Money Matters for Mental Health Practitioners

Owning and operating a private practice provides therapists with autonomy and flexibility. But running a business also requires a degree of financial savvy that many therapists find intimidating. What is the difference between a sole proprietorship and an LLC, and how do you withhold taxes when your income fluctuates from year to year?

Therapists, like any other professionals, need to consider these and other accounting issues to ensure practice success and maintain compliance with financial regulations. Here is a brief outline of the most important financial considerations for therapists:

Business Structure:

Your business structure is how you want to represent your practice legally. Which structure you choose will depend on your personal liability tolerance, plans for growth, and professional goals. The simplest form of business structure is a sole proprietorship. Easy to set up, with minimal requirements, it gives you direct control over all decision-making but holds you personally accountable for any business debts or legal issues. A limited liability company (LLC), professional limited liability company (PLLC), or limited liability partnership (LLP), on the other hand, offers liability protection.

Insurance:

Most therapists are aware of the need for malpractice insurance, which provides legal defense costs in the case of legal action against your practice. However, there are several other types of insurance you may want to consider, such as general liability insurance (for claims related to bodily injury or property damage), cyber liability insurance (for costs associated with data breaches or cyberattacks), and disability insurance (income replacement in case you are temporarily or permanently unable to work).

Setting Fees and Rates:

Some factors to consider in setting fees and rates are your level of experience, local market rates, and the demographics of your target clients. However, experts advise also considering how much income you need in order to thrive personally and professionally and working backward to establish your rates.

Billing, Collection, and Bookkeeping:

Maintaining accurate financial records is crucial for tax compliance and business decision-making. Luckily, there are a variety of billing and invoicing systems that can help you track sessions, generate invoices, and keep track of client payments, from Excel spreadsheets to Quickbooks to Wave.

In a perfect world, every patient would pay on time and in full. The reality is that situations might arise in which you will need to take additional measures in order to collect the compensation that is due to you. Establish clear policies at the outset for how you will handle overdue bills and missed or canceled appointments to minimize financial disputes and ensure consistent cash flow.

Taxes:

Therapists must understand their tax obligations, including income tax, self-employment tax (if applicable), and any state or local business taxes. Most therapists pay estimated taxes quarterly and file taxes annually. (For more on how to estimate taxes, click here.)  However, the file dates differ depending on your business structure.

You’ll also want to research whether you are eligible for any tax deductions. Deductions are business expenses that are subtracted from your taxable income, for example, CEU’s, professional membership fees, rent, and home office expenses. (For a PDF checklist of private practice tax write-offs, click here).

Retirement Planning:

Finally, as a private practice therapist, you will need to plan for your own retirement, as you won’t have access to employer-sponsored retirement plans. Options include setting up an individual retirement account (IRA) or Simplified Employee Pension (SEP).

Conclusion:

If you are feeling overwhelmed by all of this information, you may want to consider hiring an accountant or bookkeeper. An accountant can provide guidance on tax-related matters and help with filing, while a bookkeeper will keep track of your business transactions and help you stay financially organized.

Even if you are not feeling overwhelmed, you might benefit from an assessment of how much time you spend on accounting tasks, and whether that time would be better spent seeing patients or engaged in professional development. Professionals can help you navigate the above issues more effectively, and possibly with less stress than if you were to try to manage your finances independently.