income tax rate is usually between 12 and 15%. So if that net profit is $10,000, you’re now getting whammied with 30%. tax that first year. So you owe three grand on 10% 10,000. Which is just terrible.
Rachel Stas 23:12
Now, where does this all show up? On your schedule C, your schedule C is essentially your business return, that’s on your personal return. Because it is a business return that’s kind of squeezed in on a personal return, it is the most audited form that the IRS has. They are very well aware that people will try to sneak in personal expenses and like oh, I mean, but I use that computer for work and personal. So we’ll just put it all the way to business kind of thing they are very well aware. So they will look at that audit form, or they will audit that form. And the reason why people try to do that is because you benefit from a loss if you have it on your schedule C. So if you have your day job and your schedule C you know is your side hustle or if you’re married and your spouse has a W two, but you are you know, self employed. Now, if that w two is that 50, you know shows $50,000 worth of income, and you’ve had taxes taken out all year long, and stuff and then you show a $10,000 loss on your schedule. See, when you file your taxes, you’re now just going to be taxed on $40,000 you get to take that $10,000 loss directly against the other income that you show on your return, which is super favorable because now you’ve paid tax on $50,000 all year long. And now you only have to report 40 so you get a bigger refund or you owe less people aggressively, like showing the loss on Schedule C. That is when the IRS again is very well aware of that. So they’ve added a hobby loss rule and they’ve added this a long time ago. But it’s basically saying that if you aren’t profitable, if you are only if you show more than two years of loss in a five year period, then you could be considered a hobby. And if you do that, then you’re not allowed, you can still take expenses, but you’re not allowed to show a loss anymore. There are ways to mitigate being a hobby, and stuff. And it’s showing how much time you commit to it incorporating that goal, you know, your business plan on how you are going to make money, because sometimes, especially in the first few years, people just operate at a loss, a little bit more challenging for service industry like mental health, but still can. And so the IRS still looks at that, and something that your your accountant would be concerned about. And another negative with a Schedule C is it’s difficult to add an owner or an investor to it, because in order to get an owner investor, most people want to see the tax return, and it will be your personal tax return. So it’s not like it’s not just that they see your business, they get to see everything on that return, not ideal. So we will go over in a little bit, some other options, then that schedule seat. But first, the way to get that schedule C as low as possible is expenses, and how to what expenses are deductible.
Rachel Stas 26:28
Now, officially with the IRS, you are allowed to deduct any expense incurred in connection with your trade or business that are considered ordinary and necessary. So I understand, you know, we need our couches. And we need, you know, our reference materials and stuff that you have in the back, that is totally fine. And you know, you can have Freud’s book if you want, but a $50,000 signed copy of Freud’s book, probably not considered ordinary or necessary. So you don’t want to push that line too hard. But just any, but if you really legitimately need something for your business, it’s most likely deductible. Though I do understand, especially since the year just wrapped up. A lot of people want to do a lot of spending right at the end of the year, get as many expenses up as they can so that they pay less in taxes. I get that. But if you don’t need the, you really need to need the expense. You’re never going to be able to spend the money to outspend taxes, you’re still out the money and stuff. So that’s really something to weigh as you’re deciding, should I be paying this should I buy you know, the extra furniture suite and stuff like if you need it great, spend the money, but you’re usually just deferring the tax you’re eventually going to have to pay anyway.
Rachel Stas 27:53
Okay, so now I get that people, I hope kind of understand that like business cards are deductible and advertising is deductible. But there are some deductions that are a little trickier than meets the eye and can be audit red flags. So I’m going to touch on those and some of the rules I go over my crush your spirits a little bit. But don’t worry, there is almost a magic less tax button at the end of this. And I we will talk about that. So hold on with me. So the first one we’re going to talk about is mileage. And everybody really likes this one, you can use this standard mileage rate, which for 2020 was 57.5 cents a mile business mile, or 2020 is 56 cents a mile this updates every year. And now the standard mileage rate includes gas depreciation, standard maintenance, repairs, taxes and insurance. So you don’t you if you take the standard mileage, you don’t have to keep track of all that other stuff. You don’t get to take both. So no double dipping. For the most part, people find that the standard deduction is usually the most beneficial anyway. And neither one of these include, but if you use actual you can neither one of these includes the parking and the tolls. So do save those receipts that information you want to include those on top of whatever your mileage deduction is, regardless of which way you go standard versus actual, you need to keep track of what business mileage you actually drove. And the best way to do that is with a mileage log. And if we were all in person, I would give you my handy dandy mileage log that you can put in your glove compartment. But there are tons of apps these days mileage IQ seems to be the favorite. But you have to be diligent about where when you’re going somewhere now what miles are considered business miles.These are the routes that you can
Ani King 30:00
So sorry to interrupt, I’ve got a, an attendee is asking if you can slow down just a little bit.
