Enlightened Practice Podcast
Our hosts answer two questions from our listeners. One is, “how do you pay yourself?” and the second question is, “how do you create a profit and loss statement?”. As a bonus, they added taxes to the mix and this is our new episode of the Enlightened Practice Podcast. Enjoy!
If you want your question featured and discussed on the show, send it to [email protected]. We’d love to hear from you.
Transcript of the podcast
Ken: Hi Kari. Welcome back.
Kari: Hi Ken. Thanks for having me.
Ken: So, today we’re going to talk about end of the year finances and accounting, everyone’s favorite subject. I say that in jest, but probably for my account it is their favorite subject.
Ken: I figured we’d use the opportunity now that we’re approaching the end of the year, to talk about some of the basics in which we have two questions from podcast listeners. One is, “how do you actually pay yourself?” and the second question is, “how do you create a profit and loss statement?” and I guess we should talk about why that’s important to know them. I would say a critical requirement.
Ken: But, let’s start off with how do you actually pay yourself? I remember when I was in training, the money just showed up in my bank account. I didn’t do anything. And then, when I got into private practice, I realized, okay, what do I do here? So, I’m curious what system you’ve set up and how you actually pay yourself, and then we could think about taxes and how you account for that in the mix.
Kari: Right. Yeah, I’m going to be so curious to hear your system too. I know there’s probably a lot of different systems out there. Mine, generally speaking, involves having a business chequing account and that’s where I receive all my income it goes into that business chequing account. And I think how you go about paying yourself and factors to consider, I think really depends on where you live in the world. So, for that I would definitely recommend that people consult with a professional to really understand what they need to consider when they’re paying themselves in terms of, what else do they need to be paying for, taxes, all that kind of stuff.
So, for me, I wait for a certain amount of income to come in that I know is going to be enough to cover my monthly expenses, if you will, and then from that point. I keep in my bank account the amount of money I need to cover some of those expenses, like an electronic health worker, or rent when I used to have rent and that kind of stuff, before the pandemic. And then I pay myself a certain percentage and that goes to my personal account and that’s kind of like my money, for my life, to support my life, and then I give another percentage to savings and that later goes towards taxes and retirement. And that’s the number that I think consulting with an accountant would be helpful to really understand what you need to be saving for some of these infrequent but necessary payments, such as, quarterly taxes.
Ken: Yeah, I think that makes sense, and also to distinguish between an accountant and a financial planner. An accountant will help you. You give them the numbers and they will help you think about what taxes you’ll owe on those numbers and also, where you could be saving on taxes. A financial planner will help you think bigger picture about what are your goals? How much do you want to save for retirement? How much do you want to save for your kid’s college? Do you want to have an emergency fund in your fund-fund? And budgeting, how much do you need pay the expenses of the daily living whether it’s in your practice or in your personal life?
So, starting out by meeting with some professionals at the beginning I think will save significant amount of time down the road. And while I’m the subject of meeting with professionals when I first started out, I met with a Quick Books tutor. I called their consultant and they really walked me through Quick Books. I did not get some of it. It was not easy, but those are the three folks I would recommend meeting with at the beginning if you’re going to be in solo provide practice or even if you’re running a group, especially if you’re running a group. So, that way you can really get a good game plan going forward. It’s a little bit of time and a little bit of investment upfront but it saves so much time down the road.
I’ve talked with colleagues and certainly have heard stories about people not setting up a business chequing account. And all of their business expenses and income being paid from the personal chequing account, and maybe you can get by with that, at the best it’s a little bit of a headache for end of the year, for figuring out taxes. But at the worst, if you get audited by the IRS this is going to be a mess to tease out. And it’s so much better to set up good systems in the first place.
Ken: So, back to the original questions, how do you pay yourself? So, I’ve had both the solo-proprietorship and a corporation for my private practice. So I can speak to both systems. So, solo-proprietorship set up a business chequing account and get a business credit card or a business expenses. Again, so you keep your accounting just really clean and tidy. And you set up a merchant credit card account that the funds go into your business chequing account and then your patients and clients pay you that money goes into the business chequing. But you really need to know how much your business expenses are going to be before you even think about paying yourself because you’re not going to be in business for very long if you don’t pay your bills.
It can be really expensive, thinking about malpractice, insurance costs, rent in certain areas, these costs go up every year. Merchant processing fees, the list kind of goes on and on, if you’re going to have an administrative assistant you’ve got to take care of them, pay them well and all your technology, all your software, all of that. That said, once your expenses are paid when you’re in a solo-proprietorship you need to think about what percentage you’re going to set aside for taxes and what percentage you’re going to keep for yourself and you have to pay estimated taxes quarterly. So, you should set up an account with the IRS called “The EFTPS” and you should set up an account with your state, in California it’s the “Franchised Tax Board.” So, the way I did it is, I had a business savings account.
So, after I paid my expenses, I would set aside like half almost for taxes and that went into the savings account because if it was January the estimated tax payment isn’t due till April. So, you want to have that set aside because you don’t want to be scrounging for funds when it’s due. The IRS will do the math. And if they see that you’re not making estimated tax payments that add up at the end of the year, they’ll send you a letter the following year for the previous first quarter saying, why didn’t you make more of an estimated tax payment?
So again, it’s more of a headache to work through. So, then you literally just transfer the funds from your business chequing, ideally they’re at the same bank. So it’s just the funds transferred to your personal chequing, but you still have the taxes set aside in your business savings account. Now, if you’re a corporation or an LLC it’s different you have to run payroll every month and that means even though you own the corporation, you’re also an employee of the corporation. So, you have to pay yourself as an employee just as you would pay any other employee. Unless you love spending hours and hours doing monthly tax payroll paperwork, you’re going to need something like Quick Books or Wave, or other kinds of payroll processors who will be linked to your business chequing account and will link to the EFTPS and state tax.
