April 3, 2024

Navigating Finance in Private Practice: Fundamentals and Tax Strategies for Mental Health Clinicians

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Running a private mental health practice involves more than patient care; it requires savvy financial management, especially during tax season. While medical school equips you with clinical skills, it often leaves a gap in financial education, crucial for running a practice. Understanding the basics of finance, such as budgeting, tax planning, and business management, is essential. These skills are foundational for your practice's longevity and success.

This guide provides insights from clinical tax advisors Rick Wilkens, CPA, CVA and Brian Nuttall, CPA, J.D., from InTandem Tax and Wealth, to help you streamline your practice's financial and tax planning:

  • Understand financial basics and the importance of professional advice
  • Evaluate your practice's financial health
  • Navigate tax strategies and structures
  • Plan for retirement and understand wealth compounding

Note that the tips in this guide are not intended as financial advice, but an educational resource.

Financial Fundamentals

Understanding the basics of finance in your practice is crucial. Hiring a CPA and a financial planner isn't just about compliance; it's about crafting a strategy that aligns with your practice's goals.

Here are two practical tips that form the foundation of your financial planning:

1) Seperate Finances: Keep a budget and maintain clear boundaries between personal and business finances. Use separate accounts and credit cards for your practice. This separation simplifies tax preparation and financial transparency.

We put together a whole guide on budgeting and financial planning.

2) Track income and expenses: Take your business credit card statements and upload them once a month to tools like QuickBooks. This streamlines your accounting, ensuring you can easily monitor income and expenses, and make informed financial plans.

Financial Health Assessment

Financial health is the lifeblood of your practice. Just like you’d assess a patient before making a treatment plan, utilizing resources like Osmind's Analytics can offer a granular view of your financial performance, providing insights into revenue streams, expense categories, and potential areas for optimization. Regular financial health checks enable you to adjust your business strategies proactively, ensuring you're on track to meet your financial objectives.

Budgeting and Cash Flow

Just like you plan for personal bills like mortgage and car payments, you need to do the same for your business expenses, including liability insurance. It's important to also set aside money for taxes, which many overlook. This includes income tax, self-employment tax, and state tax, if applicable.

Keep a monthly track of your finances to know what's coming up. If you're a sole proprietor receiving 1099 forms, your income first covers business expenses. For example, if you end the year with a net income of $300,000 but only took out $200,000, you'll be taxed on the $300,000.

Talk with your CPA to properly manage your earnings and tax responsibilities. This includes planning for quarterly tax payments to both federal and state authorities to avoid surprises and maintain your business's financial well-being.

Importance of Accurate Record-Keeping:Maintain up-to-date financial records to facilitate efficient tax preparation and planning. Clean and organized records not only streamline tax filing but also prepare you for potential audits, reducing the risk of discrepancies and penalties.

Utilizing an all-in-one EHR for Financial Management, Visibility, and Planning

Moving beyond traditional pen and paper, most practices now utilize Electronic Health Records (EHRs). Selecting an EHR that delivers comprehensive financial reporting is crucial for your business's management. Osmind, for instance, features an area called Osmind Analytics, offering built-in and customizable reports to dissect financial data effectively. While not a substitute for QuickBooks, it provides valuable insights into revenue streams from different services.

This feature is particularly beneficial for practices with multiple clinicians, addressing a common issue with many EHRs: the lack of clarity on individual clinician contributions. Osmind Analytics allows for a detailed breakdown of each clinician's earnings and the fees associated with credit card transactions, crucial for precise financial management.

An EHR should be viewed as a dual-purpose tool, supporting both clinical and business aspects of your practice. See firsthand how Osmind can transform your practice.

Tax Planning Strategies

Moving from traditional W2 employment to private practice or partnership requires you understand tax obligations while optimizing your finances.

1. Understanding Estimated Tax Payments: Under self-employment, you must make quarterly tax payments to the IRS. These payments are due in April, June, September, and January. Make sure you put time aside to make these payments so you avoid underpayment penalties.

2. Strategies for Estimated Payments:

  • Consult Your Tax Preparer: Regular consultations with your tax advisor are crucial to adjust your estimated payments based on your practice's financial performance, ensuring you neither overpay nor underpay.
  • Use Prior Year's Tax as a Benchmark: Employ the safe harbor rule, paying at least 110% of the prior year's tax to avoid penalties, especially beneficial if your income varies.
  • Allocate a Percentage of Income for Taxes: Dedicate a fixed percentage of each income receipt for taxes, adjusting for your tax bracket and state requirements, and place this in a designated account for systematic quarterly payments.

