We know—nobody gets excited about spreadsheets or taxes.
But as a mental health professional, whether you’re just starting out in private practice or working as a 1099 contractor, understanding the financial side of your business is crucial to your long-term success.
After all, the more you know about your business’s financial health, the better equipped you’ll be to make decisions that support both your practice and your personal well-being.
In this guide, we’re breaking down the basics of accounting for mental health professionals. From choosing the right business structure and setting up your bookkeeping system to regularly reviewing your Profit & Loss statement and planning for taxes, we’ve got you covered.
#1 Structuring Your Business Entity
When you’re just starting out as a mental health professional, one of the first big decisions you’ll face is how to structure your business.
This simply means deciding the legal setup of your practice, which affects how you’ll handle things like taxes, liability (legal responsibility), and even how clients might view your business.
Here are the main options you might consider:
- Sole Proprietorship: This is the simplest and most common setup for solo practitioners. If you don’t formally register your business, you’re automatically considered a sole proprietor. The downside? Your personal assets, like your house or savings, aren’t protected if your business faces legal trouble.
- Limited Liability Company (LLC): An LLC is a step up from a sole proprietorship. It offers protection for your personal assets, meaning if something goes wrong in your business, your personal belongings are generally safe. Plus, an LLC gives you flexibility in how you pay your taxes.
- Professional Limited Liability Company (PLLC): If you’re in a state that allows it, a PLLC is similar to an LLC but is specifically designed for licensed professionals like mental health providers. It gives you the same protection for your personal assets and is tailored to fit the needs of your profession.
- S Corporation (S Corp): An S Corp is a bit more complex but can help you save on certain taxes. It allows you to pay yourself a salary and take the rest of your business profits as dividends, which can sometimes lower your tax bill. However, it comes with more rules and paperwork.
- C Corporation (C Corp): This structure is less common for small practices because it’s usually meant for larger businesses that plan to grow a lot or bring in investors. One downside is that C Corps face double taxation: the business pays taxes, and you pay taxes again when you take money out of the business.
Choosing the wrong structure can lead to unexpected problems. For example, if you stay as a sole proprietor, you might be putting your personal assets at risk. On the other hand, forming a C Corp might leave you paying more in taxes without much benefit.
Our recommendation? If you’re in a state that offers it, we suggest considering a PLLC. It’s designed for professionals like you, offering the right mix of protection and flexibility.
#2 Setting Up Your Bookkeeping Software
As a mental health professional, keeping track of your finances is crucial. But what exactly should you be keeping track of? The answer is simple: everything. This includes receipts, bank and credit card statements, and any other financial records that you’ll need when it’s time to prepare your taxes.
Which is where your bookkeeping software comes in.
For most small practices, we recommend using QuickBooks Online. It’s user-friendly, connects directly to your bank account, and automatically pulls in your transactions. You’ll need to categorize expenses, but QuickBooks makes it easy to track your finances and generate reports, helping you stay on top of your business with minimal hassle.
Even if you’re just starting out, QuickBooks can save you time and reduce errors compared to manual methods. It’s a smart investment in the financial health of your practice.
Note: If you’re using practice management software like SimplePractice, it’s important to know that while it might help with some financial tracking, it usually won’t cover all your bookkeeping needs. You’ll likely still need a system in place to manage the financial side of your practice.
#3 Regularly Review Your Profit & Loss Statement (P&L)
One of the most important tools for understanding your practice’s financial health is the Profit & Loss (P&L) statement. A P&L summarizes your revenue (money coming in) and expenses (money going out) over a specific period, giving you a clear picture of whether your practice is making a profit or operating at a loss.
Revenue: This includes all the money you earn from your services, like client fees, insurance reimbursements, and any other income sources. Accurately tracking your revenue ensures you know exactly how much your practice is bringing in.
Expenses: These are the costs of running your practice, such as rent, utilities, office supplies, and professional fees. Categorizing your expenses correctly helps you see where your money is going and where you might be able to cut costs.
QuickBooks Online is excellent for managing this. The software automatically organizes your transactions, allowing you to quickly generate a P&L statement. This not only saves time but also provides real-time insights into your practice’s financial performance.
But here’s the key part: It’s not enough to just “have a P&L.” As a 1099 contractor or private practice owner, you need to review it regularly to guide your practice in the right direction. Whether it’s adjusting your fees, cutting unnecessary expenses, or planning for growth, your P&L is a powerful tool that helps you stay on top of your finances.
#4 Filing Estimated Taxes
Once you’re self-employed, paying estimated taxes is part of the deal.
Unlike a traditional job where taxes are automatically taken out of your paycheck, you’re now responsible for estimating and paying your taxes throughout the year.
This includes federal income tax, state income tax (if applicable), and self-employment tax.
What Are Estimated Taxes?
Estimated taxes are basically your way of staying ahead of the tax game. Since no one’s withholding taxes from your paycheck anymore (because, hey, you’re the boss now), you have to pay the IRS directly four times a year. These payments cover the taxes on the money you’re making from your practice. It might sound like a hassle, but making these payments helps you avoid a big, scary tax bill (and possible penalties) when tax season rolls around.
How to Calculate Estimated Taxes
If this is your first year being self-employed, you’ll need to estimate what your taxes will be for the year. I know, it’s kind of bizarre trying to guess how much you’ll owe, but it’s necessary to avoid a big tax bill (and potential penalties) at the end of the year.
