Originally published in Massage Bodywork magazine, March/April 2008. Copyright 2008. Associated Bodywork and Massage Professionals. All rights reserved.
Just thinking about tax time can cause even the most relaxed muscles to tense up, right? And if you're self-employed, taxes can even be more terrifying, can't they? Well, take a deep breath and relax because in this article we'll demystify the tax preparation process and provide tips for keeping excellent business records. We'll also familiarize you with the steps necessary to prepare your receipts for tax time (whether you'll be doing your own taxes or having an accountant or other tax professional do your taxes for you) and show the types of deductions MTs might be allowed to claim.Excellent Business Records
Keeping accurate and detailed records of your income and expenses is one of the keys to building a successful massage therapy or bodywork business. Accurate and up-to-date records will also make it easier to prepare your taxes and give you a realistic view of your net taxable income for the year.
First, you'll want to keep an accurate log of your appointments to determine your gross receipts. Your gross receipts are the total amount of money paid to you for massage and bodywork during the calendar year--your income. You can determine your gross receipts by looking at your client logs, adding up the total number of sessions you did, and computing the total fees you earned; this figure should also include tips. You could also use your appointment book and reconstruct appointments for the year.
Next, you'll want to figure out your expenses--what it cost you to run your business this year. Your expenses help you lower your gross receipts (all of the income that you earned) and reach your net profit (the income that you'll actually pay taxes on).
The Internal Revenue Service (IRS) tells us that "to be deductible, a business expense must be both ordinary and necessary." So, what are ordinary and necessary business expenses for the MT?
Some examples might include advertising, promotion, printing, and postage; the business use of your vehicle; educational training; equipment and supplies; gifts to clients and meals to promote your business; laundry expenses; office furnishings; travel costs for educational training; and utilities, among others. (Review IRS Publication 334 to get more details.)
An easy way to keep an accurate account of your expenses for the year is to save all of your receipts for goods and services in a manila envelope and write a description of each expense on the outside of the envelope. Your descriptions should include the date, which company or person received the money, what the expense was, and how much was paid. By keeping track of your expenses this way, it will be easy to tally up your receipts for tax time. Having your expense records up to date and accurate will enable you to pay the IRS only what's owed to them no more, no less.
Also, by knowing your estimated net income for the current year, you'll be able to make wise decisions regarding additional purchases you might want to make before year end, thus lowering your net income for the year, or postponing purchases or bill payments (into the next year) to show greater income. This is especially important if you'll be looking for a loan from your bank in the coming year.Year-Round Records
If you didn't maintain an accurate account of all of your expense receipts during the year, that's okay. It will just take you a little longer to gather your documentation and tally up your totals.
Start by gathering all of your receipts, cancelled checks, and any credit and/or debit card records that you can find that pertain to your business. Next make a list of categories like those listed. Make an additional miscellaneous category, too, so that you'll have a place to park expense receipts if you don't know what to do with them right away.
Now, using a separate sheet of paper for each category, list all of your expenses from the receipts, cancelled checks, and credit/debit cards. Write down the cost and the date for each item, so you'll know if you've duplicated any receipts. Total each list. You are now prepared to answer questions from your accountant or tax preparation software pertaining to your business expenses.What Forms Do I Need?
The IRS says that if you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor, you should consider yourself a self-employed individual. The IRS also says that self-employed individuals, sole-proprietors, independent contractors, and persons who have net earnings of $400 or more are required to pay self-employment tax by filing Schedule SE in addition to your form 1040 and Schedule C.
The IRS also requires all businesses to pay quarterly estimates of profits, equal to 90 percent of your current year's profits, or 100 percent of last year's net profits. If quarterly payments are not made, a penalty and/or interest charge might be owed, averaging about 15 percent of the underpayment. And though the penalty isn't a serious problem, the business owner who delays making adequate estimated payments might be shocked to see what they owe on April 15. Not paying quarterlies might also cause you to struggle all year to catch up, so make sure your estimated payments are enough to cover your tax liability for the year. Tax estimates are due April 15, June 15, September 15, and January 15. (See IRS Publication 505 to read more.)Writing Off My Home Office
Generally, expenses related to the rent, purchase, maintenance, and repair of a personal residence may not be deducted as a business expense according to the IRS; however, taxpayers that use a portion of their home for business purposes may be able to take a home office deduction if they meet certain requirements. Expenses that may be deducted include the business portion of real estate taxes, depreciation (though taking this deduction has implications for the property's value), insurance, mortgage interest, painting, rent, repairs, and utilities.