Entity Selection and Its Implication

The type of entity you choose for your practice—sole proprietorship, LLC, or S corporation—affects your tax liabilities and potential deductions. Each has unique benefits and implications, with LLCs offering simplicity and S corporations providing potential tax-saving strategies through salary and dividend distributions.

Deducting Business Expenses

Maintain detailed logs for vehicle and home office expenses to claim valid deductions. For vehicle use, track business mileage meticulously, choosing the most beneficial deduction method. Home offices must be used exclusively for business to qualify for deductions, impacting how you claim this expense.

Common Tax Deductions

  • Vehicle Expenses: Document business usage comprehensively, deciding whether the standard mileage rate or actual expenses yield greater deductions.
  • Home Office Deduction: The space must be solely for business use, with clear documentation supporting its regular use for this purpose.
  • Meals and Entertainment: Differentiate between deductible business meals and non-deductible entertainment expenses, ensuring all claims are well-documented.

Employing Family Members

Paying family members for legitimate work can provide tax advantages. For example, employing your child and paying them a fair wage for their contributions can yield tax benefits and allow for contributions to their Roth IRA, fostering early financial responsibility and growth.

Employing a Spouse for Retirement Benefits

Incorporating your spouse into your practice can offer several retirement benefits. If your spouse is a legitimate employee, their salary can contribute to your practice's retirement plan offerings. For example, if you have a 401(k) plan, your spouse can contribute up to the employee limit (e.g., $23,000), which not only benefits their retirement savings but also allows for tax deductions for the business. This strategy can also help your spouse accumulate credits for Social Security benefits, enhancing their future retirement security.

Choosing the Right Retirement Plan: Selecting the appropriate retirement plan is a critical decision that impacts your practice's financial health and your long-term savings. Traditional options like SEP-IRAs and solo 401(k)s are popular choices, allowing substantial contributions to reduce taxable income and grow funds tax-deferred. The decision between different plans should consider factors like contribution limits, administrative responsibilities, and eligibility criteria.

Considerations for Nonprofit Status

While not directly tied to retirement planning, understanding the implications of registering a clinical practice as a nonprofit can influence financial planning. Nonprofits have specific restrictions, including how profits are utilized and public disclosure requirements, which might affect personal retirement strategies, particularly if the practice is a significant source of retirement savings.

Entity Structure and Payroll Implications

The choice between an LLC and an S corporation affects your payroll and retirement plan contributions. For S corporation owners, the IRS mandates a reasonable salary before profit distributions, directly influencing retirement contribution limits. For example, profit distributions from an S corporation cannot be directly contributed to a 401(k) or similar plan; only the salary portion can. In contrast, LLC members might have more flexibility but different tax implications for their retirement contributions, depending on whether they're treated as disregarded entities or elect to be taxed as corporations.

Read this guide for more guidance on entity structures.

Tax Strategies and Retirement Contributions

Employing advanced tax strategies, like a backdoor Roth IRA, requires a nuanced understanding of tax laws, especially concerning other retirement accounts you hold. If you have existing IRAs or SEPs, executing a backdoor Roth could trigger tax events that diminish the strategy's benefits. Furthermore, deciding between traditional and Roth retirement contributions should be based on your current tax bracket, expected future income in retirement, and potential tax rates, influencing the overall efficacy of your retirement planning strategy.

Retirement Planning and Business Structure

If your practice is part of a larger expansion or operates under a management service organization (MSO) structure, your retirement planning may need a unique approach. Different entities within an MSO can offer distinct retirement benefits, potentially allowing for greater overall retirement contributions across the various entities. However, this complexity requires careful planning to ensure compliance with IRS regulations and to optimize retirement savings across the different components of your business structure.

Final Thoughts

Effective retirement planning requires a holistic approach, considering both the business structure and personal financial goals. Engaging with a financial advisor who understands the nuances of healthcare practices can provide tailored advice to optimize retirement outcomes and ensure financial stability in the later stages of your career.

Having an all-in-one EHR with integrated billing, payment processing, and an analytics dashboard makes your life easier. See how Osmind makes it easy to maximize your practice’s financial health by booking a demo.

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