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Massage Tax Planning

If you're a massage therapist by trade and are self-employed, of course you have self-employment income. However, most massage therapists have at least some self-employment income. This income is reported on schedule C on your 1040 income tax form. With it, you add up all of the money you received during the year from your business and then subtract your business deductions. You can read about how massage therapists handle their taxes below.

“One of the biggest hurdles to starting your own massage business is taxes. Taking the time to learn effective Massage Tax Planning strategies will save you a lot of money and stress.” (about me)

If the money received is more that what your allowable deductions were, you have a profit. You have the pay the IRS a portion of your business profit as self-employment tax. You also have to pay part of your business profit to them as income tax. This income is reported on Schedule C by adding up all of the money you received during the year in your business, and then subtracting your business deductions.

The Dreaded Self-Employment Tax

The Self-employment tax rate is currently 15.3% on businesses with profit of up to $87,900.  This represents both the employers contribution to social security and the employees.  Since in your business you are both employee and employer, you have to pay both shares. 

Your business profit is also subject to income tax which can range from 10% to 38%, depending on your income and marital status. Most massage therapists can expect to pay  about 15% of their income as income tax. And of course, don’t forget state income taxes if you live in a state that taxes income.

Use Those Deductions

The more deductions you can take out, the more money stays in your pocket.
Business deductions are especially beneficial, because they reduce both your self-employment tax and your income tax. For every dollar you spend in deductions you save about 30% in taxes (15% self employment tax and 15% income tax).  If you are in a higher tax bracket you save even more.  Its like the government throwing a 30% off sale on everything you need for your business!

What Can You Deduct with Business Deductions?

In general, any business expense is deductible. The expense has to something that can easily be justified as beneficial to your business.  Keep receipts and make notes because you may have to justify your expenses to the IRS someday.    Here are some examples of common business expenses:  Your car, office rent, massage tables and other equipment, advertising expenses, telephone, fax, your web site, travel related to business activities, on going education expenses, licensing fees and association membership dues.  Of course there are many other expenses like legal and accounting help that are also deductible.

Education Expenses

Education expenses are tricky because you cannot deduct the educational expenses for training in a new field or to meet minimum professional requirements. That is considered a "startup" cost and these are not deductible.  But once you are a practicing massage therapist, any on going training and the travel associated with that training is deductible.  Its not uncommon to take “vacation” workshops in resort locations which allow you to learn, play and deduct at the same time.  But be careful to only deduct the business portion of the trip because the IRS is looking at this area closely.

Home Office Expenses

If you are practicing out of your home you have lots of additional deductions available to you.  You can deduct rent and other costs for a home office if part of your home is used as your personal place of business, even if you only use it for activities like billing and phone calls, and no outside office is available to you for you to complete these tasks.

In order to be seen as a home office, you need to use part of your home "regularly" and "exclusively" in your practice. This means that you have to use it for your business regularly, not occasionally. You can also not use it for any other purposes, such as for storage or as a guest bedroom.  If you have a laundry machine, you can only deduct it if you have a separate machine for personal use.  Otherwise the IRS will consider the machine as mixed use.  Some therapists push the rule by keeping an extra junker washer in their garage.

If you qualify for a home office deduction, you are allowed to deduct a proportionate amount of the expenses from that percentage of space. The expenses include mortgage payments, real estate taxes, rent, utility bills, repairs, as well as cleaning services, and depreciation. However, repairs or improvements that increase the value of your entire home do not qualify.  The most common way to determine what percentage of these expenses are deductible is by determining how much of the property (measured in square feet) is used exclusively by the business.  If you have a 2000 square foot home and you use a 200 square foot room as your office, you can effectively deduct 10% of your expenses (2000 / 200 = 10).  That’s 10% off your rent, utilities, depreciation, etc. 

Making Estimated Tax Payments

One of the downsides to being self-employed is that nobody is deducting money for taxes on your paychecks.  Instead you have to make payments of your estimated tax liability four times a year on April 15, June 15, September 15, and January 15. To pay your estimated taxes, you use form 1040-ES, which also has worksheets so you can calculate the amount of estimated tax payments you owe. It is based on your previous year's income. Be careful to avoid underpaying which triggers a hefty penalty.  Your accountant can help you make the first couple of payments until you get the hang of it.

How do you Avoid the Taxman?

When you start your own massage business there suddenly is this whole other accounting and tax to deal with. How do you keep your expenses and deductions straight? What is your best tip to saving on taxes?

See how other massage therapists deal with the hassle of accounting and taxes. You can read each tip, rate them and submit your own comments.

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