Ep 422 - Handling Taxes in Your Massage Business:"Business or Pressure"with Allissa Haines

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0:01:04.9 AH: Welcome to Business or Pressure, Taking the Pain Out of Massage Business with me, Allissa Haines. This is your no-nonsense guide to building a happy and sustainable massage therapy business. It is our mission to make sure every massage therapist and body worker, has the tools to make a living wage and a thriving business. Let's jump in.

0:01:29.3 AH: Today we are talking about taxes. I wanna note right away at the beginning that I am not a professional tax preparer or CPA or accountant. None of this is official tax advice. Please consult a certified tax preparer when you are determining if any of this information is applicable to your situation and your business. This is not official tax advice. Now, with that out of the way, what are we gonna cover, if this isn't tax advice? This is about how to be your tax preparer's favorite client. This is about what you need to have organized and a little bit of why, so that your tax can be prepared efficiently and correctly.

0:02:11.8 AH: I'm gonna give you a bunch of resources as we go, and you can always find the links to those resources at abmp.com/podcast. And you can look for the episode that aired around March 8th, 2024 to find that particular episode. Now, to cover taxes and what we need to prepare, I want you to have an idea of what the whole process involves, and what kind of taxes we pay as small business owners. This is very big broad overview. This is not nitty-gritty and specifics that may be different for your particular business situation. When you own a small business, you're gonna pay a few different kinds of taxes. You are likely very familiar with federal income tax. We also pay a self-employment tax, and you might have a state income tax and a local town or city income tax. Most sole proprietorships and LLCs pay based on a Schedule C.

0:03:11.8 AH: That's the form that you file along with your personal tax forms. Some LLCs and corporations may file differently as an S corp that's a little more complicated, usually requires a payroll system and a bookkeeper. For the purposes of our conversation and the information provided today, we're focusing on sole proprietorships, which is the default business type. The moment that you accept money for providing a massage, if you have not set up a different type of business, you are a sole proprietor and we're gonna focus on that process for Schedule C sole proprietors. You already know that gross income is all of the money that you accept for providing massage or selling products. All of your self-employee income, also known as your gross income, goes on that Schedule C. And then you list all your expenses and then that form helps you calculate your net profit, and you pay taxes based on that profit.

0:04:10.2 AH: Now, all of these expenses, some of them are allowable deductions. So, even if you have a great bookkeeper and tax preparer, which I hope you have a great tax preparer, at least, it's helpful to have a really good grasp of how allowable deductions work. This way, you can make better financial decisions in your business about how you spend your money. And if you do all the bookkeeping, it's even more important to understand. So, what's an allowable deduction? There are all kinds of rules. There's also a lot of gray area, and this is why it's really helpful to have a tax preparer that you can shoot questions at through the year or at least ask questions to all at once before your taxes are prepared. The IRS tells us that an expense must be both ordinary and necessary to be considered an allowable deduction. Some of this is very clear and obvious.

0:05:03.8 AH: Massage oil is an ordinary expense and a necessary expense for a massage business. There are plenty of examples of gray areas as well. Some tax preparers will say that a weekly manicure is an allowable deduction. Others will say absolutely not, but ultimately, the person who makes that decision, if it is an allowable or not, is gonna be an auditor, should you ever be audited. This is not an area that you should just wing it and hope for the best. You should consult with a professional to be sure that all of the deductions you put on your Schedule C are likely to be considered ordinary and necessary. All right. The third and final thing you need to really understand before we jump into preparation, is estimated taxes. And these often come as a big surprise the first time you're having your taxes filed as a business. But in a nutshell, Schedule C filers sole proprietors should be paying estimated taxes four times a year, throughout the year to pay a portion of what you're gonna be told you owe at the end of that year.

0:06:12.2 AH: So, just like an employer would take those taxes out of your paycheck every week, you are required to give the government, both state and federal, a certain amount of an estimated tax payment, a portion of that end of year that you're gonna owe, four times a year. And that's April 15th, June 15th, September 15th, and January 15th. And sometimes these dates adjust a little bit because of federal holidays or state holidays. So, know that at the end of the year, your tax preparer is gonna calculate how much you owe. And if you have not paid those estimated or also called quarterly tax payments, you're gonna owe a bunch of money and perhaps a little bit of a penalty for not paying on that quarterly basis. So, what kind of information are you going to need to give your tax preparer? You're gonna need to tell them a few things.

0:07:04.1 AH: First, your income. So what you earned, including tips, you're gonna need to give them any 1099 forms from work that you performed for other businesses. We talked about bookkeeping in a few previous episodes, and I just wanna reiterate that as long as every penny you make gets deposited into your business bank account, those account transactions, those bank statements are a really nice backup of your records to record your earnings. So, if you're not diligent about keeping some kind of log, if you're not using a bookkeeping system, as long as you know that every penny you have earned gets deposited into that business bank account, your bank statements, your account history will be able to tell you exactly how much you earned. And then we've got your expenses, what you spent related to your business broken out by category. If you're not sure what category to use for any particular expense, ask your tax preparer.

0:08:00.6 AH: If you don't have a regular tax preparer throughout the year, just make a note, flag the transactions that you have questions about, and then you can ask before your taxes are prepared and say these 10 expenses, are they supposed to go into particular categories? Where are they supposed to go? It's also okay to in your bookkeeping software or your ledger or whatever you're using, it's okay to have more categories than the IRS form does because your tax preparer is gonna handle grouping those together where that's appropriate. And a resource that I wanna mention here is a book called Can I Deduct That?: 100 Things You Can or maybe can't Take As Business Deductions. It's a book written by a massage therapist, Kelly Bowers and Tax Preparer Margo Bowman. The latest edition is from 2022, and it is still quite relevant today. You can check the podcast notes for the link for, Can I Deduct That?: 100 Things You Can or maybe can't Take As Business Deductions.

