Starting from nothing and working hard to build a practice is relatable. But what happens when you finally do it? The inevitable tax season catches many mental health entrepreneurs by surprise.
You see, your family at the holiday dinner table probably doesn't want to hear about the money you may or may not owe the government. But where can you find a safe space to talk openly without offending anyone? Essentially, how do you navigate tax season with grace?
This annual topic, the United States spring tax season, is the perfect example of something that can really mess with practice owners' mindset. We talk about this topic every year in Texas Counselors Creating Badass Businesses, and it is always a hot topic when I'm speaking to even NON-counselor entrepreneurs (taxes are a universal imposter-syndrome producer across the board so I'm not surprised).
But “uneasy lies the head that wears a crown” (Shakespeare, Henry IV, Part 2). The responsibility of running a practice that's changing lives in your community and the important financial decisions involved can weigh anyone down.
Join me for this discussion about money, business growth, work-life balance, and building systems that reflect your vision. Listen in and enjoy!
Get your step by step guide to private practice. Because you are too important to lose to not knowing the rules, going broke, burning out, and giving up. #counselorsdontquit.
Starting from nothing and working hard to build a practice is relatable. But what happens when you finally do it? The inevitable tax season catches many mental health entrepreneurs by surprise.
You see, your family at the holiday dinner table probably doesn't want to hear about the money you may or may not owe the government. But where can you find a safe space to talk openly without offending anyone? Essentially, how do you navigate tax season with grace?
This annual topic, the United States spring tax season, is the perfect example of something that can really mess with practice owners' mindset. We talk about this topic every year in Texas Counselors Creating Badass Businesses, and it is always a hot topic when I'm speaking to even NON-counselor entrepreneurs (taxes are a universal imposter-syndrome producer across the board so I'm not surprised).
But “uneasy lies the head that wears a crown” (Shakespeare, Henry IV, Part 2). The responsibility of running a practice that's changing lives in your community and the important financial decisions involved can weigh anyone down.
Join me for this discussion about money, business growth, work-life balance, and building systems that reflect your vision. Listen in and enjoy!
Get your step by step guide to private practice. Because you are too important to lose to not knowing the rules, going broke, burning out, and giving up. #counselorsdontquit.
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Introduction
Kate Walker: Welcome to Texas Counselors Creating Badass Businesses. I’m Dr. Kate Walker and tax season is stressful for everybody, but counselors especially. The reason I think we’re stressed, and the reason y’all tell me, is because we are not trained as businesspeople. Very few of us go into the counseling profession from a career related to business. There are a few of you out there and I want to get to know you and get you on my show as an expert. For the majority of counselors, numbers can be terrifying. Taxes can be terrifying. Thinking you might get in trouble because you filed your taxes wrong can be terrifying.
So today, I’m going to talk to you about the five things I really think counselors need to pay attention to as they’re getting their taxes ready for the April 15th deadline for tax season. And I’m going to try to make this not specific for a particular year, so I really focused on some things that are broad and that you can generalize, whether you’re listening to this when I record it in 2023 or later on down the road. So here’s what I came up with and what I want you to come away with. We’re going to talk about profit and loss, expenses and how to itemize them, what is your tax bracket, that’s four, and five, I’m going to give you, like, 85 reasons why at the end of the day, you really need to call a professional. You ready? Let’s get to work.
Profit and loss. Preparing your taxes if you own your own practice means you’re going to have to get a report together called a profit and loss statement. You’re also going to call this, or hear it called, P&L, profit and loss. And if you use an accounting program – so I will use QuickBooks as an example – you can see this report at the click of a button if you’ve been tracking your expenses all year long. Now, tracking your expenses is a form of bookkeeping. You’re tracking your income from clients, your expenses from let’s say software subscriptions or paying your office rent or if you have a virtual assistant or someone who is answering your phones, that money is going to be an expense, so you’ve got to be able to compare the two in order to know if you turned a profit, if you made a profit.
