When it comes to paying taxes as a massage therapist, if I could give you only one piece of advice for this year’s tax filing, it would be this: Get an accountant.
If there were ever a year to work with an accountant, this is it. A few hundred dollars could save you a mountain of aggravation and confusion.
When I wrote this article, there was no clear guidance on what any of the following would mean for our taxes:
- Paycheck Protection Plan (PPP) loans.
- Pandemic Unemployment Assistance (PUA).
- Economic Impact Payments (stimulus checks).
- Economic Injury Disaster (EIDL) loans.
- Closing a business, temporarily or permanently.
- And every other unimaginable thing that happened to our businesses thanks to the coronavirus.
The answers may come down to how you used the money, if you filled out the right paperwork, if you had taxes withheld, how you documented your use of the money, and (most importantly) who won the state and national elections in November.
Will the government have sorted out all the issues by the time you read this article? That’s a big “maybe.”
[Read “Coronavirus (COVID-19): Small Business Guidance & Lon Resources,” from the Small Business Administration, here.]
But you still have to pay your taxes. So let’s review the basics of what taxes mean for us and how to manage them to our greatest advantage.
Taxes: Paying Your Share?
The simplest explanation (ignoring political philosophies) is that we send money to the government to fund the country, state and city. (“Government” means both the federal government (the IRS) and your state government if your state collects income tax.
You do not have to pay state income tax in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Some counties and cities also collect income tax, even if their state doesn’t. Be sure you know the facts for where you work.) We do that through sales tax, property tax and income tax.
Thankfully, you don’t give them a percentage of your total income. You give them a portion of your net income, which is what remains after your expenses (deductions). So it’s important to keep track of all your business income and expenses (that’s bookkeeping, a topic for another day) and know which expenses qualify as business deductions. We’ll talk about deductions shortly.
By the way, tips (cash, check or charge) are income. The IRS expects you to include them.
Estimated Quarterly Taxes: Paying As You Go
You send your income tax to the government throughout the year. The set of tax forms you complete and submit every year on April 15 helps you determine if you paid enough, too much (refund!), or not enough (send money).
If you are an employee, your employer withholds some money from each paycheck and sends that on to the government for you. If you are self-employed (which includes being an independent contractor) you have to send the money yourself as estimated taxes.
They’re called “estimated” taxes because it’s almost impossible to know exactly how much you should send until you do your annual tax return (that paperwork due April 15 each year). Your taxes are affected by more than just the money you make. For example:
• Buying or selling real estate.
• Moving (especially if you move to or from a state that doesn’t have state income tax).
• Having children or having children no longer qualify as dependents.
• Getting married or divorced.
• Starting or closing a business.
• Putting money into or taking money from a retirement account.
And so much more. On top of that, Congress and your state legislature create and change laws that affect your taxes throughout the year. You may not even hear about these changes until it’s time to fill out your annual paperwork on April 15.
Hence, estimated taxes.
You make those estimated payments four times a year. Each payment is for the money you made in a three-month period (a quarter). The due dates are:
• April 15 (for January to March). Yes, the same day as your annual taxes.
• June 15 (for April to June)
• September 15 (for July to September)
• January 15 (for October to December)
Did you notice that in June and September you are paying taxes before the quarter even ends? Another reason these are estimated taxes.
There is a persistent rumor that if you make less than [magical number] you don’t have to pay quarterly estimated taxes. Not quite. If you know you will owe less than $1,000 in taxes for the year you don’t have to pay quarterly estimated taxes.
How do you calculate how much you should send in? It’s not easy. It requires you to predict your adjusted gross income, your deductions, any credits you’ll receive, the other taxes you’ll have to pay (like self-employment tax), for the year. The IRS provides a worksheet, but you’ve still got to come up with the numbers.
If you’ve been in business for more than two years, take a look at your previous tax return. If you don’t expect significant changes to your income, you can use that as a guideline for your estimated taxes. Otherwise, I recommend working with an accountant or tax preparer until you get a sense of what you usually pay for estimated taxes.
Another option is the IRS Free File Program. If your adjusted gross income (line 8b on your form 1040) is less than $69,000, you qualify. It will also help you file your estimated taxes.
Once you’ve determined how much you’ll pay, the actual paying is easy.
• If you like to pay by check, print off the estimated tax payment voucher (possibly the shortest, easiest tax form ever) and mail it in.
• If you like to pay online, go to irs.gov/payments.
• If you want to pay through your mobile device, download the IRStogo app.