Rachel Stas 30:08
All right, there’s so much information I’m excited to share with you guys.
Ani King 30:13
Thank you so much. And sorry to interrupt,
Rachel Stas 30:15
no, you’re fine. Um, so on that mileage log, these are the routes that you can take. Now, if you have a home office, that will kind of double as your home and your regular job, that’s just one building. But if you’re driving, if you have a office space that you rent out that you’re driving to, that is never deductible, that is considered commuting. And everybody has to commute when they go to work. It’s not deductible for anybody. So you just that, that just doesn’t count. Sorry. However, if you have an office space, and you you know, drive to it, but then you’re going to like a high school or hospital afterwards, those are considered second jobs are temporary workspaces. And that you can deduct, so you can, you only have to drive one way and back as commuting. Everything else that you drive for the business is deductible, if you have a home office, that’s where you’re stationed. But then occasionally, you go to a hospital or school or something like that, that those are still considered temporary work sites. So you can deduct that as well. And you get to deduct there and back. Even if like, after you finish a shift, you go to dinner or something that has nothing to do with business, you still get office to work spot and back, and stuff. So you get to keep track of that. You definitely want to be super diligent about this. And you can estimate if you kind of have a standard, you know, two times a week, you go to this one off site place. And that’s it, you can kind of create your mileage log that way.
Rachel Stas 31:52
But estimations usually leave expenses on the table, unless you are that client that I was talking about. Make sure if you are estimating that you are conservative, because the IRS has access to your your odometer readings from when you get your car serviced each year. So they know how they have an estimation of how many miles you’ve driven, that client that was audited, they claimed 30,000 miles and he was a salesperson, so he was driving a lot. But his car only went 17,000 miles. And that did not go over well. So if you’re going to do it, make sure that you are if you’re going to estimate, make sure that you are conservative, and at the very least January of each year, write down what your mileage is that on your odometer reading, and at the end of the year. So at least you know what spectrum you’re in. And the IRS isn’t ever going to think that it’s 100% business so like, Don’t be crazy. So that’s my, my little spiel on mileage.
Rachel Stas 32:59
The next one, especially in these COVID times is the home office deduction, which is a great deduction. But the IRS does require that it is exclusive use of a room. So if you have a bed, it you know a guest bedroom, but that’s where you kind of set up and work, you know a little bit that does not that is not considered a home office, it really has to be just your home office. So no bedroom room, no laptop on a dining room table and then claiming your dining room like that is not how it works. If you do have that dedicated space, it is excellent. Excuse me. It is an excellent deduction to have. Um, there are a couple of things. The way that that deduction works is that the room size compared to the rest of the house, you get to take a percentage of some of your deductions. So if you have 100 square foot room, and 1000 square foot house, then you get to take 10% of utilities 10% of your mortgage interest or 10% of your rent expense, and stuff because these are all indirect expenses. And any indirect expenses are the percentage. Now the utilities that are deductible are gas electric waste and cleaning. Your internet typically is not and your cable is not. That was included on the audited client as well.
Rachel Stas 34:30
If you have a landline that possibly can be asked your professional. So you can either do actual expenses, that percentage times your actual percentage times your actual expenses, or they have a standard rate which is just $5 port per square foot up to 300 square feet. So you can some people like to do that. It’s just easier. It’s really up to you to do the math and see which one’s best for you. But a home office deduction, you can use it as a deduction, but you cannot create a loss out of it. So if that net profit is showing $1,000, but your home office deduction is worth 1500, all you can do is zero that out and carry over the 500. So just little tidbits on home office, this is the one people don’t like very much.
