Do therapists need to pay the self-employment tax? Mental health practitioners can work under a variety of business structures. Learn more about the tax responsibilities of each.
Tax tips for the self-employed
If you're a therapist and business owner, you may be wondering about self-employment tax and if there are any special tax rules for your profession. Let's talk through tax tips for therapists — particularly for those who are self-employed or own their own practice.
Possible business structures
How your business will be taxed depends on which business structure you're using. Most business structures for therapists include:
If you are running a C corporation, your business will be taxed at the corporate level and then again on the personal level when distributions are made to shareholders. The other business structures available are generally only taxed at a single level. For these businesses, income flows through to the owners who are taxed on a personal level. Because the money flows through to the owners, these businesses are called "pass-through" entities. Many private practices are pass-through businesses.
Qualified business income deduction
If you own a pass-through business, this could mean good news for you since many pass-through entities are entitled to a 20% deduction on qualified business income (QBI). This deduction was signed into law as part of the Tax Cuts and Jobs Act in 2017, and it's also known as the section 199A deduction. It allows many self-employed taxpayers and owners of sole proprietorships, partnerships, and S corporations to deduct up to 20% of QBI as well as 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income. This 20% deduction means taxpayers can exclude up to 20% of their QBI from their federal income taxes whether or not they itemize, but it doesn't include any deductions from self-employment taxes.
Even though those in the health profession are classified as being part of a specified service trade or business (SSTB), which is excluded from the definition of qualified trade or business, you can still claim this deduction as long as your total taxable income doesn't exceed an amount set yearly by the IRS — also known as the phase-in range.
- If your income is below this threshold, the STTB limitation does not apply.
- If your income is above the phase-in range, you can’t claim the QBI deduction as an SSTB.
- Non-SSTBS still qualify for a reduced QBI deduction even if their taxable income exceeds the phase-in range.
The QBI threshold is calculated based on your net income amount, which includes wages, gains, deductions, and losses.
- For tax year 2023, single filers don't qualify for the full 20% if their annual income exceeds $182,100, and taxpayers who are married and filing jointly don't qualify for the full amount if their annual income exceeds $364,200.
- If your income exceeds those amounts, there is a phase-in range.
- For tax year 2023, this range is $182,100 to $232,100 for single filers and $364,200 to $464,200 for those filing jointly.
Reporting QBI deduction
For tax year 2019 and later, Form 8995 and Form 8995-A are used to calculate and report the QBI deduction. You'll use Form 8995-A if your taxable income is over a certain threshold. In all other cases, you'll use Form 8995. You should complete and attach your Form 8995 or Form 8995-A to your Form 1040. If you're filing for a tax year prior to tax year 2019, there is no form required.
Other business deductions
There are many business deductions therapists can use to lessen their tax burdens. Common business deductions for therapists include:
- Home office deduction
- Marketing and advertising
- Office expenses
- Legal services
- Car expenses
- Employee benefits
- Rent or lease fees
- Education and conferences
- Professional organization fees
- Self-employment tax
- Electronic health record services
Lifetime Learning Credit
In addition to the deductions you can take as a private practice owner, you can also claim 20% of the first $10,000 you pay toward qualified tuition and fees during the tax year as a Lifetime Learning Credit on your income taxes. This education credit applies to undergraduate, graduate, and non-degree or vocational students. There is no limit to how many years you can claim this credit and you can use it toward tuition, books, and supplies required for courses. You are eligible to claim the full Lifetime Learning Credit if your 2023 modified adjusted gross income (MAGI) is less than $80,000 if filing single or $160,000 if filing jointly. If your income is above that threshold, you may still be eligible for a reduced credit.
If you are a sole proprietor or other business entity that does not pay yourself through payroll, your income is likely to be subject to self-employment taxes. These are different from income taxes and are made up of two taxes: Social Security tax and Medicare tax. When you aren't a W-2 employee, you don't have an employer withholding your share of these taxes and paying their part of them, so you'll need to set aside money to pay them on your own. For 2023 the Social Security tax portion of your self-employment taxes come out of the first $160,200 axes do not have an income limit. Having a basic understanding of how self-employment taxes are calculated can help taxpayers estimate and save the required amount.
Making quarterly tax payments to the IRS is another part of having your own practice. You'll need to make these payments if you know you'll owe the IRS more than $1,000 in taxes each year. You'll estimate, file, and submit these payments with Form 1040-ES. If you live in a state with income taxes, you might need to pay quarterly taxes to your state's department of revenue as well. Make sure to set reminders for yourself to pay quarterly taxes as there are penalties for not paying on time.
One key to running a successful private practice — or any business — is staying organized and getting help where you can and staying focused on what matters most: your business and your patients.
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