So client income is like you’re at your lemonade stand, you’re selling your lemonade, and you get money and you put it in your little cash draw and you’re keeping counts. At the end of the day – your lemonade is excellent, by the way – you made $100. Now you have to go and deduct your cost for your KoolAid lemonade packets or if you purchased fresh lemons or you rented a pitcher at $10 an hour. You take all of those things, those are your expenses, and let’s say that you spent $50 on KoolAid packets, a nice pitcher, which I don’t know why you would do that, and at the end of the day, you had spent $50 in order to make $100. That means your profit is $50. You take your income minus your expenses, and that gives you your profit. That’s what your taxes will be based on, is your profit.
So if you have bookkeeping software, like QuickBooks, and you have been diligent about keeping track of your income and making sure that you enter all of your expenses as you go along, this process is super simple. If you are like 10 years ago Kate, or 15 years ago Kate, and you procrastinated, you have a long day ahead of you because you’re going to need to go back through 2022 or whatever year you are in, the previous year, and you’re going to need to make sure for each month, you track the correct income and you track the correct expenses. Do that for January, do that for February, all through the year so that when you get those numbers for each month, you can say, okay, when I look at my profit for January, my profit for February, all the way through the year you add those numbers together, you will get a grand total of what your profit is.
So P&L, profit and loss, it’s not complicated, it’s simply a matter of being diligent and consistent about entering those numbers on a regular basis. They are not paying for this show, there are lots of great programs out there. QuickBooks has a way to connect your bank account so it’s actually putting those expenses in automatically, and there are ways to use HIPAA-compliant programs using de-identified client information and codes so that you can automatically enter that client income as well. That is such a time saver when you’re able to automate that. So basically once a month, you’re going in, and it’s like balancing a checkbook. You make sure all of your expenses have been automatically downloaded from your bank account. You make sure that all of your income has been automatically downloaded from your merchant account or however you enter that. You look and you make sure everything reconciles, and you’re done for the day.
So profit and loss is not a difficult concept, but where people get hung up is one number two. Number two is our expenses. If you’ve listened to me for long enough, you know one of the things I recommend from the very beginning, whether you get a DBA or you form an LLC, whatever piece of paper you have that says you are now in business, the first thing you do is you go to your bank and you open a bank account just for your business. They give you a debit card, even better. You use that debit card to purchase anything related to your business. That means if you are going to get the latest HIPAA compliant Zoom subscription, you connect that card. If you are going to get the latest and greatest HIPAA compliant electronic health record system, you hook it up to that debit card. Whatever you use to run your business, you discipline yourself to use that card. And so you see how that works beautifully if you have a system where you connect that bank account to your bookkeeping software and you click and download and there it all is without having to stress that all of these expenses are business related. They’re all going to be write-offs.
Now, if you didn’t do that, you’ve got a day ahead of you because what you’re going to need to do is somehow tease out all of the expenses that you remember are related to your business, add them up, make sure you can document those. Now, I will pause for a second and tell you how I do this. I don’t use a debit card, I use a credit card with points because every time I purchase something for my business, I get to accumulate points, and that means when I go to Colorado and visit my son, I don’t have to pay for my rent car, or I don’t have to pay for my plane tickets. It’s a win-win. And there are some nice credit cards out there, so if you are disciplined with your credit cards, this is a really fun way to take care of expenses because with your business expenses, if you’re paying them off every month, you can also be accumulating points or cash back or whatever you like to do.
So when I connect my Chase card to my business expenses, I’ll tell you a little side note here, I am extra careful with this. I actually list, in my Trello, because you guys know I love Trello, I have a Trello card where I show every single account that is connected to my Chase card, from AT&T to Zoom to my HIPAA-compliant Google Workspaces to my learning management system to my email accounts. I list everything because if that credit card gets compromised, I have about 36 things that I need to go through and reconnect and I don’t want to waste time – okay, what did I connect to my Chase card? No, I make a list – because it happens. It happens less often than it used to, I think now that we have chip readers and different systems, it’s a lot less common, at least for me, but it happens. And so if my card gets compromised, I have my list. But I digress.