So, how do we keep that tax obligation as small as is reasonable and legal? That’s all about …
Deductions: The Key to a Lower Tax Payment
Running a business requires you to spend money. Laundry, office supplies, license renewal, continuing education, linens, massage equipment. Many (maybe most) of these qualify as business deductions. Remember: We pay taxes on what remains after we subtract our deductions. If you want to (legally) pay as little in taxes as you can, you need to make sure you are claiming all the deductions allowed to you.
To be a deduction, an expense must be “ordinary and necessary”; it’s recognized as a normal expense for a massage therapist. You also have to have had a business intent when you spent the money. That’s important when you spend money for things that could be personal or business (massages and travel are two common examples).
Ponies, for example, are not considered a normal expense for a massage practice. So if you’re deducting a pony, you better be able to show you had a strong business intent when you bought the pony!
Rather than give a long list of things you could deduct, I’m going to focus on five deductions massage therapists often ask about.
Education. A course you take with the intent of improving yourself as a massage therapist or businessperson is deductible. It doesn’t have to qualify for CE hours to be deductible.
Massages. You may take a deduction for a massage if you got the massage for a business reason, such as checking out a competitor, experiencing a modality before you take the class, or receiving someone’s work because you’re thinking of referring out to them. This is a great example of how “intent” matters: Why did you get the massage? If it’s to take care of yourself, it’s not deductible (sad but true). If it’s for business purposes, it’s deductible.
Home office. Thirty years ago, having a home office may have made you more susceptible to an audit, but there has been such an explosion in self-employment in the last 25 years that it’s no longer true. Even if you don’t see clients in your home, you may be able to claim a home office because you still need somewhere to take care of business—bookkeeping, file storage, receiving trade publications and similar activities. It needs to be a dedicated space, no matter how small. When you claim a home office, you can deduct a portion of your expenses related to your home such as utilities, house cleaning, repairs, mortgage interest and the like.
Laundry done in your home. You can take a deduction for laundry you do at home. The easiest way to do this is to take a flat deduction per load. Margo Bowman, an accountant and massage therapist, recommends $4.80 as long as that is less than what you would pay to wash a load in a laundromat.
Mileage. Here’s something most of us miss—you can only deduct mileage between two business stops. If you aren’t claiming a home office, for example, your home is not a business stop. So you don’t start tracking your mileage when you leave your house; you start tracking it from your first business stop (the bank, a client’s house). But you have to go from there to another business stop to have any mileage to deduct. That’s one of the most compelling reasons to take a deduction for a home office: It makes your house a business stop.
Also, if you go to the same place for work on a regular schedule (for example, working at a gym every weekend as an independent contractor), then you can’t deduct that mileage either. It’s no longer mileage-for-business; it’s now commuting, which isn’t deductible.
Everything You Need to Know about Schedule C
This section applies only to those businesses incorporated as a sole proprietor or single member LLC (not also a C Corp or S Corp). If you are an employee, this does not apply to you.
In among all those forms you submit to the IRS by April 15 is one that’s so important to many massage practices – the Schedule C. It’s the page where you document all you made and spent in your business in the previous year.
It’s final number (line 31) will go on to Form 1040, which you can think of as a Master Sheet that calculates whether you owe more money or are getting some back. I’m not going to document every line of Schedule C but I’m going to explain the fields that most affect your literal bottom line.
If you have more than one business and they are both in the massage field, you may be able to file one Schedule C. If they have two distinct names you should use two Schedule Cs. For example, if you have a massage practice and you teach in a massage program as an independent contractor, you could choose to use one Schedule C or break them out into two Schedule Cs.
Lines A – J
Line A – J are where you identify yourself to the IRS.
A: Use your legal title, such as licensed massage therapist, certified massage therapist, etc. When the IRS sees words like “licensed” and “certified” they understand the need for licensing and education expenses.
B: Enter 621340.
D: If you have an EIN enter it here. If you don’t leave it blank. Do not put your social security number here.
F: For most of us, the answer is “cash.” If it’s anything else, you should be working with an accountant.
Part 1: Income
Part 1 is where you document what you made last year from any business-related activities.
1: Everything you earned in your massage business in 2020, except tips. They go on line 6.
2. Except under rare circumstances, enter 0.
4: See Cost of Goods Sold, Part 3.
6: Any money you received for anything other than massage, including tips. Note: The IRS knows many of us receive tips. They will be looking for an entry in this field. If you didn’t receive any tips, enter 0. They will also look at your business name to evaluate this field. Some business names (Center City Medical Massage) sound like a place that might not accept tips. Other business names (Center City Day Spa) sounds like a place that would accept tips.
Part 2: Expenses
Line 9: You have 2 choices:
• Use the per-mile rate of 57.5 cents for 2020. Multiply your business miles by .575. Add parking fees and tolls. Enter the total in line 9. Enter the details in Part 4.