0:08:57.1 AH: All right. So you're gonna have to give your tax preparer your income and your expenses. Some other little bits of information they're gonna need; mileage, how many miles you drove in total in your primary vehicle, and how many of those miles were for business. And I wanna note that what's for business, according to the IRS might not be what's initially in your head, your route from home to your primary office. That's a commute that's not considered business mileage. And if you have a home office as well as another office, you need to have a conversation with your tax preparer about if those miles are deductible or not. But you gotta track your mileage. My biggest suggestion here is that you use an app that tracks mileage automatically, and then you just have to categorize each ride. There are plenty of apps out there. I know that some bookkeeping apps even have mileage trackers embedded into the mobile app.

0:09:53.6 AH: So, you might already have this available to you if you use a certain bookkeeping app, or you could just Google business mileage trackers. And for under 100 bucks a year, you can have an app on your phone that automatically tracks all your driving, and it's super easy to tap a button and categorize each ride. You also want to be sure that you tell your tax preparer about any big equipment or large new purchases. Something like an electric massage table, yeah, you're gonna put that in with your expenses, but you wanna have an extra note set aside to talk to your tax preparer about any extra benefits you might qualify for. For example, if you buy an electric table that is compliant with the ADA, the Americans with Disability Act criteria, you're eligible for a good-sized tax credit. So, that's a separate note that you wanna make sure your tax preparer is aware of.

0:10:44.7 AH: And sometimes big purchases like a computer get deducted over several years. So if you see a new tax preparer, or it's the first year you're running your business, you wanna make sure that your tax preparer knows about any big equipment. Almost done here. Receipts, keep them, electronic versions are fine. And sometimes even better because you know on old school receipts, the ink kind of degrades after a few years, that's kind of bad. So it is actually better and more efficient to store electronic versions of receipts. So, when you actually get a paper receipt, you can take a picture of it or scan it and then upload it from your device into a Google file or Dropbox or whatever system you have set up to store all of these little files of receipts. When you get receipts via email, save them as a PDF and do the same thing, upload it to a Google file or Dropbox or whatever system you have set up to save receipt.

0:11:41.2 AH: And I wanna quote an article about tax preparation from an organization called SCORE. And yes, the link is in the show notes, specifically a link to an article about tax preparation. And SCORE reminds us, if you don't have proof of an expense, like a bank statement, a receipt, a handwritten note, mileage forms, or any other kind of written proof, you should not deduct that expense because if you get audited, you're gonna need hard proof of your expenses. If you do not have that proof, you're gonna face some penalties, bank statements, save them, just download them from your bank and store them all in an electronic file month by month or at the end of the year, gather the PDFs and store them. If you write checks, you can also store your images of the checks. It's not hard, it's just a little task and that's it.

0:12:31.9 AH: Tax preparation seems like a massive, arduous task. It's really just collecting information to hand to a professional who is going to do the important work with it. How even if you didn't know you were supposed to be paying estimated taxes through the year, or even if you know you owe money and you don't have it, get your taxes prepared and filed on time. The IRS is very cool about payment plans, and if you work with them instead of hiding from it, it will be okay much faster than if you stick your head in the sand and end up filing three years late. And let's note that if you have ignored your taxes for a few years and you know you have to file and you know you're gonna owe, sooner is better than later. And I promise you, the relief you will feel once you get it handled and you have a payment plan in place, is absolutely worth the effort you're gonna put in now.

0:13:26.9 AH: Taxes can be big and hard to understand, but you don't have to understand every little bit. You have to understand the big concepts and the records that you need to keep track of so you can hand them to a professional. And that is what we have to say about taxes. And again, I would encourage you to consult the various resources that I have put along with the show notes, including the SCORE article and a link to the Can I Deduct That book. I have also included a link about an article I wrote a few years ago about taxes, and I've included a link to an older ABMP podcast with a tax professional who specializes in our kinds of businesses. So, check out those resources if you feel like you need to dive into tax stuff a little deeper. All right. For today's high five, we're gonna get extra nerdy and very topical, but my high five goes to irs.gov.

0:14:19.9 AH: It may or may not come as a great shock to you that the IRS has a fantastic website. You can find all kinds of forms and instructions for the forms. I didn't understand what one particular line of my tax filings was referring to, and I Googled it and it landed me on an IRS article, and then I understood exactly what that line was referring to. Yeah. I could have just emailed the tax preparer and been like, Hey, what's that line? But it was actually really satisfying to be able to find that information on my own. The IRS is actually really good at making sure all of their info is accessible to a regular person who does not necessarily understand all the tax jargon.

0:15:01.0 AH: And that's it folks. If you have a question about running your massage business or an idea for an episode, please reach out. I love hearing from you. You can email me at businessorpressure@abmp.com. You can also find me building websites and hanging out with my community of massage therapists over at deepbreathdigital.com. Make sure you are subscribed to ABMP's podcast so you don't miss a beat. There is so much to learn about building and maintaining a massage business. We're gonna help you cover the business and marketing side, the communication skills, all of it to help you be successful. I will meet you right here for the next episode. I can't wait.