Rachel Stas 35:24
Cell phones are no longer deductible. So sorry, and I understand everybody uses their cell phone for work purposes, I get it, the IRS gets it. But they also say that you are going to have that cell phone regardless if you had that business or not. So you do not get to deduct your cell phones. If you purchase a second line, you can deduct that second line, if you have a separate and entirely separate phone that possibly can be deductible, but they don’t even like it if you have internet on the phone like their This law was written in or tax law was written in 2011. So it has not really kind of kept up with the times. But that is in general, your cell phone is not deductible. So sorry, but that’s one that is getting a little of attention is meals and entertainment.
Rachel Stas 36:19
With the 2017 tax all that past, entertainment is no longer deductible. So if you are taking colleagues or referrals, or anybody out to like a basketball game, like that doesn’t count anymore, however your meals possibly can still be deductible, those are those rate at 50% of what the expense was. So if you have partners and your therapy practice, and you all go to dinner, talk about the partnership and stuff that is deductible. And after December of last year, those if anybody heard the three Martini lunches that those have now been improved to be 100% deductible. So if you go to a restaurant that provides the food and drink, and you discuss business, now it’s 100% deductible. How is the IRS going to know if that meal was about business or not? If it is a particularly expensive meal, I would save that receipt, write down who you talked to, and what you talked about. It does not need to be a paragraph, but it does need to have some key information on it. and stuff. I don’t see any auditors pushing back on that if you have a receipt going well, I talked to Joe about this. So definitely keep track on that. And then if you were traveling for some seminar for business reasons, it doesn’t matter if you discuss business at your meals are not travel meals are considered business meals, but those will be at 50%. On the deductibility. If you go to meals with some partners or colleagues and don’t discuss business at all, that is considered entertainment. So make sure you get some business talk in there.
Ani King 38:01
Do you mind I jump in with a related question Shawn is asking, because this is kind of related to the travel thing about like travel and accommodations that are connected to professional trainings. So if you have to travel for CEUs or something like that?
Rachel Stas 38:21
it is those are deductible, those should be deductible. The biggest thing that people kind of get that gets tricky for people is that they go Okay, well, my, my, I’m sorry, they call it CPEs for accountants, and CPEs, in New York. And so I’m going to go for two days to New York for my CPE. But I’m going to stay, you know, a week to be able to just vacation and stuff that entire time is not deductible, but you can take like a percentage. So if you were there 30% of the time, or you can only or you can do your real expenses, like your hotel room for the two days that you were there for really business or continuing education. Yes, those should be deductible. But if you don’t get to deduct a week’s worth of hotel stay for two days of education. So definitely want to talk to your professional about that as well. But those are things to keep track of. And just a good rule of thumb if you’re not sure if something is deductible or not send it along with all of your stuff to your accountant. And like I at least with me, I red flag anything that I’m like, Okay, well, that seems like a little excessive. So let’s talk about this. But if you don’t have it on the paper like that your accountant can be like, are you sure you don’t have more expenses here? Like, send more than you think is exciting? Be generous with yourself on that, but like, but as long as their actual expenses, like don’t make up anything. Is that so? Yes, but travel associated with continuing education should count. Yes.
Ani King 39:54
Thanks so much
Rachel Stas 39:56
Sure and then there’s a lot of time gray area when it comes to charitable conduct, well not gray area of confusion with charitable contributions. So typically, in order to take a charitable contribution, you have to itemize your personal tax return. So this is not mean itemizing your business expenses, those are completely separate that’s on your schedule C, you have to itemize, like you need mortgage interest and real estate taxes. If you don’t have that, and still at a sizable amount, you your charitable contributions typically don’t count towards your return. Now with COVID, they made an exception, where even if you don’t itemize your tax return, you get to deduct up to $300 cash. So it can’t be like goodwill, that donations or anything, but you can deduct up to $300 cash of what you’ve donated. So do include it in your information, your accountant will take care of it for you. But especially with like my soft hearts. Time is not deductible. So if you are going to help, you know, nonprofits and be like and offering up free therapy, or mental health advice and stuff, unfortunately, your time it’s never deductible, you don’t get to be like, well, I’m typically $140 an hour and I did six hours like that doesn’t work, the IRS doesn’t let you do that. So don’t ask your accountant, it is what it is. And okay, so we made it, we made it through the the soul crushing part.