The IRS says that in order to claim a deduction for that part of your home used for business, you must use that part of the home:
- Exclusively and regularly as your principal place of business; as a place to meet or deal with patients, clients, or customers in the normal course of their business; or in connection with your massage and bodywork business; or
- On a regular basis for certain storage use such as inventory or product samples.
The IRS defines "exclusive use" as a specific area of the home used only for trade or business. "Regular use" means the area is used regularly for trade or business. "Incidental or occasional business use" is not regular use. These requirements are discussed in greater detail in Publication 587, Business Use of Your Home.Computing Home Office Deduction
Generally, the amount of your home office deduction depends on the percentage of the home that is used for business. Note also that your home office deduction will be limited if gross income from your business is less than your total business expenses.
The IRS says that a taxpayer can use any reasonable method to compute the business percentage of home use, but the most common methods are to:
- Divide the area of the home used for business by the total area of the home (square feet), or
- Divide the number of rooms used for business by the total number of rooms in the home if all rooms in the home are about the same size.
The IRS also warns that taxpayers may not deduct expenses for any portion of the year that there was no business use of the home. And, again, if the gross income from business use of the home is less than the total business expenses, the deduction for certain expenses is limited. Publication 587 includes examples, worksheets, and additional information on computing the allowable deduction.Personal Expenses vs. Business Expenses
It is important for MTs to realize that business expenses may be deducted only if they are ordinary and necessary for the business of massage and bodywork. Personal, family, and living expenses are not deductible under any circumstances. A common error, according to the IRS, is to deduct expenses for a portion of the home that is not used regularly and exclusively for business. An example of this is your basic local telephone service charge, including taxes, because the first telephone line into a home is considered a nondeductible personal expense. The IRS does say, however, that charges for business long-distance phone calls on that line, as well as the cost of a second line into a home used exclusively for business, are deductible business expenses.
The IRS encourages taxpayers to familiarize themselves with the requirements before taking a home office deduction and to keep complete and accurate records to substantiate your deductions. According to IRS research, understated business income, including under-reported receipts and overstated expenses, is an area where compliance is a concern and, in addition to increasing outreach and education in these areas, the IRS will also be focusing enforcement efforts, including examinations, on these issues. Should I Prepare My Own Taxes?
At this point, you're probably feeling a little more comfortable with the tax filing process. You know how to maintain complete and accurate records, you know what your deductible expenses are, you've divided your receipts into the appropriate categories, and you have a pretty good idea about how much income you've made this year. Now you just need to decide how you want to handle the filing of your tax forms. Are your muscles tensing up again? Well, they shouldn't be, because you have options available to you that will de-stress even the most uptight tax filer.
One option is to take all your newly organized receipts, deduction category sheets, and income logs to your accountant or other tax professional to have your tax returns completed for you. Though you'll spend a little more money using this option, you'll have the satisfaction of having a professional do the work for you plus your accounting and tax preparation fees are deductible.
Another option is to do your taxes yourself. There are several tax software programs available today to help you do the job quite easily. Some of these programs include Intuit's Turbo Tax, HR Block's TaxCut, and TaxACT. The basic format of these programs is a QA session, with the programs asking you every conceivable tax-related question. You'll answer questions (on your computer) typical of those that your accountant would ask you. Once your questions have been answered and your forms are completed, your chosen tax software program will walk you through the filing process making it relatively painless. The cost for these programs is under $50 and, again, is tax deductible.
The last option is also a do-it-yourself option, and may be free if your adjusted gross income for the year is less than $54,000. This option is provided by the IRS and is called the IRS Free File Program. The program uses the same question and answer platform as the "pay for use" tax-filing programs mentioned above. To use this option you must access the IRS website at www.irs.gov and complete your taxes online.
These guidelines are for federal tax filing, but will help you prepare your state and local tax returns, as well. Consult with your tax professional for specific advice about your individual circumstances, needs, and questions.
Whether you decide to prepare your own taxes or hire a professional, you should feel more comfortable about the tax-filing process after reading this article. By demystifying the preparation process, providing tips for keeping excellent business records, familiarizing yourself with the steps necessary to prepare your receipts for tax time, and showing yourself the types of deductions that you, as an MT, might be allowed to claim, you'll be ready to face April 15. So, take a deep breath and relax, because you're ready. Lisa Bakewell (www.writerlisabakewell.com) is a full-time freelance writer in the Chicagoland area and a regular contributor to several publications. Her areas of expertise include profile pieces, general business, health and exercise, parenting, and money.