Now, let’s go back to expenses. If you are listening to this and you’re like, crap, I wish I had done this, but Kate, it’s too late, I’m already trying to go back and build my expenses for the year, well, here’s what you do. First of all, you’re going to want to Google expenses write-offs for your tax year, and that’s everybody. We all need to do that even if our expenses are automatically downloading because there are things you can write-off, like perhaps your HIPAA-compliant Zoom subscription, but maybe there are things you cannot write off, like getting your nails done. I am not a tax professional, don’t ask me, but there are ways to categorize things that you use your business card for that you find out later, those are not write-offs. It’s called an owner draw, or owner expenses.
So if you’re going back and you’re trying to recategorize these expenses, the first thing I would tell you to do is to go to your bank statement. Don’t try to look for receipts in the bottom of your purse and the bottom of your car, or whatever shoebox you keep those things in. Go to your bank online and find those transactions. Then, if you do get audited later and you need to rebuild those records with receipts, that’s when you call the tax professional. But starting now, just trying to go back and rebuild your expense reports or your expenses for the year, start with your online banking.
Now, let’s back up again. If you are listening to me right now and you’re like, oh, Kate, but I take cash, and sometimes on the way home from seeing a client, I use that money to go buy groceries! Okay, you’re going to have a little bit more of an arduous time, that’s okay, because remember number five today is to call a tax professional. If you have been mixing money, if you have been taking your client income and just using it fresh out of the cash box for your family or personal expenses, you’re going to have a little bit tougher time trying to rebuild this for tax season.
So let’s review where we are. If you have connected your bank account, you just hit print or look or whatever and there they are, those are your expenses. You go to the IRS website and verify that they are in fact legal write-offs, you total that up, there are your expenses for the year. If you’re having to rebuild and use other records, receipts, bank transactions, same thing. It’ll take a little longer but you’ll need to go back and month-by-month, total the number of expenses, add it up for the year, there are your expenses to compare with your profit so you get your P&L report. Last but not least, if you have been mixing money, it’s going to be a little bit tougher for you and that may be when you need to call a tax professional. Please listen to this entire podcast because I’m going to give you some information when we get to number five.
[Ad break: 40-hour training]
So we covered basically the first three things: P&L, profit and loss, what does that mean, and the fact that as a business owner, you will need to prepare that report; number two, expenses, what are they; and then number three, how do you itemize them. So let’s talk about number four: what is your tax bracket? Now, this is confusing for a lot of people, especially if you aren’t used to filing your own taxes or you’re brand new at adulting, or if you’re like me and you were 40 years old when you first learned this. So no shame here, no shaming.
We have a progressive tax bracket system and so the first thing to remember is profit. It has to be profit, that is your income if you are a business owner. Now, if you are not a business owner, it’s easy. You just look at your W2s, your 1099s, you count all of that together, that is your income. All I did to find this information was Google IRS tax brackets 2022 because that’s what I’m interested in. If you are interested in another year, you Google that. When you find the website of your choice, whether it’s IRS or QuickBooks or some other website, you’ll see a chart, and generally that chart will be for single or married filing jointly or married filing separately, so you pick the chart that applies to you. On the far left, you’ll see something that says tax rate, and it will say 10 percent, 12 percent, 22 percent, 24 percent. The next column will say something like taxable income bracket, so it will say up to a certain number and then the other brackets will talk about your tax owed.
The important thing to remember here is let’s say you fall in the 22 percent tax bracket. That doesn’t mean that all of your income is taxed at 22 percent. Go back to your chart. Look at the range of income that’s taxed at 10 percent. Then if you make one dollar over that range, it’s only that dollar that is taxed at the 22 percent, so you add those two amounts together to find the total that you owe. So if you find your chart, then look at your P&L, or if you don’t own your business and you’re looking at your W2s and your 1099s, look at that number for your income and then you will see how much of it falls in the 10 percent, then how much falls in the next bracket, and then how much falls in the next bracket. Add that together and then you’re going to see the total amount that you owe.
Number five, drumroll please, here’s why you must contact a tax professional, whether that’s a certified public accountant or an expert bookkeeper or a QuickBooks expert, somebody who can help you understand these things, because here are just a few of the things that I’ve discovered in my research and things that I’ve encountered in my own very loving past with my tax return. It’s been a loving relationship – nah, it’s been a rollercoaster. We’ve worked it out, though.