Rachel Stas 41:28
And now is the fun part of tax planning and business planning strategy and stuff so that we can have that magic lower tax button. So first off, if you are operating, and this usually at the beginning, your business and stuff you’re operating as a sole proprietorship, that is everything is basically running under your social security number. And you know, people are paying you through Venmo, or cheque or whatever. It’s all on your schedule. See, that’s, you know, that’s your sole proprietorship, if you incorporate, then you can become a limited liability company, that’s the best way to incorporate especially for one person.
Unknown Speaker 42:10
Rachel Stas 42:11
I am not a lawyer, my lawyer told me to tell you that this provides you some legal liability protection. Because most of you, I assume, have licensure, you most likely are going to need to be a PLLC, which is just a professional Limited Liability Company. Same thing, LLC PLLC in this spectrum, it’s all the same. But that that forms a business entity, that if you were to be sued, the business is sued and keep separate from you personally, which is good, they can go after your business bank account, but not necessarily your personal bank account. Again, not a lawyer. But it is a good idea, especially with just how litigious The world is.
Rachel Stas 43:00
I’ve been asked what an EIN is. And basically an EIN is the social security number for your business. Which I highly recommend even as a sole proprietor, if you even if you don’t incorporate, you can still get an EIN for yourself for your business through the irs.gov website, it’s free, you don’t need to spend $80 on LegalZoom for it. But that that way, if you’re filling out W-9s, for people that 1099 you, you don’t have your social security number just floating out there, that gives me a lot of anxiety.
Rachel Stas 43:36
But if you get to the point where you are like, yep, I need to incorporate, need to be an LLC, then you can elect to be an 1120s, which is an S corp, which is the best lower your tax button that we have. Now what an 1120 S’s are is the form for an S corp, you’d be an LLC taxed as an S Corp. It takes that schedule C and it moves it to its own business tax return. And it you still get to take the same kind of deductions, all of that gets over there, which is great. And adds actually another layer of liability protection, it just get it’s that much harder to get to you personally, which is great also. But the big difference is that net income that you were showing on your schedule C like that $10,000 that we talked about earlier that would have been taxed at essentially 30%. So the $10,000 shows up on your escort, return. The S corp doesn’t pay for its own taxes and stuff. It’s just a filing drill just tells the IRS how much money your business made, and then it flows through back to your personal return with a K1 and then you still pick up that income and pay tax on it. However, that $10,000 that’s over here now is not subject to Social Security and Medicare anymore. So you’ve saved 15.3%, just like that. So you’re still you know that 10,000 is still going to be subject to your income tax rate. There’s nothing we can do about that. But now it’s your bill is $1,500 instead of $3,000. Most people love that results. And I recommend an S corp election happening when you’re about at a $15,000 net profit or higher than it ends up paying for itself. So it’s my magic lower tax button.
Rachel Stas 45:33
But there are some negatives, or at least some challenges that comes with it. One, you do have to be incorporated before you can elect to do that. LLC costs vary from state to state in the state of Texas, it’s $300. But I’ve seen it as high as like $800, like California is pretty high. And they have franchise tax, that’s higher, too, but so something to definitely discuss with your local CPA, hopefully, that you’re working with now. But that is, that’s one of the barriers of entry there. Another thing is that S corp return is due March 15. So you are paying for a second return. And you have to you have to file by March 15, you can extend until September 15, that’s fine. But do not be late on this filing the penalties of error $195 a month per shareholder on an S-Corp. And it is very hard to get rid of them. And so I’ve seen people do that, and then ignore their filing for six months and owe $800 without even blinking. So if you’re kind of like, I don’t know, I’m trying out my business, maybe I’ll commit to it, maybe not, don’t do an 1120s don’t make that S corp election until you are ready to like go in. So.
