It’s is that time again. April 15th is just around the corner. Are you having feelings of stress, anxiety or frustration because you are not prepared?
Just in case you are not as prepared as you would like, here is some suggestions for keeping business records, preparing receipts, understanding allowable deductions, and knowing options for tax preparation.
KEEPING ACCURATE RECORDS
Keeping accurate and detailed records of your income and expenses is an important key to building a successful massage therapy business. Accurate and up-to-date records will also make it easier to prepare you tax return and will give you a realistic view of your net profit. This is the number that you will ultimately be taxed on.
Figuring your net income for the year is an easy process if you are prepared. Ideally, the easiest way to keep income and expenses is on the computer with an accounting software package such as QuickBooks or Quicken. If you don’t have a computer you will have to do this process by hand.
First, you’ll need to figure your gross receipts by adding up the total fees earned including tips. Next, you will want to figure out your business expenses – what it costs you to run your business for the year. These business expenses will be deducted from your gross receipts to give you your net profit.
The easiest way to keep track of your business expenses is to save all of your receipts for goods and services in a file folder. It might be helpful to keep a running log of each expense with the date, company, description and the cost. By keeping your receipts this way, it will be easy for you add everything up at tax time.
If you didn’t keep organized tax records this year, it may take you a little longer to prepare your taxes because you will have to gather all of the necessary documentation.
WHAT EXPENSES ARE DEDUCTIBLE?
In order to deduct an expense for business, it must be “ordinary and necessary” according to the IRS. 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. So what is ordinary and necessary for Massage Therapists: advertising and marketing (i.e. newspaper ad, brochures and business cards), banking fees, books and magazine subscriptions, business licenses and permits, continuing education, equipment and supplies, health insurance and other insurances required to run your business, mileage, office furnishings, printing, postage, professional fees such as accountant or lawyer, professional dues, rent, utilities, laundry expenses, meals and travel expenses associated with continuing education, client gifts and business use of your vehicle. See IRS Publication 334, Tax Guide for Small Business for more information.
You may be able to deduct expenses associated with a home office such as mortgage interest, insurance, utilities, repairs and depreciation. These expenses would be a percentage of the portion of the space used for the home office compared to the total square footage of the dwelling. For instance, if the total square footage of your house is 1000 square feet and your home office is 200 square feet then you can deduct 20% of the expenses (200 divided by 1000). In order to deduct a home office you must use that part of your home for “exclusive and regular use for your business and must be the principal place for your business”. For more information, see IRS Publication 587, Business Use of Your Home.
PREPARING YOUR TAXES AND FILING FORMS
If you are in business for yourself, as a sole proprietor or independent contractor, the IRS requires you to file a Schedule C with your 1040. Also, you are required to pay self-employment taxes by filing a Schedule SE. According to IRS regulations, all businesses must pay quarterly estimates of profits. If quarterly payments are not made, a penalty and interest may be assessed. Tax estimates are due April 15, June 15, September 15 and January 15. See IRS Publication 505, Tax Withholding and Estimated Tax, for more details. To make things a little easier, you can set up automated payments by going to www.eftps.gov.
At this point, you will need to decide how you will file. Will you file the return on your own either manually or with a software program such as TurboTax? Will you have a tax professional do your return for you? There are advantages to both. By having a professional do your tax return, you are getting just that a “professional” whose job it is to know the tax laws and know what is deductible and what is not. If you are ever audited, the tax professional will go with you to answer the audit. Although the fee is usually higher than buying on of the software programs, the tax professional’s fee is deductible on the next year’s taxes. By doing the taxes on your own, you save a little money up front as most of these programs are less than $100. These programs are fairly user-friendly with a Q&A session and then the computer program fills in the necessary forms and walks you through the filing process. The cost of the software program is also deductible on your next year’s taxes.
Don’t let filing taxes get you frustrated or stress you out. Get prepared and you will make the experience less painful.