This year’s Tax Day is Tuesday, April 18. And if you’re wondering why you’ve been granted a three-day extension (usually, the deadline is April 15), then check out this article that explains it all—along with an apropos GIF of Prince John in Disney’s Robin Hood counting his “beautiful, lovely taxes.” While Prince John may be a fan of this time of year, most of us are less than excited about it—unless we’re getting a refund, that is. So, in addition to calling in the refund fairies on your behalf, we’ve also put together a list of some things to avoid when doing your taxes. Hopefully, this will make the process that much easier.
Before we jump into that list, though, we must say this: We are not tax experts, accountants, or attorneys. Therefore, please take the following information as just that: information. It is general in nature, will not be suitable for everyone, and should not be construed as legal or expert advice. We strongly encourage you to speak with a tax expert and healthcare attorney to decide what’s right for your business before implementing any strategy, including what’s outlined below.
With that out of the way, here are five common tax slip-ups in PT private practice:
1. Being unprepared.
As a busy practice owner, you’ve got a lot on your plate. And no one likes thinking about taxes. So, it might be tempting to put them off until—well—April. But, that’s not wise—especially considering that many small business owners may need to submit estimated taxes quarterly. Failure to do so could result in penalties and a huge tax responsibility at the end of the year. Additionally, this resource recommends estimating your adjusted gross income before the end of the year to determine which tax bracket you’ll fall into. If you’re on the cusp, you may want to work with your CPA to identify potential expenses that could knock you into a lower bracket. And speaking of things to think about before tax time, you may also want to consider funding a tax-favored retirement plan (as this article points out). David Schiller, a tax attorney in Norristown, PA, says healthcare providers should start funding these plans at the beginning of their career: “When you’re in your 30s and you fund a retirement plan, that’s your most valuable money, because you have 40 years of tax-deferred compounding in front of you.”
2. Not keeping receipts.
Over the years, we’ve hammered home the importance of defensible documentation. Well, today that recommendation extends beyond clinical documentation and into your business files. That’s because the IRS demands you maintain paperwork and receipts that fully support every line item and deduction you take on your taxes. Planning to write off the purchase of a new piece of clinical equipment—or perhaps take advantage of its depreciation over time? You won’t be able to do so without proof of purchase. What about that luncheon you held to drum up business from local physicians? With proper documentation, you could write off 50% of that expense. Without it, you’ll be out of luck. Sufficient documentation also allows you to deduct the cost of professional dues; seminars, workshops, and continuing education courses; professional publications; and a whole host of other business-related expenses. But, as this resource warns, “don’t exaggerate your deductions.” Doing so could land you in hot water.
3. Doing it all yourself.
There are few things in life more complicated than Medicare—and one of them is most definitely the US Internal Revenue Code. So, unless you majored in accounting and/or have a secret passion for puzzling out IRS guidelines, hire a tax expert. As WebPT President Heidi Jannenga pointed out in her most recent Founder Letter, “handling your business taxes is very different than doing your personal ones.” In other words, just because you’ve mastered the 1040EZ does not mean you should take on your business taxes singlehandedly. Not only could you put your business at risk for an audit, but you also could miss out on numerous tax breaks and incentives. And speaking of missing out on tax breaks, according to this resource, Benjamin Rucker—owner and founder of Rucker Tax and Consulting, LLC—says that many small businesses mistakenly file as C Corporations when there are more tax-friendly options available. This is yet another reason to hire an expert who can advise you on the best route for your particular business—one that aligns with your state practice act and ensures you’re keeping as much of your hard-earned money in your pocket as possible. That being said, as this resource suggests, run—don’t walk—from any so-called tax professional “who suggests you hide income or take write-offs you know you aren’t entitled to.”
4. Incorrectly classifying employees.
As WebPT’s Brooke Andrus explains in this post, while hiring contractors can provide some tax savings (namely, you’re not responsible for paying their employment taxes), misclassifying employees as contractors “is one of the most common—and most costly—mistakes startup business owners make.” According to this Justworks article Andrus cites, misclassifications can result in IRS and state penalties. In California, for example, the penalty for deliberately misclassifying an employee can range from $5,000 to $15,000 per violation. And according to this article, misclassifying workers is a “hot audit topic.” To learn the IRS rules for proper classification, click here.
5. Missing the deadline.
According to this resource, tax attorney Venar Ayar says “one of the big no-nos...is paying taxes late.” That’s because, as NOLO explains, “the IRS usually adds a penalty of .5 to 1% per month to an income tax bill that’s not paid on time.” This IRS computer usually adds this penalty on automatically whenever someone files an incomplete return or pays late. There’s also a penalty for filing late—the IRS can charge an additional 5% per month on balances due. However, “this penalty can only be applied for the first five months following the return’s due date—up to a 25% maximum charge.” That’s not all: there’s also a “special rule [that] applies if your business both files its taxes late and underpays. The IRS can (and probably will) impose a ‘combined penalty’ of 25% of the amount owed if you don’t pay in the first five months after the return and tax are due. After five months, the ‘failure to pay’ penalty continues at .5% per month until the two penalties reach a combined maximum of 47.5%.” Ouch. Furthermore, “late penalties for failing to make payroll tax deposits on time are much higher.” And, as this resource explains, approximately 40% of small businesses incur an average penalty of $845 annually for payroll-related errors.
The moral of this story? File—and pay—your taxes on time. And if you simply can’t get your tax paperwork done before it’s due, apply for an extension. However, please note that “an extension only pushes back the due date for the filing of your tax return documents. It does not give you extra time to pay on any taxes you may owe.”
There you have it: Five common tax slip-ups that affect PTs in private practice. How has your experience been with business taxes thus far? Have you learned anything that you think other providers should know? Share your stories—and advice—in the comment section below.