Rachel Stas 46:52
And then the other thing with the 1120s and the reason why you don’t have to pay that Social Security and Medicare is one of the rules is as the owner, if you’re profitable, you need to be paying yourself a W two wage. So that’s how you get, you will be giving yourself a paycheck, you’ll be giving yourself a W two as the year goes on. But you’re still you’re paying some of those taxes a little by little, instead of getting hit all at once. And you can still mitigate some of that 15.3%. It’s pretty specific person to person, so we can’t really go super into it. But you would need to be on payroll. If you’re if you’re profiting more than like $20,000 a year. QuickBooks again is great, because you can set up your payroll through it, it can run it for you, if you don’t have QuickBooks gousto, I’ve been really pleased with those results. So that is definitely another option if you just want to run payroll. So that’s my little spiel for tax business and planning. And then real quick,
Ani King 47:55
if I, we’ve got a few questions about the difference between an LLC and S Corp. And I wonder if it makes sense to ask those now while we’re on the topic, or if you’d rather wait.
Rachel Stas 48:06
Yeah, let’s answer I’ll answer that. So an LLC is a business entity, but it does not have an assigned tax return. So if you are a single member LLC, if you’re the only person that owns that LLC, by default, it just goes on your schedule C, except so you can still have that LLC on your personal return. Oh, pay attention to this. If you have a two member LLC, it is automatically a partnership and partnerships returns are due March 15, as well. And so I have a lot of people who don’t tell me that they formed an LLC with their buddy and stuff until like May after the year they’ve done it. And it’s like, Okay, well, your tax return was due in March on this because it has to be a partnership. So you’re either a Schedule C or partnership, in order to be an an escort or an 1120. S, you actually have to make a specific election. So you can be an LLC, you you would be an LLC, taxed as an S corp, or you’re an LLC, taxed as a partnership or an LLC, taxed as a Schedule C or sole prop. So those, those are the differences. This is for some reason, this is very complicated. For some people, like my lawyers do not get their head wrapped around that very well. But you get an LLC as an entity, and your 1120 S is actually what is being taxed and like how does that cover it?
Ani King 49:40
And I believe so the one follow up question to that is asking if you have to have a board of directors with an S Corp.
Rachel Stas 49:46
No. No. So an LLC is so the board of directors actually comes with incorporation. So if you were Inc after your name, that is what usually is a board of directors. LLC is something that the IRS created to try to make it kind of easier for people to incorporate without having all the paperwork and all of the fiduciary duties that are required. So LLC is very simple. You can form them yourself on like Legal Zoom if you want or swift filing is good for if your sole member if it’s only you, or maybe if it’s only you and your spouse, if you get a partner involved that you are not related to even if maybe even if you’re related. Get a lawyer involved, you do need to have some kind of agreement and a handshake is not great. So definitely, that I’m so weary of being like, Oh, go talk to a lawyer. But that is the one where I’m like, Okay, you gotta, you got to do the lawyer. accountants can form LLC for you, we are allowed to do that for CPAs can form an LLC for you. We can do that for tax purposes. Oh, I’m not really allowed to give you like specific legal advice on how it’s helping liability and stuff. Every any legal advice you’ve heard is because my lawyer has suggested that so
Ani King 51:09
understood. So just a reminder to everyone that the two most important roles that can help you with your private practice, are a licensed CPA and an attorney in your area.
Rachel Stas 51:22
Agreed! Absolutely agreed.
Ani King 51:25
answering those. Sure, sure.
Rachel Stas 51:27
Those are good questions. And so okay, real quick, if you have been working your side hustle or had a different one, or you haven’t been up to date on your taxes, for whatever reason, start tackling that mountain. Now. The IRS, if paperwork has been filed 1099s have been filed for you, the IRS has them, they are just they just haven’t gotten to yet. But they will. And once they do, you have penalties and interest accruing the entire time, like it just it’s better to just face the monster, your accountant is there to help you, we are not there to get you guys in trouble. So like just you can do it.