So, you will log in and say, okay, I’m going to pay myself X amount on a monthly basis. And they will create a paycheque for you that’s actually like a paycheque that you get when you’re an employee. But it will have all the funds for federal and state estimated taxes withheld automatically. Plus, state disability, and you have to set up a worker’s compensation with some rare exceptions and there are other kinds of programs your state may require. So, all of that is automatically withheld.
They do all the paperwork and you have to pay for it, but then the money is direct deposited into your personal chequing account, but it’s not a funds transfer from your business chequing, it actually is going through payroll and then at the end of the year you get a W2. And then you put that on your 1040. If you’re solo-proprietorship at the end of the year, you need to do a schedule C which leads us to the next question, which is, how do you create a profit and loss statement? I’m curious what your approach is to that, Kari.
Kari: Well, I do use an online version of Quick Books to help create the profit and loss statement and I’m a big fan of getting help with this kind of stuff because as a psychologist I don’t really have the financial tax background. So, I have a lot of help with creating this. I also have a bookkeeper and an accountant. My bookkeeper helps me to categorize all my expenses over the course of the year, to basically figure out what’s income, what’s lost, what am I spending on? And to make sure that’s all clean in Quick Books. And then I developed the profit and loss report from there with just a click of a button.
But it does take a lot of work throughout the year to keeping the books organized and categorizing all the different expenses to make sure that the things that should be deducted are being deducted and all the income is reported, of course. I do it using technology with the support of multiple people and that is one of those investments that’s worth it for me, otherwise I do think I would be confused and overwhelmed and that’s the path I’ve chosen. I’m not sure how other people do it or what other options are when you’re not using Quick Books and all that stuff. I’m curious to hear what your experience is.
Ken: Yeah. And just for those who are listening who don’t even really know what Quick Books is, it’s a way to take all of your business’s income and expenses and put it in a system where you can not just see the information but tag it or assign expenses and incomes to different categories and when you do that then you can run reports on that and that’s so meaningful not just for taxes, although, your schedule C is essentially a profit loss statement. So, how are you going to fill that out if you have no idea what your profit loss is?
So, you absolutely need to come up with your own schedule C profit loss on your own somehow or just hit a button, that’s it, just generate profit loss. But you’re right, Kari, during the year you have to do the work, whether it’s with a bookkeeper or on your own to have good data at the end of the year. So, for example, what I’ve done is linked my business chequing, business credit card, business savings all to Quick Books, so it pulls the information in and every so often I’ll go and click update. It will pull the information from those sites and then it will say, okay, we found the following five expenses and this is how you’ve categorized these expenses before. Are you sure that these expenses indeed still go in those categories?
For example, it may see that I paid the landlord X amount and I categorized that under rent. We see this landlord’s name here would you like to categorize this as rent? So, that way you know where every dollar is coming from and where it’s going to. And what’s really meaningful about this is you need to run a profitable business. If you’re not running a profitable business you’re not going to be able to provide patient care or clinical care. So this is part of your job, is being at least being decent enough in business that you keep your doors open and the lights on, and if you want to hire somebody to help you with that, great.
Think about large corporations, most of those folks have in-house staff who specialize in this. The CEO of IBM is not doing Quick Books. So, it’s totally fine to have staff or consultants who do that for you. If you really want to do that on your own to save money then there are YouTube videos on it. You can get a one-time tutorial like I did from a Quick Books expert which actually turned into a five time tutorial because I kept screwing stuff up. But, it’s really meaningful at the end of the year. You want to know what is the health of your business? And are you profitable? Where could you be cutting back on expenses? Where could you be optimizing your income?
We’ve talked about it in other podcasts, how to think on the income side, but we haven’t talked so much about optimizing your expenses. So, if you have it all in one place at the end of the year, where you can go, oh my god, I didn’t realize that, ten percent of my income is going to rent or whatever. It gives you an opportunity to reevaluate, is this the way it should be or do I need to make adjustments for next year and future years?
Ken: So, that’s essentially how I create a profit loss, is just click the button in Quick Books and hand it to the accountant. I’ll say, if you’re in a corporation it’s definitely more complicated than just having a profit loss. You also need a balance sheet and you need a general ledger. And you need a reconciliation statement. That said, that means I hit four buttons in Quick Books instead of one.
Ken: I mean, it’s really not that hard to hit the button. So, the value of accounting software if you’re in a corporation or an LLC it’s required, it’s essential. I just can’t imagine you wanting to create all of that on your own and the IRS might actually come after you and say, you’re not keeping good books. And part of keeping your status as a corporation, there are legal formalities, you have to have annuals, shareholders meetings, and board of directors meetings, even if it’s kind of silly if you’re the only one, you still have to do it and keep documentation. But you have to show the IRS that you’re actually a real corporation and part of that is having real accounting records. So there’s no messing around with it.
But, even back to being a solo-practitioner, what are you going to give to your accountant at the end of the year? They’re going to say, well, okay, but show me your expenses. I guess you could hand them a shoebox with a hundred receipts, kind of the old fashion way, but then you’re going to pay more to the accountant who has to spend all that time going through trying to figure out how much your expenses are. If you hand them a one page profit loss it just makes their life so much faster and they charge less. On that note, I think that covers those two questions.
Ken: Looking forward to chatting soon again and covering more in the fun world of finance and taxes, and accounting for clinicians.
Kari: Looking forward to it.
Ken: Good chatting. All right, take care, Kari. Bye.
Kari: Okay. Bye.