• Itemize your car expenses. Include on line 9 the business portion of expenses for gasoline, oil, repairs, insurance, license plates, etc. Show depreciation on line 13. Enter the details on Form 4562. Skip Part 4 of the Schedule C.
Line 10: You are unlikely to ever need this.
Line 12: You are unlikely to ever need this.
Line 14: Only use this line if you have employees and entered their wages on line 26.
Line 16a: This does not apply to your home mortgage if you have a home office (that goes on form 8829). It only applies if you have a mortgage for a separate building for your business.
Line 18: Things you need to run an office. Paper, pencils, pens, paper clips, etc. This should be a small percentage of how you spent your income.
Line 19: This only applies if you have employees and offer a pension or profit-sharing plan.
Line 20a: Any equipment you may rent, such as a credit card machine, a massage chair, a truck to move your office, etc. Does not apply to rental cars while travelling.
Line 20b: If you pay rent to a landlord, put it here. A split qualifies as rent if you give the money to the contracting company. If they pay you, it’s not rent.
Line 22: Things you need to run a massage practice. You could put massage supplies here or break it out as a specific category in Part 5.
Line 23: County and local taxes. Not expenses related to your massage license.
Line 24a: Only for travel outside your tax home. Airline, rental car, cabs, lodging, etc. but not food.(In most cases you get to determine your tax home. It’s not based on where you live but rather on where you work. According to TurboTax “The IRS defines your tax home as the ‘entire city or general area’ of your workplace.” A more practical way to think about this is: where does your day-to-day life and work tend to take you? Also, at what point are you far enough away from your workplace/ home office that are no longer “near home”? Those boundaries define your tax home.)
Line 24b: All meal expenses, whether inside or outside your tax home.
Line 25: Utilities for an office but not a home office. Home office utilities are dealt with in
Line 26: This only applies if you have employees.
Line 27: Record your “other” categories and expenses in Part 5 at the end of Schedule C. Enter the total here.
Part 3: Cost of Goods Sold
Record the details related to products you sell in your practice. Put the final number on Line 42 and Line 4 in Part 1. If your income from products is less than 10% of your income, you can also reasonably enter it as an “other expense” in Part 5.
Part 4: Information on Your Vehicle
See the info for Line 9.
Part 5: Other Expenses
“When in doubt, break it out.”
Let’s talk about something you’ve probably never heard of: the Statistics on Income. The IRS has a profile for all professions that shows what people in that profession generally spend (as a percentage of their income) on certain types of expenses. They call it the SOI (Statistics on Income).
They gather this information based on the business/professional code you enter on your Schedule C, which is why it’s so important to enter the correct business code in Box B, above.
For example, in 2019 massage therapists spent, as a portion of their income:
- 2.2% on advertising
- 5.73% on car & truck expenses
- 1.65% on legal and professional services
- 1.85% on travel
- .89% on meals
If a category of your expenses takes up a significantly higher percentage of your income than the SOI lists then you get DIF (discriminate index function) points. The more points your return acquires, the greater the chance of your file being pulled for an audit. This does not mean you cannot go above the SOI numbers. It just means you should be aware of this reality.
How do you work with this? Break your expenses down into enough categories – especially categories you create – that it’s not easy for the IRS to directly compare your return to the SOI. Enter those expenses here in Part 5. Enter the total (Line 48) on Line 27a.
For example, the Schedule C doesn’t have a pre-set category for laundry, but it makes sense that you would. Other categories that might make sense for you but aren’t already set on the Schedule C can include massage linens, continuing education, marketing, coaching, conferences, market research, etc.
The more categories you have, the smaller the dollars will be. You’re trying to make sure any one category isn’t too far out of line with the SOI. (Where do you get the SOI? You talk to a tax professional.)
Before you say anything, this is neither illegal nor unethical. As a business owner, you are expected to categorize your expenses in a way that works for you. You are not required to limit yourself to the expenses listed in lines 8-26.
Remember, Work with a Tax Professional
This is a general overview of your Schedule C. At the time of this article, the government had not made decisions about PPP loans, EIDL, etc. Make sure you know how these will affect you before you file. If you have questions, contact a tax professional.
Learning about deductions and taxes has helped me feel more in control of my business, which is always a good feeling. It’s also helped me appreciate the value of a good accountant. I’ll be happy to hand all this over to her this year!
Kelly Bowers, LMBT (NC 16669), has been writing, teaching and speaking about the business of massage since 2003. Owner of the Healing Arts Business Academy, she is the co-author of “Between Doormat and Diva: How Massage Therapists Can Find the Sweet Spot Between Service and Servitude” and “Can I Deduct That?” (both, amazon.com) and author of “The Accidental Business Owner” (Handspring Publishing.)