Rachel Stas 52:05
And then another thing, and I’ve seen this a lot in recent years, is if you’re using something like square to, you know, swap for your merchant services, they are offering and they’re doing this a lot for artists and stuff. But I can see it happening for therapists as well. They are offering loans, and like, Hey, you know, you qualify for a 15 $100 loan and you’re going oh, well, I really could use, you know, some upgrades in the office or something like that. And so you sign on for it, because they’re like, Don’t worry, all we do is increase your fees a little bit. But you won’t even notice. And if you’re not keeping track of your books, if you’re not doing that bookkeeping on a monthly basis to see your bottom line number, you might not notice how painful those loans and those extra fees are. But what they are doing what they are counting on is that when you do the small loan, and then you pretty quickly start paying it off. By the time you get, you know, it’s $1,000, you’re paying it off, you’re close to having it closed out, then they’re gonna offer you another loan that’s $5,000. And it starts growing, and they are counting on you to not to spend that money on stuff you don’t have to have, but that you might want. And it is more expensive than it looks like. And then if you aren’t swiping people’s cards as much as you usually do, if you have an off month, and you just didn’t make enough to make that minimum payment, then there are crazy penalties that are associated, that go after you and it all moves to the for all your interest moves to the front. I mean, it’s just it’s super ugly. So just a good rule of thumb is if someone is coming to you to sell a loan, it’s not a good loan, you need to make sure that you’re going to the bank, or you’re going to something and asking for one. And just keeping that in mind. I’ve just seen too many people take advantage taken advantage of
Ani King 53:56
Rachel Stas 53:57
Yes, just so sad gives me anxiety. And then real quick with COVID. Um, if you have been as if you were set up as a schedule, see if that your taxes have been shown on that schedule C you could be eligible for the PPP loan. And if you took one out and those are forgivable, which is awesome. If you took one out last year, they have a second draw that’s happened and you have until March 31 to apply as long as you show profit. That net profit number is what they’re looking at line 31. You can you can still apply for for the most part, start with your banker first and then go to your accountant on what you need, what information you need. Don’t go to your accountant, I’m going to apply for the PPP loan. What do I do? We don’t know your banker, it’s different bank to bank. There’s not just a flat thing, like go to your banker first get it started and then when you’re asking I need a copy of my schedule C or my 941 or whatever, then we can help So that’s my advice there. And for most people, if you have you needed a business bank account before you were able to apply, but definitely, it’s worth a shot to check. So, yeah, because that money is forgivable.
Rachel Stas 55:14
Now an EIDL. That’s the emergency disaster loan, that’s a real loan. It’s really favorable rates through the SBA, which is great. And they’re giving you a year before you have to pay on it. But do know that if you take that as soon as you get that funding, and that funding is in the bank, it is accruing interest that entire time. So I’ve had some people that are like, Oh, I got 150,000. I’m just gonna leave it there just in case. And I totally understand wanting to have that safety net. But that just in case money is costing you, whatever that interest is, so and some people are willing to have it that way. And that’s totally fine. But I don’t feel like it’s super transparent that that interest is started as soon as that money is hit. So definitely keep that in mind with your ideals.
Rachel Stas 56:04
Okay, so we’ve covered a lot. So I just want to let you guys know, like whether you decide to do your own bookkeeping and taxes or outsource them, knowing where your business stands is paramount in succeeding in that business. Trust your instincts. If someone you’re dealing with as an accountant, a banker, a potential partner, makes you feel uneasy or stupid for asking questions. Find someone knew, you should never be made to feel less than for asking questions. But make sure you are ready to listen to those answers. Even if it’s something you don’t want to hear. Being a mental health professional can be a very lucrative business, and the IRS is going to tax that business. But keeping track of your financial situation and your tax filings is important to make sure they don’t get more than their fair share. So with that, are there any questions?
Ani King 56:57
Awesome, thank you so much, Rachel, this has been so helpful. I do have just a few questions from our audience left, and thanks for answering a few of those during your talk.
Rachel Stas 57:07
Oh, sure. Sure.
Ani King 57:08
The first question I have is, is what I pay myself in my solo LLC, private practice tax deductible.
Rachel Stas 57:17
So it is not as an so if you’re on a schedule C, that net profit, you don’t get to deduct paying yourself, the IRS thinks that you pocketed everything that’s on that net profit. However, if you move over to that schedule at that 1120s, and that business return, that payroll that you’re taking, that is deductible, this is actually one of the only ways that you get to deduct employment taxes and your your federal withholding, this is the only way to do it. So you do still get even more of a little benefit with that. But if you’re just withdrawing money from the company, and it just kind of willy nilly, I need $2,000. Here there that is not deductible. No.
