See a professional for your tax prep. Really. Everything else I have to say in this post is anecdotal experience and is not to be taken as tax advice.
So at some point, you may decide to do some massage as an individual or sole proprietorship. What this means is that you no longer have an employer paying the taxes you owe the IRS, State Franchise Tax Board and whatever city you happen to be working out of.
This can be a real problem for some folks. While I don’t know anyone personally who has gotten in hot water with the various tax entities, I have heard stories second hand of careers ended by taxes pretty much since the day I started massage school.
Let’s start from the big boys and work our way down: IRS. Depending on how much you make in your private practice, and what your overhead is, you have two major choices. If you’re working several shifts as an employee somewhere, you can adjust your W-2 withholding to offset any taxes you owe on your personal business. If you’re making most of your money in private practice, you’re going to need to pay quarterly estimated taxes. I’ve found that these tend to equal about 18%-24% of my business gross income. They are due April 15th, June 15th, September 15th and January 15th. There are two “safe harbors” that relate to how much of your tax burden you need to be paying in estimated taxes over the year in order to be “safe.” The first is easy: 100% of whatever you owed the year before is always good to go. The other safe harbor amount is a bit more complicated and should only be aimed for once you have a solid sense of what to expect: 90% of whatever you end up owing for the year in question. I.e.: if I pay 3k a quarter in estimated taxes, and last year I paid 15k total in taxes, I better hope that when I get done doing my tax return for the year, that I only owe 13.3k.
Regarding state taxes, I can only tell you what I know about California. It sucks for two reasons that I’ve noticed so far: 1) they have you pay on a weighted scale, 30% or so on 1st and 4th quarter, 40% on 2nd quarter, and 2) calculating what you’ll owe is challenging, as you’ll move across tax brackets with higher marginal rates fairly quickly. You can use the W-2 trick I mentioned for the IRS for California taxes as well: you pay your taxes for your private business from your spa job. The fine if you mess up and don’t pay exactly when and how much they want wasn’t too bad the one year I flubbed it…an extra $5 I think.
City and county taxes:
These taxes have been such a pain for me personally. Both of the cities that I have a business license in have differing rules and ways of calculating your tax burden. Both have been slow in cashing checks in years past and issuing business licenses. You’ll need to take a day when you first start up in a city just to track down who to talk to and what is needed. Most likely, there will be an inspection of your business space by the fire department, you may need to talk to the police (and get treated like you’re some sort of sex worker…more on that later) and you may also have to deal with the zoning enforcement folks. Once you’re established, it’s mostly a matter of mailing in ~$300 per municipality (for me) for your yearly tax. One town I work in has a flat rate, the other town I work in charges me a percentage of my total sales.
Only one of the counties I work in seems to care about my business, the assessor for the county sends me yearly requests to update them on what property my business owns, any newly purchased or sold property and what equipment I’ve added or gotten rid of. Since my logistics are almost all lotions and sheets, they’ve not charged me any taxes yet, but I still have to spend a few hours dealing with paperwork from them every year around tax time.
Lastly, the trick I’ve learned for making quarterly taxes manageable for me. Every night or two, I sit down with a spreadsheet and record every penny I’ve made (and every penny I’ve spent…save those receipts, folks). After recording all this information, I calculate 25% of my gross sales, and transfer that amount from my business checking account to my business savings account. Once I’ve done this, I change the background color of those cells on my spreadsheet so I know I’ve made the transfer, note the transfer in another area of my spreadsheet and save my changes. I do this no matter if I’m making good money or bad, large amounts or tiny amounts. This habit has saved me innumerable headaches and possible panics. If you don’t make a plan for setting aside a portion of your money for taxes, you will find yourself short when the end of the quarter rolls around.
So there you go, the basics of my tax life as a massage therapist. Any thoughts for questions?