It’s tax time again.
Whether you are a do-your-taxes-yourself person use a tax professional, you will still need to have all of the information handy to get the biggest refund, or owe the least amount of tax possible.
The government starts accepting tax returns at the end of January, and the deadline for filing without penalty in 2018 is April 17.
Getting your tax return prepared as early as possible will help you determine whether to file early and get that refund or give you time to save up to pay what you owe before April 17, to avoid penalties and late fees.
Of course, many of you are on a quarterly payment plan, as small-business people.
The New Tax Law
The Tax Cuts Act passed by the US Congress in December 2017 will affect the taxes you owe for 2018.
One main feature, the larger standard deduction combined with fewer allowable itemized deductions, will mean that fewer people will benefit from itemizing. This means that employees will most likely not be able to deduct any of their business-related expenses.
Also, the changes in tax rates will change the amount of taxes employers deduct from your paycheck. Employees should expect to see these changes in February 2018.
The changes in the tax laws won’t affect the ability of self-employed massage practitioners to deduct expenses on Schedule C, so independent massage contractors and self-employed small massage business owners should still track their expenses.
However, there is a 20 percent tax break for all small businesses, and that includes sole proprietors. This tax break allows small businesses earning less than $157,000 to deduct 20 percent of their business income on their Schedule C next year, resulting in a reduction in taxes owed.
Filing Your Taxes
There are several ways to file your tax returns. The IRS will allow you to file online for free. Check the IRS website for details.
People earning less than $66,000 can access free software to help with completing their taxes. People earning over $66,000 can still file for free through the IRS website, but they can only use fillable forms with minimal guidance, so you will need to know more about doing your own taxes to use that service.
If you prefer to do your own taxes using commercial software, you can purchase tax preparation software for $15 to $100. The lower cost software includes fewer schedules and options, while the more expensive software may include tools for complex business deductions and also filing your state income taxes.
For those who prefer to let others do the data entry, there are commercial tax preparation companies that will do your taxes for $100 to $500. Be careful when you use these preparers, as some are not well-trained and are essentially doing the same thing you would do entering the data into a commercial software program.
If they make a mistake, you will still be the person who owes the IRS money.
If you have your own accountant, they will usually charge by the hour to do your taxes, so the more prepared you are when you bring them your information, the less it will cost you.
An advantage to using a private accountant, especially a CPA, is that they have significant training in tax law and accounting. The overall cost to have a CPA do your taxes would typically be similar to the cost of using a commercial tax preparer.
Information You’ll Need
Whether you do your own taxes or have someone do them for you, it is your responsibility to have the correct records and information needed.
When filing personal taxes, massage therapists generally fall under one of three categories: employee, independent contractor or self-employed. In some cases, you may fall under more than one of these categories.
For instance, you may work as an employee at a spa or clinic three days a week and then do massages at your own location two days a week. Or you may have your own clinic, but also work as an independent contractor or employee for other massage therapy businesses when they need someone to fill in.
Massage therapists who are employees will have the simplest tax returns. Their employers have taken out federal and state taxes throughout the year, based on a withholding document you provided.
Employers will issue you a W-2 form with information on what you have earned and what they have taken out for taxes. Any work-related expenses you have paid out might be deductible if they meet the federal threshold and you have enough other deductions to be able to itemize.
Massage therapists who are independent contractors generally work one or more locations, but are not considered an employee. You are paid the full amount you have earned and you are responsible for ensuring that taxes are paid on a quarterly basis.
Independent contractors are considered self-employed for tax purposes, and your expenses for your work can be deducted from your income on Schedule C. Your taxable income is the difference between the money you have been paid (which will generally be reported to you on a 1099-MISC form) and the expenditures you have paid out.
Expenditures that are usually deductible include license fees, massage school fees, continuing education, insurance, professional memberships, payments to accountants and attorneys, and supplies and equipment. You may, under some circumstances, be able to deduct a cell phone, home office or mileage.
Self-employed massage therapists who run their own business will have the most complex returns. Since nobody is sending you a tax form, you will have to track your income throughout the year, and pay estimated taxes on a quarterly basis.
You may have to provide a 1099 or W-2 to other therapists or employees, such as a receptionist or a cleaning person. You may even need to provide a 1099 to your landlord, if you rent from an individual rather than a company.
Like the independent contractor, you will report business expenses on a Schedule C, and these are deducted from your gross income to determine taxable income. In addition to expenses listed above for independent contractors, you will likely be able to deduct rent, utilities, business license fees, advertising expenses, scheduling software, internet fees, credit card processing fees, and many other business related expenditures such as paper towels, cleaning supplies, oils, and more.
The IRS allows you to deduct any expenses that are considered “ordinary and necessary” for your business. You can get more information on the IRS website.
A note about tips: The IRS considers all tips taxable, whether or not they are reported on a W-2 or 1099.
Your Refund or Payment
The IRS says that the fastest way to file taxes and get a refund is to file electronically and get the refund direct-deposited into your bank account.
Filing on paper or requesting a paper check for your refund will increase the time to process your return and issue the refund. In most cases, the IRS expects to issue electronic refunds within 21 days of receipt of your return.
If you owe taxes, you must have your refund and payment submitted electronically or postmarked by April 17, 2018 in order to be considered timely. You can make payments online using a credit card, debit card, or bank account.
If you cannot afford to pay your tax bill in full, you may be able to set up a payment plan or request a temporary delay in collections. Penalties and interest may accrue until the bill is paid.
Planning for Next Year
If you are getting a large refund and you expect to have similar earnings in 2018, tax experts suggest you may want to consider reducing the amount of withholding your employer takes or reducing the amount you send in on your quarterly estimated payments.
Overpaying your taxes may result in a once-a-year big check from the government, but you are missing out on using that income for day-to-day expenses or investing it and earning interest.
If you owe a large amount of taxes to the IRS, you should consider increasing the amount your employer withholds or increasing your estimated quarterly payments.
The IRS will charge a penalty for not making sufficient payments throughout the year if your tax bill is $1,000 or more, except under certain circumstances. You can increase or decrease quarterly payments throughout the year to ensure that your payments are sufficient.
If you are expecting any changes in your income or in your family’s structure or income, you may want to fill out a new W-4 form if you are an employee or revisit the IRS’s estimated tax calculator if you are self-employed.
Many independent contractors and self-employed massage therapists miss out on deductions by not keeping adequate records throughout the year. Using a dedicated checking account or credit card just for business expenses may help you track your expenditures more readily.
The IRS allows you to use electronic copies of receipts, so scanning receipts and keeping them on your computer may help you stay organized and clutter-free when tax time comes around. There are even apps for your smart phone that can help you stay on top of your expenses.
Editor’s note: The information presented here is a general guide and should not be used in place of professional business advice.
About the Authors
Neal Lyons is a lead volunteer coordinator with Massage Therapy Schools Information. He has experience practicing and running his own massage business in Texas.
Mark Faubion, CPA has been a certified public accountant for over 15 years and runs a small business assisting individual service providers with tax optimization and compliance