Ani King 58:03
Awesome. And so I have a couple of folks who have asked what is the best way to find a qualified CPA who is experienced with mental health professionals. And I know you mentioned that, you know, as a CPA, you can’t really specialize in a specific industry. But are there ways that these folks can find people who are more familiar, that I’m sure word of mouth is one way, but are there other avenues that they can take?
Rachel Stas 58:32
That Honestly, I think that word of mouth is the best way I will let you guys in on a little secret that most for the most part, small businesses and general there just isn’t a very, there isn’t a lot of things that are specialized about it. So you want someone who is used to working with small businesses. And someone who’s used to working with therapists just because they are they recognize, oh, you know, usually I have this kind of expense, because my other therapists have it. So they’re a little bit more in tuned. But there isn’t like special like, Oh, I can take this class. And now I can do therapists returns 100% better than the other CPA, they’re just there isn’t that it’s really you want someone who’s self used to dealing with self employed people in general. And so if you have therapists that you are friends with, and they’re happy with their accountants, that is a good one. If you have a one big thing is that if you are talking to an accountant, and they are not recommending the S corp, that usually means they’re probably a little on the older side, because it’s actually kind of fairly new. And people for some reason, just don’t like it. The older generation of accountants just don’t like it where it’s like my generation, everybody likes it. So I think that is the big red flag on that I can even help myself with my own therapist or I was just like, okay, but you’re an S-Corp, right? Like, that’s it. The one thing I know about her, but that it really is word of mouth is the best way. But there is a just like Psychology Today there is accounting today. So I guess but I’ve never filled out anything for that. So I don’t think you could find me there
Ani King 1:00:16
And we have an audience suggestion to to, you know, read mental health professional journals because CPAs will advertise themselves in those. So that is a really, that’s a really good suggestion. And then we are just about at time. So I have two more questions. Real quick. The first one is, for a credit card, does it have to be business specific to write off the annual fee? Or can you use any card for your small business?
Rachel Stas 1:00:44
Um, I would say that you could use any card for your small business as long as it is segregated. Like that’s the big key, and especially if you’re going to be an S-Corp is that you do have to have segregated funds. So they don’t want you to use your personal bank account and just have everything rolled through it. Like you want to make sure that if you have a business card, even if it’s not business, and stuff that it is only used for business, if you have a segregated checking account and stuff, and the IRS doesn’t look to see if it’s a business card or a business checking account and stuff. However, my lawyer told me that you could get in trouble with personal cards or personal bank accounts and stuff, even if you’re an LLC, and stuff that that kind of they can pierce the corporate veil with that. And that’s a whole nother thing it is best s to have business. But I would say if it was my accountant, my client, that it would you just need to be hardcore. It has to be segregated, just make sure it’s segregated.
Ani King 1:01:47
So if you’re using a debit card, it shouldn’t be the same debit card you buy your groceries with it should be a different account. Thank you so much to our audience for the great questions we’ve had.
Rachel Stas 1:01:58
Ani King 1:01:59
The last one we have is does going to an S-Corp filing status affect your Social Security benefits at retirement?
Rachel Stas 1:02:08
Oh, that is a little I don’t think so. The big thing with the S corp is that it you should be still getting W-2 wages with it. And so those wages will have kind of an impact. But I don’t think that the S corp necessarily has, because that’s supposed that isn’t supposed to be associated with your social that’s supposed to be a segregated entity.
Ani King 1:02:31
But I am really in the EIN then you’re still paying your social security taxes based on your social security number.
Rachel Stas 1:02:40
Yes. So I’ve seen some people who like won’t pay themselves wages with their S Corp. And then they just like, take the income and like that could have some kind of negative effects. But I’m by no means a social security expert. So but I as far as I know, it shouldn’t.
Ani King 1:02:58
awesome. Thank you so much, Rachel. Just so everybody knows, we will have a replay of this up on the allcounselors.com website by Monday afternoon. And we’ll also have it available on YouTube and we will post it on our Facebook page. So thanks again to integrativelifecenter.com for sponsoring this. And Rachel again, thank you so much. This has been so helpful. And I hope that you stay warm and safe in Texas.
Rachel Stas 1:03:26
Yeah, Thank you
Ani King 1:03:26
we would love to have you back again sometime. Thank you
Rachel Stas 1:03:29
anytime. Take care guys. Good luck.