If it’s not your first year, you’ve got a bit of a shortcut—you can use last year’s tax return as a reference to help estimate what you’ll need to pay this year.
To calculate your estimated taxes, you’ll need to factor in all your income sources, expected deductions, and any tax credits you qualify for. Tools like QuickBooks Online or a chat with your accountant can help give you a clear picture of your income and expenses, making it easier to estimate what you owe.
Our Tip: Don’t skip out on paying your estimated taxes, even if they seem a bit confusing. Missing these payments could leave you facing penalties and fees at the end of the year. If you’re not sure how much to pay or when to pay it, it’s a good idea to consult a tax professional. Head over to our Get In Touch page to see how we can help.
#5 Keeping an Eye Out for Tax Deductions
While nobody likes paying taxes, the good news is that as a business owner, you can write off some of your expenses. In fact, most of your legitimate business expenses can count as tax deductions for your private practice.
When we say legitimate, we mean expenses that are reasonable, ordinary, and necessary for your business. Congress understands that you have to spend money to make money, so they give you a break on these costs.
Throughout the year, keep an eye on these tax deductions:
Special Tax Deductions for Therapists
- Home Office Deduction: If you work from home, you may be able to deduct a portion of your mortgage or rent. But be careful—this deduction has several rules, so make sure you fully understand them before claiming it.
- Supervision Expenses: Costs for supervision required for your therapy licensure are deductible, as long as they’re reasonable, ordinary, and necessary.
- Software & Apps: All the tools and software packages you use to keep your practice running smoothly are deductible.
- Professional Memberships: Membership fees for organizations like the APA or ACA are deductible business expenses.
- Advertising: Whether you’re buying ad space in Psychology Today or running online ads, these expenses are deductible as they help promote your practice.
- Continuing Education: Staying up-to-date with your education is crucial, and the costs for courses, seminars, and certifications are deductible. If your employees take courses and you reimburse them, you’ll need to set up an accountable plan.
- Health Insurance: If you pay for your own health insurance, that cost is deductible.
- Mixed-Use Items: For items like your cell phone that you use both personally and for business, determine what percentage is used for business. You can then deduct that portion of the expense.
Note: One of the biggest expenses you might be thinking about is student loan interest. Unfortunately, while your student loans were necessary to become a therapist, the interest isn’t deductible as a business expense. However, you can still deduct it on your personal tax return (Form 1040), just not on your business return (Schedule C).
#6 Setting Financial Goals
As a mental health professional, setting financial goals isn’t just about hitting a revenue target—it’s about building a practice that supports your life, both professionally and personally. To do this effectively, it’s essential to set Key Performance Indicators (KPIs) and financial goals that align with your overall vision for your practice.
Start by thinking beyond just revenue. For example, consider what you want your work-life balance to look like. How many sessions do you want to conduct each week? What is your ideal session fee? Setting a target session fee isn’t just about charging more—it’s about understanding the value of your services and ensuring that your fees support your financial and personal goals.
As you plan, think about the bigger picture. If your goal is to work 20 sessions per week at a certain fee, what does that look like in terms of annual revenue? And beyond revenue, how does this fit into your life? Are you allowing enough time for self-care, continuing education, and other important aspects of your life?
By setting thoughtful KPIs and aligning your goals with your desired work-life balance, you can create a practice that’s both successful and sustainable.
Our Tip: Your financial goals should support the life you want to lead, not just the business you want to build. An experienced accountant can help you set and reach both short- and long-term goals.
#7 Set Aside Money for Retirement
Last but not least, don’t forget about retirement. I’s easy to get caught up in the day-to-day demands of your business. But while you’re focusing on helping others, it’s crucial not to overlook your own future—specifically, planning for your retirement.
Unlike traditional employees who may have access to employer-sponsored retirement plans, as a business owner, it’s up to you to take charge of your retirement savings.
The good news is that there are several retirement savings options available to self-employed individuals, each with its own benefits.
Consider these options:
- SEP IRA (Simplified Employee Pension): A SEP IRA is a popular choice for self-employed individuals. It allows you to contribute up to 25% of your net earnings from self-employment, up to a maximum of $66,000 for 2024. Contributions are tax-deductible, which can lower your taxable income.
- Solo 401(k): If you’re looking to save more aggressively, a Solo 401(k) might be the way to go. It allows for both employee and employer contributions, meaning you can contribute as both. The contribution limits are higher, which can be beneficial if you want to maximize your retirement savings.
- Traditional or Roth IRA: Depending on your income level and tax situation, you might also consider a traditional or Roth IRA. While the contribution limits are lower, these accounts offer flexibility and can complement other retirement savings plans.
Our Tip: Planning for retirement might not seem urgent when you’re in the early stages of building your practice, but the sooner you start, the better off you’ll be. Consistently setting aside money for retirement, even if it’s a small amount, can make a significant difference over time.
Need More Help With Your Mental Health Professional Accounting?
There you have it! These are our top 7 tasks to help you kickstart your mental health career on the right financial foot.
But remember, there’s a lot more to running a successful business—these tips just scratch the surface.
If you need help getting your finances in order, are ready to take your practice to the next level, or just want someone to handle the monthly accounting tasks, we’re here to help.
At Traktion, we specialize in supporting mental health professionals with their practice accounting. Simply head over to our Contact page to get started.
And while you’re here, don’t miss our new calculator: LLC vs. S-Corp—we think you’ll find it incredibly useful.
Until next time!