So here’s some things I’ve found, and especially if you listened at the beginning of this podcast and you are freaking out because you mixed money. One of the main reasons to call a tax professional is you need to understand what the standard deduction is. I know from my own experience, I have gone through my books with a fine-toothed comb. I came up with this beautiful, suitable for framing, P&L and my expenses, there they were, and they were all so legit and so wonderful, and then I get to my tax professional and they say, the standard deduction is going to lower your taxes more than the expenses. Mind blown, right? All of this work I had just done making sure my expenses were picture perfect and then the tax professional says, you know what, we’re not even going to look at that because the standard deduction is a greater amount than the amount of your expenses.
You see, the standard deduction is there to lower your income, right? I want to get to that lower tax bracket and the standard deduction, or my legal expenses, both of those things can lower my income so I go to a different tax bracket. So freaking out about expenses because you mixed money or you didn’t track them accurately, you may be able to breathe a sigh of relief because when you talk to your tax professional, they may say, you know what? You can just take the standard deduction and we don’t even need to worry about expenses. Again, I’m not a tax professional, but that’s why you’re going to call one.
Another reason to make sure you call your tax professional is to make sure you’re not listening to somebody, I don’t know, like me, or somebody out there telling you, hey, this is a tax deduction, or this is a tax deduction! I know for a while, everybody was saying, hey, you need to write off your car, and then I had a tax professional say yeah, if you write off your car though, if you ever get sued in your business, that’s considered property of your business and bye-bye, there goes your home. The same thing with your home office, there are pros and cons of every business write-off. So make sure you’re not listening to your neighbor, or anecdotal Steve over here who is telling you over happy hour that you really need to write-off your manicure and your latest outfit. It’s important that you talk to a professional, help them understand what your business is, what it does, and if you find out that your business is doing lots and lots and lots and lots and lots of things, it may be time to set up another business, but that’s a topic for another business.
So if traveling is something you love and it’s something you want to be able to have a business write-off for, but your main job is seeing counseling clients in an office in one location, you may want to look at that. Because I get it, you want to work traveling into your business, but it may not fit with the business you are currently in and a tax professional or a bookkeeping professional can help you sort that out.
The other reason you need to talk to a tax professional is because your profit, right? You have done an amazing job this year. You are just kicking ass and taking names. You have done a great job in your business and you want to take that profit home like a macaroni necklace or a brand new puppy and you want to show your family, hey, look what I did! I did it and my business is successful! And then you take all of that to the tax professional and you find out you just kicked your family into a higher tax bracket and you don’t have the expenses to bring it down.
Now, that’s okay. You still did a wonderful job as my first accountant, and I love him so much, he’s no longer with us, but he would always look at me and say, Kate, you did a great job. Kate, you had a good year. Kate, you are doing so well. And then he’d give me the taxes that I owed. It softened the blow though. It was nice because you have to remember, making a profit is wonderful, but it also will affect your tax bracket, and that kind of messes with your head a little bit, especially if you have a partner looking at you going, oh my gosh, all of this work you did, and you just knocked us into a higher tax bracket. I don’t know if it’s worth it. You know, all of that negativity is not good for you.
You have done a great job. Your community appreciates you. If your income knocks you into a higher tax bracket, work with your tax professional to make sure next year, you are really tracking those expenses.
Also, a good tax professional will help you fund a SEP IRA. That’s a special IRA fund, a retirement fund, for folks who own their own business. If you fund your SEP IRA before you file your taxes, that’s another deduction. So that’s the name of the game as a business owner when it comes to tax season. You’re looking for ways to use qualifying expenses to lower your income, so you lower your tax bracket. But you’re also going to pat yourself on the back because if you did earn a great income and your community showed their appreciation by showing up and finding you and coming to counseling, you’ve got to be able to manage that cognitive dissonance and stay and keep doing it again and again and get better and better at this whole tax thing.
Profit and loss, expenses, itemizing expenses, find your tax bracket, and call a professional. Those are the things you’re going to do before tax season this year and you’re going to make sure that you track and do next year because you are too important to lose to not knowing about taxes. We don’t want you to burn out. We don’t want you to go broke. Your community needs you. You can do this, badasses. I’m Dr. Kate Walker, thanks for listening.