As a licensed massage therapist you may have chosen to go into private practice, become an independent contractor, be an employee or do a little of each over the past year. No matter what it is you have chosen you must deal with paying taxes.
It is never too early to begin organizing your paperwork and financial records. Ideally, you should keep track of your income and expenses on an ongoing basis throughout the year. Then, when tax time arrives, all you need to do is gather the information together and present it to your tax specialist. Or, if you are brave, dig into it yourself.
Helpful Hint: Keep a Spreadsheet
One of the easiest ways to keep track of your income and expenses is to prepare a simple spreadsheet. You can do this by hand using a simple ledger, or you can do it electronically by using a basic database program on the computer. Yet another option is to use preset software, where there is little setup involved and you merely have to enter the data as you go along. There are several software programs available created specifically for massage therapists, including Massage Office Professional made by Island Software. A key benefit of using the computer is that many programs allow you to automatically transfer the information to tax forms.
5 Frequently Asked Questions About Tax Obligations
With few exceptions the Internal Revenue Service (IRS) requires almost everyone to report their income and pay taxes, as well as pay into the Social Security System and Medicare programs. If you are an employee, this is done automatically through payroll deductions and, once a year, sometime between January 1 and April 15, you file an income tax return along with your W-2 forms and reconcile, with the IRS, the amount under or overpaid.
If you are self-employed or work as an independent contractor, you must take care of estimating and paying your own tax obligations, file them quarterly and make a final reconciliation at the end of the tax year, sometime prior to April 15. For the self-employed practitioner there are some basic rules to be aware of. Here are answers to some most frequently asked questions.
1. Who must file taxes and when?
- A person who works solely as an employee must file taxes once a year, on or before April 15.
- If you are self-employed and receive payment directly from clients, or if you are an independent contractor and receive IRS form 1099 at the end of the year, you should file estimated taxes quarterly and a tax return for the year prior to April 15.
2. When do I pay my taxes if I am self-employed?
- You must pay your estimated taxes quarterly if you had a tax liability the previous tax year, or if you expect to owe $1,000 or more in taxes for the current year. Failure to do so may result in interest and penalty payments being added to your tax obligation.
3. What forms are required?
- At the end of the tax year everyone will file either a 1040 or 1040-EZ form, all other forms are either attachments or supplements.
- Each quarter, if you are self-employed you must file a 1040-ES, along with payment for your estimated quarterly taxes.
- If you are employed you will receive a W-2 form at the end of the year.
- If you work as an independent contractor, anyone paying you $600 or more for the year must issue you a 1099 form in January of the following year.
- If you participate in bartering you may receive a 1099B form and must report that as income.
- Schedule SE is filed along with your 1040 and is a worksheet used to calculate your net earnings.
- Schedule C is a worksheet used to calculate the profit or loss of your business and must be filed along with your 1040 form. This is where you would list deductions such as advertising, office supplies and professional dues.
- Depending on your personal circumstance there may be other forms required, especially if you have income from investments.
4. How much must I earn before paying taxes?
- Amounts will differ depending on your expenses and allowable deductions.
- If you earn more than $400 in a year you are required to report that income. If you are working as an independent contractor, the employer will issue a 1099 if they have paid you more than $600 for the year. This means you could work independently for four or five companies with each of them paying you $300 and not issuing you a 1099. You, though, will have earned $1,200 – $1,500 and must claim that income.
5. What is new* for 2008?
- The amount allowable for Earned Income Credit (EIC) has increased. Even if you are single with no children you may now qualify. Many people do not realize they are eligible and lose out on this benefit.
- Income limits have increased with regard to certain retirement savings plans.
- Standard mileage rates have increased. For business use it is now 50 ½ cents per mile. It is 19 cents per mile for medical use and 14 cents per mile for charitable use of your car. The IRS has very specific standards as to how this is determined with regard to proof of usage and how it is calculated.
- You may be able to exclude as income part or all of the mortgage debt on a principal residence.
*Note: There is more that is new for 2008 as well as some expiring benefits. Those listed here are just a few you may be eligible for.
It is important to keep track of both your income and your expenses for the year on an ongoing basis. Waiting until a few days before the deadline will only create chaos and stress. It will also take valuable time away from your clients if you need to take time off to get your financial records in order.
Forms and detailed instructions are available through the IRS in their regional offices and at their website, or can be requested by phone or mail.
Internal Revenue Service – United States Department of the Treasury. 18 Nov 2008 . 1-800-829-1040 (individuals) or 1-800-829-4933 (businesses)
Small Business Association. 18 Nov 2008. 1-800-827-5722