Tax, record keeping advice offered by strategist
Keeping detailed records and hiring a tax consultant are among the practices a psychologist should adopt when starting a business.
That advice and more was offered by David McLaren, founder and partner at McLaren & Associates, CPAs PC in Shrewsbury, Mass., who has more than 35 years of experience offering tax and accounting services.
During a webinar for early career psychologists, McLaren identified common pitfalls for psychologists when filing taxes. These involve company structure, missing deductions, paying too much tax, bad records, and co-pay fraud.
“Most psychologists are excellent at what they do but not trained in business,” McLaren noted. “How do you measure what you don’t know about and how will you know if you are making money or losing money?”
He emphasized the importance of having a CPA provide tax strategies to get the highest value for the business.
McLaren noted, for example, that taxes for a sole proprietor are cheaper to prepare but result in a higher tax rate than other types of entities.
“Entity structure is key,” McLaren said, advising psychologists to ask themselves if they plan to add partners, intend to sell in the future and when.
He talked about aspects of having an LLC (Limited Liability Company), such as being subject to pay 15.3% self-employment taxes on net profits although more structured than sole proprietorships and easy to form.
S Corps, if small, allow for 20% of profit tax-free, he said, although they are subject to many IRS requirements to qualify.
Some psychologists prefer to be paid in cash at the front desk, which he described as “the number one way to pay too many taxes.” McLaren said that arrangement also costs “$8,000 per year in damaged relationships with patients.”
McLaren emphasized the importance of record keeping that will hold up to scrutiny and audits.
“If it is not done correctly, you will cost yourself a lot more money in taxes,” he said.
“I’m telling you, even Mother Theresa could not pass an audit today.”
He noted that keeping receipts is not enough, explaining the IRS wants originals, not credit card company bills.
Citing a total and tip of a business lunch is inadequate, for example. “They need the name on the dinner reservation, the location, the topics of conversation, etc.,” he explained.
Similarly, auto expenses must include all the addresses tracked, mileage, the purpose of the visit and more.
McLaren also spoke about keeping up with other non-resident state rules if applicable or “otherwise falling behind the eight ball and ending up in real trouble.”
He noted that tax reductions are often missed, citing the example of a deduction if a vehicle has lettering on it (identifying the business) versus just mileage.
Addressing issues of private pay versus third party, McLaren said psychologist can make more money going the private pay route but it may take longer to find patients.
He also spoke about the maximum amount a practitioner can charge being based on what insurance is involved and the importance of knowing specific considerations for telehealth by state.
“It is complex and that is why professional (help) can make it easier for you,” he said. “Tax strategists pay for themselves and you can find specialists with mental health care experience.”